Does foreign aid procurement in resource-rich countries depend on these countries’ financial development and institutional quality? Evidence from PVECM and quantile-on-quantile regression

Abstract

The underlying structure of the global economy has undergone major structural changes over the last two decades. These transformations have been powered by globalisation, technological development and multilateral trade agreements. The more open global economy has benefitted the global community, but many resource-rich developing countries are struggling to keep pace with more developed countries. As these resource-rich countries attempt to catch up with more developed economies, many rely on foreign aid to develop their institutions of governance and financial sector for a more knowledge-intensive economy. This study analyses the long- and short-run associations between foreign development aid procurement, financial development, and institutional quality in resource-rich countries from 2005 to 2020, employing the panel vector error-correction (PVECM) model and Quantile-on-Quantile Regression (QQR). Our analysis shows that, in the short run, there is a strong endogenous nexus between foreign aid procurement, quality of institutions and financial development. Furthermore, the results reveal that financial development and higher institutional development assist resource-rich countries in procuring foreign developmental aid in the long run. These findings suggest that a financial system which functions well, and favourable institutional governance are critical for these countries to secure foreign aid to put them on a path to sustainable development.