The Role of Political Regimes in the Macroeconomic Effectiveness of Foreign Aid in Pakistan

Abstract

This study is an attempt to analyze the role of political regimes in the effectiveness of foreign aid. In particular, we focus on the role of foreign aid in economic growth under democratic regimes. The empirical exercise is based on time-series data of the Pakistan economy over the period 1972–2011. To meet the objective of the study, an interactive term of democratic regime and foreign aid is used as a regressor in the growth equation. Our findings show that democratic regimes are harmful in the effectiveness of foreign aid as far as the economic growth of Pakistan is concerned. Moreover, the study suggests diminishing returns to scale of foreign aid as the assumption of a linear relationship between foreign aid and economic growth is relaxed. The other control variables such as physical capital and human capital enter the model in a significant way and with their expected signs in both the short and the long run. JEL Classification: F34, O4, O11, O43