Aid-growth Nexus Research Articles

The roles of inflation and financial development in the effectiveness of foreign aid: Evidence from Bangladesh

The long-run economic benefits of foreign aid in a recipient country depend on the absorptive capacity of the nation in terms of institutions, macroeconomic stability, and financial development. While the role of institutional quality on the aid-growth nexus has already been empirically determined, the moderating roles of inflation and financial development have not been investigated. Therefore, our study addresses these research gaps by examining the moderating roles of inflation and financial development on the impact of aid on economic growth in Bangladesh during 1980–2020 period. It utilizes the Autoregressive Distributed Lag (ARDL) bounds testing technique. This study reveals that the impact of aid on growth depends on the levels of inflation and financial development. If inflation rises above 9.85% threshold level, the marginal effect of aid on growth turns negative. In contrast, the marginal effect of aid on growth is positive even at the maximum level of financial development. The outcomes are robust to alternative proxies and structural breaks. The implication is that an increase in aid and financial development boosts economic growth, but high inflation limits the efficacy of aid. Therefore, to reap the long-term economic benefits of aid, countries should embrace the requisite macroeconomic stability and financial development.

Analysis of the Moderating Roles of Human and Physical Capital on the Impact of Foreign Aid on Economic Growth in Nigeria

Though the impact of foreign aid on economic growth has been examined in several studies, the roles of human and physical capital in aid-growth nexus has not been investigated. This is important because the effectiveness of foreign aid could be contingent upon the absorption capacity of the recipient country. We fill this research gap by examining the moderating roles of human and physical capital on aid-growth nexus in Nigeria during 1980 to 2020. Our study deploys the Autoregressive Distributed Lag approach on the interaction models. It shows that the variables are cointegrated. Though aid has a positive impact on growth, human and physical capital have significant moderating roles on the impact of aid on growth. Precisely, the marginal effect of aid on growth varies with the levels of human and physical capital. However, if human and physical capital surpass the threshold levels of 55% and 65%, respectively, an increase in aid cannot accelerate growth. These findings are robust to alternative proxies, structural breaks as well as diagnostic tests. This research implies that, given the requisite levels of human and physical capital, foreign aid can complement domestic capital to enhance growth. Hence, for nations to obtain the long-term benefits of aid, they should create the enabling environment by adequately investing in human and physical capital to attain sustainable economic development. JEL Classification: O47; F35; E22; J24

Aid–Growth Nexus and Corruption

Abstract Using data on 71 aid recipient countries over the period 2000–2019, this study examines the effect of the size and composition of foreign aid (Official Development Assistance, ODA) on economic growth. The size of ODA is positively correlated with growth, and the impact of an increase in ODA on growth decreases when ODA reaches a certain level. The influence of the composition of ODA in terms of grants and loans on growth is estimated differently depending on sample selection. The sample is divided into two sub-samples based on the median of the corruption perception index. The regression results show that grants have a positive and significant impact on growth without sample selection. However, loans have a positive and significant impact on growth in the sub-sample of less corrupt countries, but a negative and significant impact on growth in the sub-sample of more corrupt countries. Therefore, the results suggest that ODA is useful for inducing growth in the early stages of development. However, improvement in the economic environment in terms of reduced corruption is required to increase the positive impact of ODA in the form of loans on growth.

The Impact of Foreign Aid on Economic Growth in Africa: Empirical Evidence from Low Income Countries

This article aims to shed some insights into the ongoing debate on the aid-growth nexus by examining whether sources of aid matter in explaining aid effectiveness. In doing so, we consider three main proxies for bilateral aid based on three sources of aid such as Total Aid (TA); Traditional Donors aid (TDA) and Non-Traditional Donors aid (NTDA) as independent variables in a dynamic panel growth model within a system GMM framework. The study uses a panel dataset from 25 Low-Income Countries (LICs) in Africa over the period 2000–2017. The main findings show that the impact of aid on economic growth appears to be negative and significant for TA and TDA proxies, while it is positive but insignificant when the aid proxy is NTDA. A relatively larger share of TA and TDA disbursement away from the direct growth-enhancing productive sectors towards the unproductive sectors seems to have contributed to their strong negative impact on growth. The key policy implication is that governments in LICs in Africa and donors should work in collaboration to design effective ways to ensure that TDA should target the direct growth-enhancing sectors.

The Heterogeneous Impact of Sectoral Foreign Aid Inflows on Sectoral Growth: SUR Evidence from Selected Sub-Saharan African and MENA Countries

A great deal of the foreign aid–growth literature finds that the net effect of aggregate aid on total growth appears to be insignificant. This study argues that this aid–growth nexus can be better explained by testing the variation responses for each of growth sectors to their corresponding allocated aid inflows. It aims to investigate the heterogeneous effects of sectorally allocated aid inflows on their corresponding growth sectors (industry, agriculture and services) using data from 37 Sub-Saharan African and MENA-recipient developing nations from 1996 to 2017. We constructed two measures; one is the (SAASG) Sectoral-Allocated-Aid-for Sectoral-Growth, which was used as a major measure in the first two econometric specifications, and another one was the revised Clemens early-impact aid categories measure, which was used as the secondary measure in the third specification. The seemingly unrelated regression framework (SUR) was employed as the basic estimation approach, while the GMM approach was used to check robustness. The empirical findings revealed clear systematic impacts associated with aid distributed to each sector of growth, which may explain why the net effect of overall aid on total growth appears to be insignificant. The findings show that allocated aid inflows have a strong positive impact on agricultural growth, helping boost overall growth, whereas aid allocated to the service and industrial growth sectors tends to minimize the net benefits of total aid on growth due to financial and institutional reasons. The success of the planned scaling-up of aid to recipient countries depends on the financial system, institutional quality policies, and the ability to design a way to maintain incentives in the MENA and SSA regions’ selected recipient countries to overcome structural bottlenecks of sectoral growth.

Does Aid Fragmentation Affects Growth: The Case of Nepal

Nepal’s strategic position and open border with India and China have attracted unusually high attention, particularly during the Cold War era, not only from these two large neighbours but also from European countries, the USA and the former Soviet Union. However, despite decades of aid inflows, Nepal remains one of the poorest countries. While debate over aid–growth nexus remains unsettled, our empirical results do suggest that aid fragmentation is detrimental to growth, perhaps due to increased administrative burden to manage a large number of small projects and meet reporting requirements of the donor community. While we find that aid is good for growth, attracting uncoordinated and fragmented aid without the need for assessment can, in fact, do more harm than good. These findings point to the importance of coordinated aid approach not only at the country level but also among the donor community.

Human capital interaction on foreign aid-growth nexus: evidence from South Asia and sub-Saharan Africa

Purpose The purpose of this study is to examine the interactive role of human capital development (HCD) in foreign aid-growth relations in South Asia and sub-Saharan Africa countries from 1985–2019. Design/methodology/approach The study used panel data that cut across all countries in South Asia and sub-Saharan Africa collected from The World Bank’s Development Indicators. The data were analysed using Bai and Ng panel unit root idiosyncratic cross-sectional tests and the system generalised method of moments (SGMM). Findings The study found that foreign aid and HCD have negative impacts on economic growth. Fortunately, the interaction of human capital with foreign aid reduces the extent to which foreign aid impedes economic growth. The presumption is that South Asia and sub-Saharan Africa economies had not reaped the potential growth effect of foreign aid inflows due to high illiteracy rates and weak social capacities. The peculiarity of these regions hinders the absorptive capacity to transform positive externality associated with foreign aid into sizeable economic prosperity. Practical implications It is imperative for South Asia and sub-Saharan Africa countries to not depend on foreign aid; instead, the strategic action by policymakers should be to developing sustainable social capacities with HCD as the centre-piece. Originality/value The highpoint of this study is its inter-regional approach and the interplay between human capital and foreign aid using the second generation panel unit root estimator and the SGMM approaches.

Revisiting the aid-growth nexus in light of the Sachs-Easterly debate

In light of the renewed interest on the aid-growth connection spurred by the recent Sachs-Easterly debates, this note revisits the aid-growth nexus, hypothesizing that aid impacts on growth nonlinearly and that its particular effect conditions on the quality of policies and governance. Using the dynamic panel estimation method, Two-step system generalized method of moments, on more recent data involving an unbalanced panel of 106 countries for the period 1989-2013, we verify some key findings in the aid-growth literature. In particular, aid’s effect on growth is subject to diminishing returns, indicating that there are absorptive capacity constraints that may hinder the effectiveness of aid. However, these absorptive capacity constraints may be relaxed in environments of good governance and policy, enabling aid to have a positive impact on growth. JEL classification: C14, C23, F35, O11, O19

Foreign Aid-Growth Nexus in Africa: Do Institutions Matter?

The aim of this work is to investigate the institution’s role on amelioration of the effectiveness of foreign aid in two subregions: 25 low-income and 23 middle-income African economies. To do this, we estimate an OLS (ordinary least squares), FMOLS (fully modified ordinary least squares), and SGMM (system generalized method of moments) models. Yearly data from 48 African provinces in a panel framework for the period 1996–2014 has been used. The evidence reveals that both in short- and long-run results confirm that foreign aid is not effective in terms of economic growth and with increasing returns. In addition, aid ineffectiveness is more important in the low-income African countries than in the middle-income African countries. But, the aid effectiveness is promoted with the presence of good institutions. In this case, the analysis evidence finds that foreign aid is more effective in two subregions. About the six institutional dimensions, the pertinent governance indicators that ameliorate aid effectiveness are Rule and Laws, Government Effectiveness, and Voice and Accountability, in low-income countries. However, all institutional indicators, except Rule and Laws, ameliorate aid effectiveness in middle-income countries. The long-run aid effectiveness is promoted by Government Effectiveness and Voice and Accountability, in low-income countries. But, in middle-income countries, aid effectiveness can be ameliorated, especially, by Political Stability and Regulatory Quality.

Aid-growth Nexus in Bangladesh: An Evidence from the ARDL Bound Testing Approach

The debate on the aid-growth nexus isn’t a new one. This much heated issue has received a good deal of empirical coverage for the time series data of Bangladesh. In this study we have revitalized the old debate to minimize existing literature gaps on the aid-growth nexus in Bangladesh. We have employed ARDL bound testing approach to examine the nature of relationship between aid and economic growth in Bangladesh. In the long run per capita foreign aid positively influence per capita gross national income. It exerts the same effect in short run too. In long run a 1 percent increase in per capita aid leads to 0.27 percent increase in per capita gross national income and in short run 10 percent increase in aid per capita increases per capita gross national income by 0.54 percent. A positive effect from the policy variable has also been obtained which justifies the implementation of pro trade liberalization policy in the post liberation-war period. Keywords: official development assistance, economic growth, cointegration, ARDL bound testing DOI : 10.7176/JESD/10-6-17 Publication date :March 31 st 2019

Analysis of capital formation and foreign aid nexus in Nigeria

PurposeThe issue of foreign aid has continued to gain renewed economic cum political attention in the early years of the twenty-first century. At a summit, popularly known as the Millennium Summit, which took place in 2000, there was an agreement by the international community concerning some goals known as the Millennium Development Goals which were targeted to be reached by the year 2015 but have now been replaced by the Sustainable Development Goals. Against this background, it becomes pertinent to ascertain the contributions and impact of foreign aid in the form of Overseas Development Assistance (ODA) on capital formation in Nigeria. This is an area of foreign aid studies that has been ignored by many researchers. Most studies are seen delving into analyzing the aid-growth nexus without evaluating the transmission link through which foreign aid transmits to affect economic growth. There is paucity of studies on the aid-capital nexus. The paper aims to discuss these issues.Design/methodology/approachThe empirical method used was autoregressive distributed lag (ARDL) model.FindingsThe empirical results from the ARDL model estimations show that foreign aid, which is proxied by ODA, has a positive and significant impact on capital formation in Nigeria for the years under analysis. The result of the Granger causality test shows that a bi-directional granger causality exists between foreign aid and gross fixed capital formation (GFCF).Originality/valueEmpirical results from the ARDL model estimations show that foreign aid, which is proxied by ODA, has a positive and significant impact on capital formation in Nigeria for the years under analysis. The result of the Granger causality test shows that a bi-directional Granger causality exists between foreign aid and GFCF. It is therefore recommended that government should make serious efforts toward the implementation and effective utilization of foreign aid. Appropriate policy measures that would monitor the maximum and effective utilization of foreign aid are also required.

AID VOLATILITY, MACROECONOMIC POLICY AND ECONOMIC GROWTH IN PAKISTAN

Like other developing countries, Pakistan also suffers from low saving base. Historically, foreign aid has played a crucial role in filling the gap between saving and investment in case of Pakistan, albeit with considerable volatility. We analyze the impact of foreign aid and its volatility in on economic growth in Pakistan over the period of 1974-2015; foreign aid effectiveness has been evaluated in the presence of sound macroeconomic policies by constructing an index of macroeconomic policy using principal component method. The study concluded that foreign aid and its volatility has negative impact on economic growth in Pakistan under currently prevailing macroeconomic policies. This study departs from existing studies in two ways. First, Generalized Method of Moments (GMM) approach has been used in this study to control for potential endogenity related to aid inflow. Secondly, aid volatility, measured through Hodrick–Prescott (HP) filter, has been incorporated in aid-growth nexus to gauge its impact of growth performance of the country

The Economics of Foreign Aid: Time Series Evidence from a Less Developed Country (LDC)

Empirical literature on aid-growth nexus mostly centered within cross-country framework exploiting typical ordinary least squares (OLS) estimation. As a result, scarcity prevails studies empirically examine country-specific causes of aid-growth nexus exercising distinct methods. This study aims to fill this gap, taking the case of Bangladesh- a leading aid recipient country. Empirical findings based on vector error correction modeling and Granger causality test unearth absence of long-run and short-run causality of aid on GDP growth. Therefore, this study argues that although aid remains a major component of LDCs macroeconomic framework; however, it is yet to emerge as a significant player in their economic growth.

Your development or mine? Effects of donor–recipient cultural differences on the aid-growth nexus

Development aid from the West may lead to adverse growth effects in the global South due to the neglected cultural differences between development aid (paradigm) providers and recipients. I test this hypothesis empirically by augmenting an aid-growth model with proxy variables for cultural differences between donors and recipients. First, I use donor–recipient genetic distance, i.e., blood types, to capture the traditional way of cultural transmission. Second, I use western education of recipient country leaders to capture resource-based transmission of culture. Results of the OLS panel estimation in first differences show that a one unit increase in donor–recipient genetic distance reduces the main effect of aid on growth by 0.2 percentage points when aid is increased by one percentage point. In turn, a one percentage point increase in aid yields on average a 0.3 percentage point increase in growth after a decade for countries with western educated leaders.

AID-Growth Nexus Debates in Selected African Countries: A Methodological Exposition

Aims: This study examines the effectiveness of foreign aid in selected African countries. Also, it investigates the relevance of SEM system in gauging the relationship among multiple variables like foreign aid, economic growth, investment and human capital using multiple techniques such as SURE, 3SLS and OLS. This is to provide methodological exposition and contributions in aid-growth nexus debates, especially in the sample countries. Study Design: Case Study. Place and Duration of Study: Africa. Panel data ranging from 1987-2010. Methodology: Simultaneous Equations Model (SEM) using balanced panel data approach was adopted and three techniques of estimation i.e. OLS, 3SLS and Seemingly Unrelated Regressions Estimate (SURE) were utilized. This adoption is in line with the dominant view in the literature that the best model for gauging the relationships among multiple variables like foreign aid, economic growth, investment and human capital as the case in this study is through SEM system. Results: Our finding supports the popular view on aid effectiveness hypothesis in Africa. This is because our finding reveals that foreign aid impacts on economic growth through investment as a major transmission channel and it also impacts on human capital. Also, our findings indicate that SURE method proved to be the most efficient method for the estimation of SEM among the three techniques adopted; while OLS proved to be an Original Research Article British Journal of Economics, Management & Trade, 4(5): 724-742, 2014 725 appropriate technique for the estimation of SEM. Conclusion: Essentially, the application of SURE method on SEM using Africa as a case study, is indeed a major empirical contribution from this study. Hence, due to our choice of appropriate model and estimation techniques, our finding becomes consistent with the leading view on aid effectiveness in Africa. We therefore recommend that more foreign aid should be allocated to investment and human capital. In the same vein, we suggest that subsequent studies on aid-growth nexus in Africa should take a clue from this study, especially in the area of methodological contributions.

Aid-Growth Nexus in South Asia: Evidence from Time Series and Panel Cointegration

Given the strong likelihood of a sharp decline in remittance flows because of the recent recession, coupled with limited access to the global capital market, foreign aid inflow in South Asia can play an important role in boosting economic growth in this region. In the existing literature, the relationship between foreign aid and per capita real GDP is rather inconclusive. Does aid work in South Asia? We answer this question for five economies in this region: Bangladesh, India, Nepal, Pakistan, and Sri Lanka. Using both country-specific time series and a recently developed panel cointegration procedure over the period 1976 to 2008, our results suggest a positive long run relationship between growth rate of per capita real GDP and aid as a percentage of GDP for four out of five countries. Hence, this investigation tends to support the aid effectiveness hypothesis for South Asian countries.

Aid, Macroeconomic Policy Environment and Growth: Evidence from Sub-Saharan Africa

This paper is a contribution to the growing debate on aid-growth nexus. It examines the role of macroeconomic policy environment in aid-growth nexus an area which has received less attention in Sub-Saharan Africa (SSA). In a panel regression model covering twenty Sub-Saharan African countries, estimated with the use of OLS and 2SLS over the period 1970 to 2001(in nine-four year sub-periods), the study finds that a sound macroeconomic environment is fundamental for the effective contribution of aid to sustainable growth. The results also show that macroeconomic policy environment is an important determinant of growth. Overall, the paper concludes that the macroeconomic instability and poor institutional framework have crippled the growth of aid recipients in SSA.

Economic growth in a vulnerable island nation: An empirical study of the aid-growth nexus in Vanuatu

Among all the island countries of the world, Vanuatu, a small island nation in the South Pacific with a population of 220,000 was once ranked as the most vulnerable economy on the basis of having the least resilience to withstand the adverse impacts of external and internal shocks. Vanuatu is currently designated, on the basis of quality of life, as one of the five least developed countries among the Pacific island countries, the other four being Kiribati, Samoa, the Solomon Islands and Tuvalu. Recognizing its special circumstances, including its high dependency on strategic imports with unstable export earnings, proneness to natural disasters and inadequate human resource skills, the international community has been assisting the country with generous external aid ever since its independence in 1980. Bilateral development assistance comes especially from the two regional powers. But, in terms of pure grants given on an annual basis, multilateral funding agencies, including the Asian Development Bank, have been assisting the country with concessional loans for projects and reform programmes. Despite these annual aid inflows, Vanuatu has been performing poorly which is reflected in the stagnation of its per capita income. This article seeks to examine the nexus between aid and growth in Vanuatu and investigates causes behind the country’s weak performance. Based on the analysis, the article then makes recommendations with some implications for policy.

Aid-growth nexus: empirical evidence from Fiji

Foreign aid to the island economies is a major source for foreign exchange and resource needs. This paper presents an empirical analysis of the relationship between foreign aid and economic growth in the case of Fiji. A neoclassical production function is applied to estimate the aid-growth nexus. Since the data employed are time series for the period 1968 to 1996, the Autoregressive Distributed Lag approach to cointegration is utilized to estimate the models. Components of total aid, such as grant aid, loan aid, technical cooperation, bilateral and multilateral aid flows are also utilized to estimate a disaggregated short-run and long-run relationship between foreign aid and economic growth. The results show that total aid flows and its various forms, i.e. bilateral aid, grant aid and technical cooperation grant aid, has a significant impact on economic growth in Fiji. As for domestic resources, only exports and private investments in two equations show positive contribution to growth.

Aid-growth nexus: empirical evidence from Fiji

Foreign aid to the island economies is a major source for foreign exchange and resource needs. This paper presents an empirical analysis of the relationship between foreign aid and economic growth in the case of Fiji. A neoclassical production function is applied to estimate the aid-growth nexus. Since the data employed are time series for the period 1968 to 1996, the Autoregressive Distributed Lag approach to cointegration is utilized to estimate the models. Components of total aid, such as grant aid, loan aid, technical cooperation, bilateral and multilateral aid flows are also utilized to estimate a disaggregated short-run and long-run relationship between foreign aid and economic growth. The results show that total aid flows and its various forms, i.e. bilateral aid, grant aid and technical cooperation grant aid, has a significant impact on economic growth in Fiji. As for domestic resources, only exports and private investments in two equations show positive contribution to growth.