Foreign Aid and Economic Growth in South Asian Countries

Abstract

This study employs panel data from 2000 to 2019 to examine and analyze the impact of foreign aid on growth in six South Asian nations, which are Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka. The motivation of this study is to furnish empirical support for resolving the ongoing discourse on the relationship between foreign aid and economic growth. To this end, the article employs three panel regression models: pooled ordinary least-squares, random effect, and fixed effect, and estimates them using White cross-sectional standard errors and covariance. The empirical results reveal that foreign aid and population have a negative and considerable impact on Asian countries’ economic progress; whereas, gross capital formation has positive and significant effects. The empirical results of this study have important implications for both donors and aid recipient countries. It suggests that to get positive influence from aid, the recipient countries should enhance the quality of governance on the other side; the donor should provide a huge amount of aid for reforming the institutions’ quality and capacity building to developing countries. Furthermore, these countries should prefer to receive a grant as aid rather than a loan to reduce the debt burden. Government should develop the appropriate policies that help to increase government revenue and reduce the unnecessary current expenditure. To increase government revenue, the tax base should be regulated rather than being reliant on foreign loans. Also, advised channeling remittance into the productive sector and reducing the trade deficit by substituting imports through attracting foreign direct investment.