Foreign Aid in South Asia - Allocation and Economic Impact
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This paper is an attempt to answer this important question: does foreign aid promote economic growth and the welfare of people in low income countries? The paper is designed to contribute to this debate by taking a different approach from conventional analyses. The study extends the existing studies in two important ways. First, this study employs sectorial data on aid, but also takes into consideration the heterogeneous nature of aid in five major South Asian countries to reveal the role of ODA in the post 2000 period. To address problems with endogeneity and measurement errors, the panel GLS estimation technique was employed. Second, this study incorporates governance indicators to conduct more rigorous empirical analysis in revealing the aid-growth relationship in the context of South Asia. The main finding confirms our hypotheses regarding the dominant contribution of Economic Aid on the economic growth or the income level of low income countries. The estimated coefficient for Social Aid is statistically significant only with the inclusion of governance instrument. In a more segmentalized analysis, aid to economic infrastructure has a significantly positive impact throughout the entire specifications, counteracting against the argument of the ‘crowding out effect’ of foreign aid. As for Social Aid and aid to the production sector, the results were mostly insignificant and very negative. Here the issue of 'fungibility' may arise but it should be dealt with caution. It may also raise the importance of channels through which aid is provided. Finally, in our specifications, the inclusion of governance indicators increases the explanatory power and the coefficients of key variables have become more significant, suggesting the possible role of relevant governance. But this does not provide adequate support for the notion that the impact of aid depends on democratic governance. These results provide a sound credence to the MDG’s goals and the discussions of MDG’s post targets. The pessimistic approach to the effectiveness of aid in its growth and welfare enhancing effect is not justified yet. As shown in this study, aid remains an important tool for enhancing the development prospects of less developed countries. The challenge is to improve the effectiveness of foreign aid so that economy and welfare level in low income countries can be substantially advanced. The next challenge would be to find out the evidence of channels through which aid might effectively promote growth. These efforts will contribute to improve aid effectiveness, hence to boost economic growth for low income countries.
Abstract
This paper is an attempt to answer this important question: does foreign aid promote economic growth and the welfare of people in low income countries? The paper is designed to contribute to this debate by taking a different approach from conventional analyses. The study extends the existing studies in two important ways. First, this study employs sectorial data on aid, but also takes into consideration the heterogeneous nature of aid in five major South Asian countries to reveal the role of ODA in the post 2000 period. To address problems with endogeneity and measurement errors, the panel GLS estimation technique was employed. Second, this study incorporates governance indicators to conduct more rigorous empirical analysis in revealing the aid-growth relationship in the context of South Asia. The main finding confirms our hypotheses regarding the dominant contribution of Economic Aid on the economic growth or the income level of low income countries. The estimated coefficient for Social Aid is statistically significant only with the inclusion of governance instrument. In a more segmentalized analysis, aid to economic infrastructure has a significantly positive impact throughout the entire specifications, counteracting against the argument of the ‘crowding out effect’ of foreign aid. As for Social Aid and aid to the production sector, the results were mostly insignificant and very negative. Here the issue of 'fungibility' may arise but it should be dealt with caution. It may also raise the importance of channels through which aid is provided. Finally, in our specifications, the inclusion of governance indicators increases the explanatory power and the coefficients of key variables have become more significant, suggesting the possible role of relevant governance. But this does not provide adequate support for the notion that the impact of aid depends on democratic governance. These results provide a sound credence to the MDG’s goals and the discussions of MDG’s post targets. The pessimistic approach to the effectiveness of aid in its growth and welfare enhancing effect is not justified yet. As shown in this study, aid remains an important tool for enhancing the development prospects of less developed countries. The challenge is to improve the effectiveness of foreign aid so that economy and welfare level in low income countries can be substantially advanced. The next challenge would be to find out the evidence of channels through which aid might effectively promote growth. These efforts will contribute to improve aid effectiveness, hence to boost economic growth for low income countries.
참고문헌 (24)
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