Government Debt and Foreign Aid: Do They Matter for Economic Growth in Small Island Economies? Empirical Evidence from the Pacific Islands

Aruna Gounder (), Priteshni Chand () and Avineel Kumar ()
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Aruna Gounder: The University of the South Pacific
Priteshni Chand: The University of Fiji
Avineel Kumar: The University of Fiji

Journal of the Knowledge Economy, 2024, vol. 15, issue 2, No 129, 8327-8348

Abstract: Abstract This study examines the relationship between debt, foreign aid, and economic growth in three Pacific Island economies; namely Fiji, Papua New Guinea (PNG), and the Solomon Islands. Small and vulnerable island economies are dependent on foreign aid and debt for economic development. However, empirical studies on how debt and aid impact economic growth in small and fragile island economies are scarce, and this study aims to fill this gap. We use the ARDL approach and estimate the debt-growth and aid-growth relationship for each of the three economies. Our results indicate that debt reduces economic growth in both the short-run and the long-run in all three economies. Moreover, while all the three economies are also heavily dependent on foreign aid, we do not find any growth enhancing effect of aid. The findings suggest that although government borrowing and foreign aid are necessary for small island states given their lack of domestic capital, it is important that these resources be utilized efficiently for growth benefits to be realized.

Keywords: Debt; Economic growth; Foreign aid; Island economies (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s13132-023-01175-2

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