Aid and developing regional integration

King Yoong Lim and Chunping Liu

International Review of Economics & Finance, 2024, vol. 93, issue PB, 756-776

Abstract: This paper examines megatrends and interdependence of the loan aid-capital investment links across developing regions. Theoretically, it contributes to the existing studies by providing a novel theoretical framework with a dual-objective donor-giving grant (driven by a benevolent objective) and loan aid (profitability motive), as well as a public–private partnership-like investment structure and multi-region feedback mechanism. Empirically, this paper adds to the literature by allowing for cross-heterogeneity and interdependencies across regions of loan aid-capital investment link. We estimate a panel structural VAR model of grant aid, loan aid, private consumption, and aggregate capital stock using data from nine developing regional country blocs covering the 1961-2017 period. Amidst a generally weak aid-investment link, we find loan aid to Granger causes capital accumulation, and among African regions, it is the most (least) productive – in terms of within- and spillover effects – in the IGAD (ECOWAS) region. In addition, our results suggest deeper regional integration between the Sub-Saharan African regions than the collective Latin American & Caribbean regions and the two Southern Asian regions (Southeast Asia and South Asia) examined.

Keywords: Aid and donor objectives; Capital investment spillover; Regional country blocs; Regional integration; Structural VAR (search for similar items in EconPapers)
JEL-codes: F35 O40 P45 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Dual-objective Donors and Investment across Economic Regions: Theory and Evidence (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:93:y:2024:i:pb:p:756-776

DOI: 10.1016/j.iref.2024.05.002

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