Estimating aggregate economic rate of return to foreign aid in Pakistan

Muhammad Arshad (), Sana Hameed Pasha (), Naeem Akram () and Nadia Hussain ()
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Muhammad Arshad: Ministry of Economic Affairs
Sana Hameed Pasha: Ministry of Economic Affairs
Nadia Hussain: Ministry of Economic Affairs

SN Business & Economics, 2023, vol. 3, issue 6, 1-19

Abstract: Abstract The effectiveness of foreign aid is a highly debated issue in the economic literature. It was argued that foreign aid makes countries dependent on it and is ineffective, and the negative impacts of aid outweigh its positive role. A contrasting argument is that foreign aid has helped different economies in their economic development. Taiwan, Israel, and South Korea are some examples of success stories that signify that aid is a crucial and essential ingredient in the process of economic development. Given the importance of aid effectiveness, the present study has attempted to calculate the rate of returns to foreign aid in Pakistan by using data for the period 1960–2020 and using the generalized method of moments (GMM) technique. The study calculated that foreign aid plays a positive role in the economic development of Pakistan and the rate of return on foreign aid is 10–14% in different specifications. It is suggested that before accepting any new loan, its rate of return must be calculated. Development activities such as conducting feasibility studies and other pre-investment analyses should be financed either from foreign grants or from internal sources.

Keywords: Foreign aid; Economic development; Rate of returns (search for similar items in EconPapers)
JEL-codes: F35 I26 O11 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s43546-023-00475-8

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