Foreign Aid and Growth Nexus in Pakistan: The Role of Macroeconomic Policies

Muhammad Javid and Abdul Qayyum

No 2011:72, PIDE-Working Papers from Pakistan Institute of Development Economics

Abstract: Despite receiving large quantities of foreign aid, Pakistan, like many other developing countries, has remained stagnant and become more aiddependent. This grim reality has provoke d a vigorous debate on the effectiveness of aid. This study examines the effectiveness of aid, focusing on the ongoing debate on the interactive effect of aid and policy on sustainable economic growth. The empirical analysis is based on the ARDL cointegration approach, using the data for the period 1960 to 2008. The empirical findings are that foreign aid and real GDP have a negative relationship, while the aid-policy interactive term and real GDP growth have a positive and significant relationship. Interesting results emerge when aid-GDP alone is introduced into the growth equation and has an insignificant positive coefficient in the long run and a negative and weakly significant coefficient in the short run, while the aidpolicy interactive term has a positive and significant coefficient both in the short run and the long run. When we disaggregate aid in terms of the bilateral and multilateral components, bilateral aid is significantly positive in the short run and multilateral aid is insignificant, while the aid interactive term is positive in both cases. The results strongly support the view that foreign aid does have a positive impact on economic growth in Pakistan, though conditionally so, i.e., if based on sound macroeconomic policies.

Keywords: Foreign Aid; Macroeconomic policies; Economic Growth; Pakistan; ARDL (search for similar items in EconPapers)
JEL-codes: C23 O1 O2 O4 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2011
New Economics Papers: this item is included in nep-dev
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Citations: View citations in EconPapers (21)

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