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Foreign Aid and Economic Development A study of Foreign Aid and Its Effects and Relationship with Per Capita Income of Afghanistan

Rahmatullah Arsalan ()

MPRA Paper from University Library of Munich, Germany

Abstract: Despite the fact that Afghanistan has been receiving hundreds of billions of dollars of foreign aid since the 1970s, still, the impact of foreign aid on economic growth and particularly on per capita income of Afghanistan has been negligible and most of its population is still living below the poverty line. The rate of development seems misaligned with the level of foreign aid provided to the country. Afghanistan is becoming aid dependent, a fact causing negative consequences both economically and politically. Thus, the objective of this study is to investigate the effects and relationship of foreign aid with per capita income of Afghanistan. And the research question is: Is there any effect and relationship of foreign aid with per capita income of Afghanistan? The researcher applied quantitative research methods and employed secondary time series annual data for the period of 1970-2016. The study used a larger sample of forty-seven years compared to other studies which best represent the population and provides strong basis for validation and generalization of results. The study conducted the analysis of time series data through ADF to check Stationarity of each variable first and then Johansen co-integration tests to assess the long-run relationship of foreign aid and per capita income of Afghanistan. All analyses were carried out using econometric software package EViews 10. The results of ADF tests showed that variables were stationary at first difference. The Johansen co-integration test authenticated that there is no long-run relationship between foreign aid and per capita income of Afghanistan. The study concluded that reliance on foreign aid is not a long term sustainable approach for the economic growth of Afghanistan and further provides the following recommendations: - Afghanistan should start working on reducing the dependency on foreign aid and focus on encouragement of foreign direct investments and extractions of mineral mines. - For short-run, the amount of aid to Afghanistan infrastructure development projects is not enough as required; thus, the Afghan government should work together with donors and allocate enough aid to infrastructure development projects, such as establishment of dams, railway tracks and roads. This will greatly contribute to long-run sustainable economic growth. - The main barriers, such as corruption, insecurity and bad governance that each contribute to the ineffectiveness of aid, should be comprehensively addressed through full implementation of Afghanistan National Strategy for Anti-Corruption.

Keywords: Afghanistan; foreign aid; economic growth; ADF; Johansen Co-Integration; GDP Per Capita (search for similar items in EconPapers)
JEL-codes: O10 (search for similar items in EconPapers)
Date: 2019-04, Revised 2019-09
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Handle: RePEc:pra:mprapa:96136