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Dual-objective Donors and Investment across Economic Regions: Theory and Evidence

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  • King Yoong Lim
  • Chunping Liu

Abstract

Based on a novel theoretical framework with a dual-objective donor giving grant (driven by benevolent objective) and loan aid (profitability motive), as well as a public private partnership-like investment structure and multi-region feedback mechanism, we estimate a panel structural VAR model of grant aid, loan aid, private consumption, and aggregate capital stock using data of nine economic communities/regions covering the 1961-2017 period. By allowing for cross-heterogeneity and interdependencies across regions, we identify empirical commonalities and differences across regions. Amidst a generally weak aid-investment link, we find loan aid to Granger-cause 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.

Suggested Citation

  • King Yoong Lim & Chunping Liu, 2021. "Dual-objective Donors and Investment across Economic Regions: Theory and Evidence," NBS Discussion Papers in Economics 2021/01, Economics, Nottingham Business School, Nottingham Trent University.
    • Handle: RePEc:nbs:wpaper:2021/01
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    More about this item

    Keywords

    foreign aid; donor objectives; investment; regional integration; structural VAR.;
    All these keywords.

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • P45 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - International Linkages

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