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

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Author Info

  • Muhammad Javid

    (Pakistan Institute of Development Economics, Islamabad.)

  • Abdul Qayyum

    (Pakistan Institute of Development Economics, Islamabad.)

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.

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File Function: First Version, 2011
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Bibliographic Info

Paper provided by Pakistan Institute of Development Economics in its series PIDE-Working Papers with number 2011:72.

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Length: 23 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:pid:wpaper:2011:72

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Keywords: Foreign Aid; Macroeconomic policies; Economic Growth; Pakistan; ARDL;

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Cited by:
  1. Nasir, Muhammad & Rehman, Faiz Ur & Orakzai, Mejzgaan, 2012. "Exploring the nexus: Foreign aid, war on terror, and conflict in Pakistan," Economic Modelling, Elsevier, vol. 29(4), pages 1137-1145.
  2. Ali, Sharafat & Ahmad, Najid, 2013. "A Time Series Analysis of Foreign Aid and Income Inequality in Pakistan," MPRA Paper 48877, University Library of Munich, Germany.

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