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Foreign Aid-Growth Nexus in Pakistan: Role of Macroeconomic Policies

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  • Muhammad, Javid
  • Qayyum, Abdul

Abstract

Despite receiving the large quantities of foreign aid, like many other Developing Countries, Pakistan has remained stagnant and become more aid dependent. This grim reality provokes 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. Based on the empirical results we find that foreign aid and real GDP has negative relationship while aid-policy interactive term and real GDP growth has positive and significant relationship. The interesting results emerge; when Aid/GDP alone is introduced into the growth equation it has insignificant positive coefficient in the long run and negative and weakly significant coefficient in the short run while aid policy interactive term has positive and significant coefficient both in the short run and long run. When we disaggregate aid in term bilateral and multilateral component, bilateral aid is significantly positive in the short run and multilateral aid is insignificant while aid interactive term is positive in both cases. The results strongly support the view that foreign aid does have positive impact on economic growth in Pakistan conditional on sound macroeconomic policies.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29498.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:29498

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

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  1. Raghuram Rajan & Arvind Subramanian, 2005. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," IMF Working Papers 05/127, International Monetary Fund.
  2. Rati Ram, 2003. "Roles of Bilateral and Multilateral Aid in Economic Growth of Developing Countries," Kyklos, Wiley Blackwell, vol. 56(1), pages 95-110, February.
  3. C-J. Dalgaard & H. Hansen, 2001. "On Aid, Growth and Good Policies," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 17-41.
  4. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
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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. Kargbo, Philip Michael, 2012. "Impact of Foreign Aid on Economic Growth in Sierra Leone: Empirical Analysis," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).

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