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Does Foreign Aid Promote Growth? Exploring the Role of Financial Liberalization

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  • James B. Ang

Abstract

This paper examines the impact of foreign aid on the process of economic development in India by controlling for the degree of financial liberalization. A composite index is constructed using the method of principal component analysis to capture the joint influence of various financial sector policies. The results show that while foreign aid exerts a direct negative influence on output expansion, its indirect effect via financial liberalization is positive. Therefore, an important implication of the findings in this paper is that adequate liberalization in the financial system of the host country is a crucial requirement for effective foreign aid. Our results are robust to a number of control variables and estimation techniques.

Suggested Citation

  • James B. Ang, 2010. "Does Foreign Aid Promote Growth? Exploring the Role of Financial Liberalization," Review of Development Economics, Wiley Blackwell, vol. 14(2), pages 197-212, May.
  • Handle: RePEc:bla:rdevec:v:14:y:2010:i:2:p:197-212
    DOI: 10.1111/j.1467-9361.2010.00547.x
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    Cited by:

    1. Mah Jai S., 2015. "The Effect of Foreign Direct Investment Inflows on Income Inequality: Evidence from China," Global Economy Journal, De Gruyter, vol. 15(4), pages 443-453, December.
    2. Debasish Kumar Das & Champa Bati Dutta, 2013. "Global Financial Crisis And Foreign Development Assistance Shocks In Least Developing Countries," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 1-41, June.
    3. Mah Jai S., 2015. "Export Expansion and Economic Growth in Tanzania," Global Economy Journal, De Gruyter, vol. 15(1), pages 173-185, March.
    4. Subhayu Bandyopadhyay & Dustin Chambers & Jonathan Munemo, 2014. "Foreign Aid, Illegal Immigration, and Host Country Welfare," Review of Development Economics, Wiley Blackwell, vol. 18(2), pages 372-385, May.
    5. Uwaoma G. Nwaogu & Michael J. Ryan, 2015. "FDI, Foreign Aid, Remittance and Economic Growth in Developing Countries," Review of Development Economics, Wiley Blackwell, vol. 19(1), pages 100-115, February.
    6. James Ang & Kunal Sen, 2011. "Private saving in India and Malaysia compared: the roles of financial liberalization and expected pension benefits," Empirical Economics, Springer, vol. 41(2), pages 247-267, October.
    7. Duc Hong Vo & Anh The Vo & Chi Minh Ho, 2020. "Does Financial Integration Enhance Economic Growth in China?," Economies, MDPI, Open Access Journal, vol. 8(3), pages 1-18, August.
    8. Adedoyin Isola Lawal & Tony I. Nwanji & Abiola Asaleye & Victor Ahmed, 2016. "Economic growth, financial development and trade openness in Nigeria: An application of the ARDL bound testing approach," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1258810-125, December.
    9. Fahmida Khatun & Syed Yusuf Saadat & Md. Kamruzzaman, 2019. "FINANCE FOR SDGs: Addressing Governance Challenge of Aid Utilisation in Bangladesh," CPD Working Paper 125, Centre for Policy Dialogue (CPD).
    10. Jalil, Abdul & Tariq, Rabbia & Bibi, Nazia, 2014. "Fiscal deficit and inflation: New evidences from Pakistan using a bounds testing approach," Economic Modelling, Elsevier, vol. 37(C), pages 120-126.
    11. Jalil, Abdul & Mahmood, Tahir & Idrees, Muhammad, 2013. "Tourism–growth nexus in Pakistan: Evidence from ARDL bounds tests," Economic Modelling, Elsevier, vol. 35(C), pages 185-191.
    12. James B. ANG, 2014. "Innovation and Financial Liberalization: The Case of India," Economic Growth Centre Working Paper Series 1404, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    13. Njangang, Henri & Nembot Ndeffo, Luc & Noubissi Domguia, Edmond & Fosto Koyeu, Prevost, 2018. "The long-run and short-run effects of foreign direct investment, foreign aid and remittances on economic growth in African countries," MPRA Paper 89747, University Library of Munich, Germany.
    14. Hoda Abd El Hamid Ali, 2013. "Foreign Aid and Economic Growth in Egypt: A Cointegration Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 3(3), pages 743-751.
    15. Abdul Jalil & Samia Manan & Sundus Saleemi, 2016. "Estimating the growth effects of services sector: a cointegration analysis for Pakistan," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 5(1), pages 1-14, December.
    16. Ang, James B., 2014. "Innovation and financial liberalization," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 214-229.

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