Foreign aid, foreign direct investment and economic growth of Lao PDR
This paper investigates the impact of foreign aid and foreign direct investment on the long-run income per capita and short-run income growth of Lao PDR. We formulate a modification of Solow model; then we employ a cointegration technique to carry out the long-run relationship, and employ an error correction model to estimate the short-run growth effects. The results show that foreign aid has a strong positive impact and is the main contributor on income level and income growth of Lao PDR in the long run. Surprisingly, FDI has significant negative impact on long-run income per capita and small positive impact on income growth in the short run. We conclude that the long-run negative impact of FDI might be due to its surge and concentration on few economic sectors and due to its extreme rises and falls in some period. Therefore, the policies to promote FDI in many sectors and the policies that attract stable FDI inflows should be promulgated.
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