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Financial Liberalization And The Aid Growth Relationship In India

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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, 2009. "Financial Liberalization And The Aid Growth Relationship In India," Development Research Unit Working Paper Series 10-09, Monash University, Department of Economics.
    • Handle: RePEc:mos:druwps:2009-10
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    File URL: http://www.buseco.monash.edu.au/units/dru/papers/working-papers-09/09-10financialliberalizationang.pdf
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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