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Financial Liberalization And The Aid Growth Relationship In India

  • James B. Ang

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.

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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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Paper provided by Monash University, Department of Economics in its series Development Research Unit Working Paper Series with number 10-09.

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Length: 23 pages
Date of creation: 01 Jun 2009
Date of revision:
Handle: RePEc:mos:druwps:2009-10
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