Foreign aid and economic growth in South Asia

Abstract

The main objective of this paper is to investigate the impact of foreign aid on economic growth in South Asia. Still, there is an inconclusive debate in determining the exact relationship between foreign aid and economic growth. Foreign aid basically consists of two types namely grants and loans. Although government doesn’t want to repay grants, it needs to repay loan amount and interest payments. High debt burden and political influences make foreign aid less effective. To opposite that opinion, some empirical findings proved that foreign aid is important for increasing the economic growth, assistance for human health, immediate humanitarian assistance in disasters and long term development programs in developing countries. Thus, this paper aims to find out the impact of foreign aid on economic growth and try to suggest recommendation for a better economic status. Panel data of four South Asian countries are used for this analysis from 1977 to 2017. This study basically focuses on the impact of concessional loan and official development assistance on the economies of South Asian countries. Ordinary Least Squares model is used to test the relationship between froing aid and economic growth. The results of the analysis show that foreign aid has a negative impact on economic growth in South Asia during the period of 1977 to 2017. Therefore, it is better not to depend on foreign aid. Because a country has to pay higher proportion of aid repayments from its gross domestic production and it is difficult to allocate resources on development purposes. Thus, developing countries should develop appropriate policies to reduce debt burden and develop a mechanism to maintain a suitable aid level. The government should effectively manage budget in order to avoid unnecessary current expenditure. The tax base should be regulated to enhance government revenue rather than depend on other nations. It is important to empower the transparency and accountability of governing bodies and strengthen public finance management.