Foreign Aid and Country's Growth

This study assesses the effect of overall and sectoral aid disbursements on the economic growth of LDCs in the short and long runs. In particular, to empirically test the hypotheses regarding humanitarian, development food, and technical cooperation assistance, dynamic panel ARDL – PMG model is employed. The analysis makes use of an annual panel dataset of 47 countries over 2010-2018 period. In the short run, results indicate that there is no statistically significant evidence of any impact on aggregate output, regardless of aid purpose. In the long run, foreign humanitarian and technical aid spur growth, whereas development food supplies – hamper. Likewise, the overall net ODA exhibits no immediate effect but harms economic growth in the long-run relationship. The obtained results are structurally valid and robust to alternative model specifications and choices of control variables. This paper contributes to the current aid effectiveness literature by focusing on the dynamic relationship between disaggregated aid and growth of LDCs, whilst controlling for salient socioeconomic and geopolitical factors. Results of this paper can potentially be utilized by regulatory authorities and both donors and recipients to adjust the current composition of ODA or align aid proliferation with the local compliances. These activities are in turn intended to promote economic growth in the poorest countries of the international community.