Aid-Growth Nexus in South Asia: Evidence from Time Series and Panel Cointegration

Abstract

Given the strong likelihood of a sharp decline in remittance flows because of the recent recession, coupled with limited access to the global capital market, foreign aid inflow in South Asia can play an important role in boosting economic growth in this region. In the existing literature, the relationship between foreign aid and per capita real GDP is rather inconclusive. Does aid work in South Asia? We answer this question for five economies in this region: Bangladesh, India, Nepal, Pakistan, and Sri Lanka. Using both country-specific time series and a recently developed panel cointegration procedure over the period 1976 to 2008, our results suggest a positive long run relationship between growth rate of per capita real GDP and aid as a percentage of GDP for four out of five countries. Hence, this investigation tends to support the aid effectiveness hypothesis for South Asian countries.