Aid and Per-Capita Economic Growth in Asia: A Panel Cointegration Test

In light of growing skepticism toward aid-effectiveness for economic growth in aid-dependent economies, this paper investigates the aid-growth nexus for a panel of 13 Asian economies that have historically been some of the largest recipients of foreign aid, namely, Afghanistan, Bangladesh, Bhutan, Cambodia, India, Lao PDR, Maldives, Myanmar, Nepal, Pakistan, Philippines, Sri Lanka and Vietnam. The period of study is 1971-2010. Both short-run and long-run effects of foreign aid on economic growth are significantly negative: a 1% rise in aid (in share of GDP) results in 0.18% fall in per-capita real income in the long-run; thus, if the aid-dependent Asian countries continue to receive foreign aid, then over time, per-capita economic growth in those countries will decline. Cointegrating relationships also indicate significantly positive long-run effects of trade openness and domestic investment on per-capita economic growth.