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Foreign aid and growth nexus: empirical evidence from South Asian countries

Nihar Ranjan Jena (Department of Economics, KET's V.G. Vaze College of Arts, Science and Commerce, Recognized Research Centre of University of Mumbai, University of Mumbai, Mumbai, India)
Narayan Sethi (Department of Humanities and Social Sciences, National Institute of Technology Rourkela, Rourkela, India)

South Asian Journal of Business Studies

ISSN: 2398-628X

Article publication date: 27 May 2020

Issue publication date: 3 February 2021




The purpose of this paper is to empirically examine the effectiveness of foreign aid in improving economic growth prospects in the South Asian region from 1996 to 2017.


A sample of eight South Asian countries for the period 1996–2017 is being considered for this study. This study uses various econometrics tools such as Pedroni and Johansen–Fisher panel cointegration test, panel fully modified ordinary least square and panel dynamic ordinary least square (PDOLS) to ascertain the long-run and short-run dynamics among the variables under consideration.


The empirical results found that long-run, as well as the short-run relationship, exist among foreign aid, economic growth, investment, financial deepening, price stability and trade openness of the South Asian economies. The authors also found unidirectional causality running from foreign aid to economic growth. Both the long-run relationship as well as short-run causality between foreign aid and economic growth is unequivocally positive.


This study uses a dynamic macroeconomic modeling framework to assess the impact of aid flows on economic growth in South Asian economies. Taking into account the diversity of level of growth experienced by the eight countries in the Asian region, this study uses an appropriate regression technique, i.e. PDOLS whose results are robust. Therefore, the policymakers in these countries are well-advised to implement suitable policy measures to ensure optimum utilization of foreign capital resources garnered by way of receipt of foreign aid and build on for stronger future economic growth.



The authors are grateful to the Editor, Associate Editor and anonymous referees of the journal for their extremely useful suggestions to improve the quality of the paper.


Jena, N.R. and Sethi, N. (2021), "Foreign aid and growth nexus: empirical evidence from South Asian countries", South Asian Journal of Business Studies, Vol. 10 No. 1, pp. 1-28.



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