Thian-Hee Yiew

University Tunku Abdul Rahman

Malaysia

yiewth@utar.edu.my

Does foreign aid contributes to or impeded economic growth

Evan Lau

Universiti Malaysia Sarawak (UNIMAS)

Malaysia

lphevan@unimas.my

Abstract. This study empirically investigates the role and the impact of foreign aid (ODA) on economic growth (GDP) using 95 developing countries as the sample. Here we also include foreign direct investment (FDI) and population (POP) as the control variables. The panel data results indicate that a U-shape relationship exists between foreign aid and economic growth (Wamboye, 2012; Gyimah-Brempong and Racine, 2014). Initially, foreign aid negatively impacts the countries’ growth and over a period of time, it positively contributes to economic growth. Further, the results strongly support the view that both FDI and POP are more important determinants of GDP, implying that GDP is less likely to depend on ODA. Strengthening the legal framework would be essential for these countries while their overdependency on the influx of ODA might lead to negative impacts on the growth as a whole. Importantly, effective management of foreign aid would ensure the Sustainable Development Goals (SDG) are achieved.

Received: February, 2018

1st Revision: May, 2018

Accepted: July, 2018

DOI: 10.14254/2071-

8330.2018/11-3/2

JEL Classification: F35, O40, C23

Keywords: foreign aid, economic growth, developing countries, panel data