Can Foreign Aid and Remittances Reduce Poverty in Afghanistan An Application of Cointegration and Vector Error Correction Model

Abstract

International remittances and foreign aid flowing into developing countries are attracting increasing attention as of their rising volume and their effect on receiver countries. The basic objective of the present paper is to determine the long-run and short-run associations among poverty, foreign aid, and remittances. It is hypothesized that foreign aid and remittances are the possible variables affecting poverty. The foreign aid, remittances, and poverty comparison are tested both for the short-run and long-run. Johansen and Juselius's (JJ) cointegration and Vector Error Correction Model (VECM) was used for establishing short-run and long-run relationships between poverty and its determinants. Secondary data was collected for poverty, foreign aid, and remittance from the year 2002 to 2018. The study found a significant long-term and short-term relationship between poverty and its determinants such as foreign remittance, foreign aid, 7and per capita income. Our results are consistent with the findings of Hossain (2013), Connors (2012), Goff (2010), Banga and Sahu (2010), Asra et.al. (2005), and Jongwanich (2007) who found foreign aid and remittances do not help to poverty eradication. Keywords: Foreign Aid, Remittances, Poverty Eradication, Johansen Cointegration, Vector Error Correction Model (VECM), Afghanistan. JEL Codes: F35, F50, F24, F22, I32, O1