Does Foreign Aid Have an Expected Role in the Economic Growth of Bangladesh? An Analysis in ARDL Approach

Abstract

Bangladesh, a lower-middle-income country in South Asia and expected to be a developing country by 2024, is one of the most densely populated countries in the world, with 166.30 million (WDI, 2021) people. Foreign Aid (FA) plays a vital role in the economic development of Bangladesh. Foreign Aid, loans, and grants generally, which we call Official Development Assistance (ODA) (in this study, we have used the term 'Foreign aid') have increased gradually over the years after the liberation of Bangladesh with the increase of per capita GDP. In our study, we have conducted a single country investigation on Bangladesh and examined the impact of Foreign Aid on the Economic growth of Bangladesh from 1971 to 2019. The ARDL bounds test methodology was applied in the study, followed by the unit root test and the bound test for cointegration. Several diagnostic tests were conducted to check the stability and reliability of the model. The obtained results revealed that Foreign Aid has a significant and positive impact on the Economic growth of Bangladesh in the long- and short-run. The coefficients of the variables of our study refer that a 1(one) unit increase in foreign Aid would intensify 0.24 units of Economic growth in Bangladesh. In line with Foreign Aid, Gross capital formation also has a significant positive impact on the country's economic development. On the contrary, trade openness has a negative but insignificant impact both in the short and long run. Besides, population growth negatively and significantly impacts economic growth in the long run. In this study, finally, we have recommended some policy implications for the Government of Bangladesh.

Foreign aids and human capital development in Nigeria

“…This is particularly true if the recipient country executes proper policies. Also, other scholars such as Ewubare & Ozigbu (2019) and Nderitu & Wenani (2023) argued that foreign aid has both positive and negative impact on the economic growth and economic development of the third world countries (Fasanya & Onakoya, 2022). It is based on this that the paper aims to investigate the impact of foreign aids on human capital development in Nigeria with a view to closing the precarious gap that exists between foreign aids and human capital development in Nigeria.…”

“…The impact of foreign aids is debatable among development economists. Some are of the opinion that external aid has no positive impact on economic growth, let alone economic development (for example, Boone, 1996 in Fasanya & Onakoya, 2022). Others such as Burnside and Dollar (2000) as cited in Fasanya & Onakoya (2022) hold a strong belief that foreign aids contributes significantly in improving economic development of less developed countries like Nigeria.…”

Foreign aids and economic growth in Africa: Does third-country effect matter?

“…Tüzemen and Tüzemen (2015) also suggested a negative relationship between ODA and economic growth in Turkey. Other researchers, such as (Moreira, 2005;Fasanya &Onakoya, 2012 andSiddique, Kian, &Batool2018), found that ODA improved economic growth.…”

“…The findings revealed a negative influence of foreign aid on economic growth. Fasanya and Onakoya (2012) examined the impact of ODA on Nigerian economic growth from 1970 -2010 using the neoclassical modelling analytical framework.…”

The Effect of Official Development Assistance Aid on Economic Growth and Domestic Savings in Kenya

“…Sakyi (2011) found foreign aid and trade openness significantly and positively influenced economic growth. Fasanya and Onakoya (2012) study on the effect of ODA on economic expansion in Africa concluded that the inflow of aid into the nation promoted economic growth by boosting domestic savings and investments, freeing up resources that improve domestic investment. Fayissa and El-Kaissy (1999) concluded that because international aid supplements domestic savings rather than substituting for them, it has a positive impact on the growth of the economies of developing states.…”