Foreign aid volatility and economic growth

Ruksaar Shah , Mirza Aqeel Baig2, Muhammad Javid

Professor, Ruksaar Shah,


While the debate on the effectiveness of foreign aid remains inconclusive, recent literature has focused on exploring the possible causes that render such an ineffective. Among others, the volatility in aid inflows is cited as one of the reasons for aid ineffectiveness. Historically, Pakistan has been one of the major aid recipient countries, but it still lags behind in terms of economic development. By analysing the period 1972-2015, we explored the role of aid volatility in explaining economic growth in the case of Pakistan. By developing an index for macroeconomic policy environment, we also investigate the role of prevailing macroeconomic conditions in aid effectiveness. We employed the Generalised Method of Moments (GMM) for estimation because of its advantage in handling the endogeneity of foreign aid. After controlling for traditional determinants of economic growth, our results show that both foreign aid and its volatility are negatively related to economic growth in case of Pakistan. However, we have found that a favourable policy environment results in an increase in foreign aid effectiveness.

  • Keywords:

    Foreign Aid, Volatility, Macroeconomic Policy Index, Economic Growth, Generalised Method Of Moments, Endogeneity

  • Area of Research:

    Islamic Studies

  • Doi#:


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