Does foreign aid with political strings dampen or heighten growth? An analysis of aid-growth nexus in Pakistan
Pakistan has received around 1.3 billion dollars (current US$) on an annual basis from 1972 to 2014 in the form of bilateral and multilateral aid. While Pakistan’s per capita GDP (current US$) rose from 152 US$ in 1972 to 1,315 US$ in 2014, the world per capita GDP increased from 979US$ to 10,755 US$ in the same period. A lot of empirical evidence suggests that the aid coming from the countries that attach political and strategic strings with the aid fails to contribute to economic growth significantly. Using data for the sample period 1972 – 2014 and employing the Vector Error Correction (VECM) estimation method, we find that aggregate official development aid has a significant and positive long-run impact on the GDP per capita. A 1% rise in aggregated Official Development Assistance increases Pakistan’s GDP per capita by 0.75%. We also find that bilateral aid from very few countries such as Belgium, UK, and the US has a significant long-term impact on Pakistan’s GDP.
Additionally, we fail to accept the hypothesis that aid coming from some countries with political and geostrategic strings has any adverse impact on the GDP per capita of Pakistan in the long run. Regarding the impact of different components of aggregate aid on Pakistan’s GDP per capita, we see mixed effects. The results show that a 1 % increase in both Official Development Assistance (ODA) and technical cooperation decreases GDP per capita by 1.55% and 1.063%, respectively. Conversely, a one percent increase in grants leads to an increase of 2.71% in Pakistan GDP per capita in the long run. As Pakistan’s economic problems have considerably deepened in recent years because of a variety of factors including Covid-19, Pakistan has been actively looking for economic bailouts from the IMF and other bilateral partners. This study is expected to provide important insights regarding the components of aid and their implications for economic growth.