Impact of Official Development Assistance on Economic Growth: Evidence from South and Southeast Asian Countries

Abstract

The main purpose on this study is to explore the impact of Official Development Assistance (ODA) on the economic growth of Afghanistan, Nepal, Bangladesh, Pakistan, Bhutan, Sir Lanka, India, Maldives, Cambodia, Indonesia, Lao People’s Dem. Rep., Malaysia, Myanmar, Philippines, Thailand, and Vietnam. It covers 15 years from 2002 to 2016. For this research, the paper used secondary dynamic panel data. The econometric model which is used for analysis consisted of GDP growth rate as dependent variable while the independent variables are labor force, Official Development Assistance, trade openness, conflict, government expenditure, investment, broad money, control of corruption, interaction term, government effectiveness, inflation rate, and time dummies. The main data sources are the World Bank’s (WB) World Development Indicators database (WDI), WB Worldwide Governance Indicators database (WGI), and the data of conflict is obtained from BBC timeline country profile. A one-step generalized method of moments (GMM) with second lag instrument methodology, and Pooled OLS, Fixed Effect as a benchmark, is applied in order to solve for possible endogeneity between the macroeconomic variables. The study found that there is a significant negative impact of ODA, positive and significant impact of ODA and control of corruption interaction term, labor, and broad money on economic growth. In addition, government expenditure (fiscal policy), inflation (monetary policy), trade openness (trade policy), control of corruption, and inflation have a positive but insignificant impact on economic growth. While conflict and government effectiveness have a negative and insignificant impact. The result recommends that SSEA countries rethink and revise their aid policies, control corruption, expand financial services, decrease unproductive public expenditure, and prioritize more government policies.