The Impact of Foreign aid to the GDP Growth of Central Asian Countries

Abstract

Discussions about the effectiveness of foreign aid go back decades. Some development economists argue that aid has increased corruption, substituted domestic resources, distorted income distribution, enriched the elite and supported inefficient governments. Others state that foreign aid has facilitated GDP growth by filling the foreign exchange gap, increasing national savings, complementing domestic resources and providing access to modern technology. This research focuses on the effectiveness of foreign aid in the Central Asian region and examined the impact of overseas development assistance in per capita terms to GDP growth over the period of 1990-2015. The initial assessment indicated that five countries in the region have received US $20,095 million in the last decades, but standards of living, quality of life and other development indicators have not significantly improved. Thus, the research examines the relationship between foreign aid and economic growth applying the augmented Solow growth model to measure the sign and magnitude of foreign aid and along with other predicting variables of growth. Using the annual World Development Indicators database, strongly balanced panel data with 67 observations have been constructed and several econometric regressions including OLS and GLS have been incorporated. All estimations gave positive and statistically significant relationships between key predictor and dependent variables of the estimations. Robustness checks of the model indicated that fixed effect estimation and GLS are preferred regressions for the study. Therefore, the paper concludes that foreign aid can facilitate economic growth and stimulate the economy of Central Asian developing countries.