The Impact of the United States Foreign Aid on the Economic Growth: Case Study of South and Central Asian Countries (2002-2016)

Abstract

This paper aims to explore the effects of the U.S. foreign aid on the economic growth of Afghanistan, Pakistan, India, Sri Lanka, Bangladesh, Nepal, Bhutan, Uzbekistan, Tajikistan, Kyrgyzstan and Kazakhstan form 2002-2016. Secondary panel data with a General Method of the Moment (GMM) estimation technique is used to study the effects of U.S. foreign aid on the sample countries' economic growth.

The data sources used in this research paper include World Development Indicators (WDI) from the World Bank website, United States Agency for International Development (USAID) website, and The British Broadcasting Cooperation Website (BBC) timeline country profile. To address the endogeneity problems in the econometric model used, all the endogenous variables are instrumented with their second lag because the second lag is not related with the error term.

The result of GMM estimation indicates that the United States foreign aid has no significant positive impact on the economic growth of South and Central Asian Countries. The main obstacles or factors constraining the effectiveness of aid on the economic growth in South and Central Asia are rampant corruption and insufficient absorptive capacity of aid recipient countries. The coefficients for both corruption and absorptive capacity are negative and statistically significant. On the other hand, foreign direct investment (FDI), growth of population in the region, trade, and government expenditures have a considerably significant positive impact on the sample countries' economic development.

To improve the effectiveness of foreign aid on the economic growth of selected countries, this research provides four policy recommendations which include creating effective anti-corruption policy, increasing regional collaboration for removing security challenges such presence of insurgents and terrorist groups, adopting evidence- based economic policies, and making an effective monitoring and evaluation system aiming to track the consumption of donated money and increase accountability.