The Long-run relationship between ODA, growth and governance: An application of FMOLS and DOLS Approachs

Yahyaoui, Ismahen and Bouchoucha, Najeh (2019): The Long-run relationship between ODA, growth and governance: An application of FMOLS and DOLS Approachs. Published in:

Abstract

This paper investigates the role of good governance to ameliorate, in the long-run term, the effectiveness of foreign aid in terms of economic growth in Maghrebian economies from 1996 to 2014, using the FMOLS and DOLS model. According to the results of the analysis, it was determined that there is a negative relationship between foreign aid and economic growth in the long-run term. However, the effectiveness of aid had ameliorated if countries have good quality of governance, measured by the six dimensions of World Bank Governance. Nevertheless, the most pertinent indicators that ameliorate the aid’s effectiveness are Control of Corruption, Voice and Accountability and Quality of Regulation.

• Item Type: MPRA Paper
• Language: English
• Keywords: aid, governance, economic growth, FMOLS, DOLS
• Subjects: F - International Economics > F0 - General > F00 - General

References

• Abd El Hamid Ali. H (2013), “Foreign Aid and Economic Growth in Egypt: A Cointegration Analysis.” International Journal of Economics and Financial Issues, Vol. 3, No. 3, 2013, pp.743-751

• Ali, A. M., and H. S. Isse. (2005). “An Empirical Analysis of the Effect of Aid on Growth.”International Advances in Economic Research, 11 (1): 1–11.

• Alvi, E., D. Mukherjee, and E. K. Shukralla. (2008). “Aid, Policies, and Growth in Developing Countries: A New Look at the Empirics.”Southern Economic Journal, 77 (3): 693–706.

• Ang, J. B. (2010). “Does Foreign Aid Promote Growth? Exploring the Role of Financial Liberalization.” Review of DevelopmentEconomics, 14 (2): 197–212.

• Ang, J.B. (2010), Does Foreign Aid Promote Growth? Exploring the role of financial liberalization. Review of Development Economics, 14(2), 197-212.

• Arndt. C and Jones. S, (2015), “Assessing Foreign Aid’s Long-Run Contribution to Growth and Development.”World Development, Vol. 69, pp. 6–18

• Asongu, S. A., & Jellal, M. (2013). “On the channels of foreign aid to corruption”, Economics Bulletin, 33(3), pp. 2191-2201.

• Asongu, S. A., (2014b). “On taxation, political accountability and foreign aid: empirics to a celebrated literature”, South African Journal of Economics: Forthcoming.

• Asteriou, D. (2009). “Foreign Aid and Economic Growth: New Evidence from a Panel Data Approach for Five South Asian Countries.” Journal of Policy Modeling, 31 (1): 155–161.

• Balde, Y. (2011). “The Impact of Remittances and Foreign Aid on Savings/Investment in Sub-Saharan Africa.”African Development Review, 23(2), 247-262.

• Bassam, A.A. (2008), "Foreign aid and economic growth in Egypt and Jordan: an empirical analysis". Working Paper 418, Economic Research Forum, 1-8

• Bhattarai, B. (2009). “Foreign Aid and Growth in Nepal: An Empirical Analysis.”The Journal of Developing Areas, 42 (2): 283–302.

• Bhattari. B, and Sharma. K (2013). “Aid, Policy, and Growth: The Case of Nepal?”, Journal of Economic Issues, 47(4):895-910

• Boone, P. (1996), “Politics and the effectiveness of foreign aid.“European Economic Review, vol.40, p.289–329.

• Boone, T (2000)”saving, investment and capital flows an empirical study of the Asian economics.”Working paper, n°3.

• Bräutigam, D. A., and S. Knack. (2004). “Foreign Aid, Institutions, and Governance in Sub-Saharan Africa.” Economic Development and Cultural Change, 52 (2): 255–285

• Burke, P. J., & Ahmadi-Esfahani, F. Z. (2006). “Aid and growth: A study of South East Asia.” Journal of Asian Economics, 17(2), 350-362.

• Burnside, C., & Dollar, D. (2000). “Aid, growth, the incentive regime, and poverty reduction.”The World Bank: Structure and Policies, 3, 210.

• Burnside, Craig et David Dollar (2000), “Aid, Policies, and Growth.”American Economic Review, 90:4 (September), pp. 847–68.

• Burnside, Craig et David Dollar (2004), “Aid, Policies, and Growth: Revisiting the Evidence.” World Bank mimeo.

• Collier, P., and D. Dollar.(2002). “Aid Allocation and Poverty Reduction.” European Economic Review 46 (8): 1475–1500

• Dalgaard, C. J., H. Hansen, and F. Tarp. (2004). “On the Empirics of Foreign Aid and Growth.”The Economic Journal, 114 (496): F191–F216.

• Dickey, D. A., & Fuller, W. A. (1979). “Distribution of the estimators for autoregressive time series with a unit root“, Journal of the American Statistical Association, 74, 427–431.

• Fayissa, B., and M. I. El-Kaissy. (1999). “Foreign Aid and the Economic Growth of Developing Countries (LDCs): Further Evidence.” Studies in Comparative International Development, 34 (3): 37–50.

• Feeny, S. (2007). “Impacts of Foreign Aid to Melanesia.” Journal of the Asia Pacific Economy, 12 (1): 34–60

• Gomanee, K., S. Girma, and O. Morrissey. (2005). “Aid and Growth in Sub-Saharan Africa: Accounting for Transmission Mechanisms.” Journal of International Development, 17 (8): 1055–1075

• Gounder, R. (2001). “Aid-Growth Nexus: Empirical Evidence from Fiji.” Applied Economics, 33 (8): 1009– 1019.

• Herzer, D., and M. Grimm. (2012). “Does Foreign Aid Increase Private Investment? Evidence from Panel Cointegration.”Applied Economics, 44 (20): 2537–2550.

• Herzer, D., and O. Morrissey. (2013). “Foreign Aid and Domestic Output in the Long Run.”Review of World Economics, 149 (4): 723–748.

• Im,K.S ,Pesaran,M.H.,and Shin, Y.(2003). “ testing for unit roots in heterogeneous panels“, Journal of Econometrics,115,53-74.

• Irandoust, M., and J. Ericsson. (2005). “Foreign Aid, Domestic Savings, and Growth in LDCs: An Application of Likelihood-Based Panel Cointegration.” EconomicModelling , 22 (4): 616–627

• Islam, A. (1992). “Foreign Aid and Economic Growth: An Econometric Study of Bangladesh.” Journal of the History of Economic Thought, 24 (5): 541–544

• Islam, M. N. (2003). “Political Regimes and the Effects of Foreign Aid on Economic Growth.” The Journal of Developing Areas, 37 (1): 35–53.Juselius, K., N. F.

• Juselius, K,N.F.Moller, and F.Tarp.(2014).“The long-Run Impact of Foreign Aid in African countries: Insights from Multivariate Time Series Analysis.”Oxford Bulletin of Economics and Statistics, 76(2):153-184.

• Kargbo, P. M., and K. Sen. (2014). “Aid Categories that Foster Pro-poor Growth: The Case of Sierra Leone.” African Development Review, 26 (2): 416–429.

• Karras, G. (2006), « Foreign aid and long-run economic growth: empirical evidence for a panel of developing countries» Journal of International Development, vol.18, no.7, p.15–28.

• Kaufmann, D., Kraay, A., &Mastruzzi, M. (2010).”World governance indicators project.” World Bank.

• Khan, M. A., and A. Ahmed. (2007). “Foreign Aid – Blessing or Curse: Evidence from Pakistan.”The Pakistan Development Review, 45 (3): 215–240.

• Kim, J. (2011). “Foreign Aid and Economic Development: The Success Story of South Korea.”Pacific Focus, 26 (2): 260–286.

• Levin, A., Lin, C. F., & Chu, C. S. (2002). “Unit root tests in panel data: asymptotic and finite sample properties“, Journal of Econometrics, 108, 1–24.

• Lloyd, T., O. Morrissey, and R. Osei.(2001). “Aid, Exports and Growth in Ghana.” CREDIT Research Paper, No. 01/01. https://www.econstor.eu/bitstream/10419/81784/1/01-01.pdf

• Loxley, J., and H. A. Sackey. (2008). “Aid Effectiveness in Africa.” African Development Review, 20 (2): 163–199.

• Mallik, G. (2008). “Foreign Aid and Economic Growth: A Cointegration Analysis of the Six Poorest African Countries.” Economic Analysis and Policy, 38 (2): 251–260.

• Mekasha, T. J., and F. Tarp. (2013). “Aid and Growth: What Meta-analysis Reveals.”Journal of Development Studies, 49 (4): 564–583.

• Moller, and F. Tarp. (2014). “The Long-Run Impact of Foreign Aid in 36 African Countries: Insights from Multivariate Time Series Analysis.” Oxford Bulletin of Economics and Statistics, 76 (2): 153–184.

• Moolio. P et Kong. S, (2016).”Foreign Aid and Economic Growth: Panel Cointegration Analysis for Cambodia, Lao PDR, Myanmar, and Vietnam”, Athens Journal of Business and Economics, Vol. 2, No. 4, pp. 417-128

• Moreira, S. B. (2005). “Evaluating the Impact of Foreign Aid on Economic Growth: A Cross Country Study.” Journal of Economic Development, 30 (2): 25–48.

• Nkusu, M. M., and S. Sayek (2004). “Local Financial Development and the Aid-Growth Relationship.” IMF Working Paper, No. 4-238. http://www.econstor.eu/bitstream/10419/19849/1/Sayek.pdf

• Ouattara, B. (2008) "A re‐examination of the savings displacement hypothesis", Empirical Economics, vol. 36, 3, pp.671‐683

• Ovaska, T. (2003). “The Failure of Development Aid.” Cato Journal, 23 (2): 175–188. • Papanek, G. F. (1973). “Aid, foreign private investment, savings, and growth in less developed countries.”The Journal of Political Economy, 120-130.

• Pedroni, P. (2004). “Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis“, Econometric Theory, 20, 597–625.

• Phillips, P. C. B., & Perron, P. (1988). “Testing for a unit root in time series regressions“, Biometrika, 75, 335–346.

• Rajan, R., & Subramanian, A. (2008). “Aid and growth: What does the cross-country evidence really show?” The Review of economics and Statistics, 90(4), 643-665.

• Sarwar, Hassan and T. Mahmood.(2015).”Foreign Aid and Governance in Pakistan.” Pakistan Economic and Social Review, 53(2):149-173.

• Sharma, K., and B. Bhattarai. (2013). “Aid, Policy, and Growth: The Case of Nepal.” Journal of Economic Issues, 47 (4): 895–910.

• Shields, M. (2007) "Foreign aid and domestic savings: The crowding out effect", Discussion Paper 35, Monash University

• Snyder, W.D. (2000) "Foreign aid and domestic Savings: a spurious correlation?", Economic Development and Cultural Change, vol.39, 1, pp.175-181

• Solow, R. M., (1956). “A Contribution to the Theory of Economic Growth.” The Quarterly Journal of Economics, 70 (1): 65–94.

• Svensson, J. (1999). “Aid, Growth and Democracy.”Economics & Politics, 11 (3): 275–297

• Taslim, M.A and Weliwita, A. (2000). “The Inverse Relation between Saving and Aid: An Alternative Explanation”, Journal of economic development Volume 25, Number 1, June 2000

• Tiba, S, Omri and Frikha, M.(2015).”The four way linkage between renewable energy environmental quality, trade and economic growth: a comparative analysis between high and middle-income countries”, Energy Systems, 7, 103-144.