An Investigation of the Impact of Foreign aid on Economic Growth of Pakistan
Abstract
This research study is aimed to examine the impact of foreign aid on economic growth of Pakistan. It covers a detailed introduction to the topic under discussion, highlighting the history of foreign aid received by Pakistan and the positive and negative effects it has on the different sectors of the economy. The study takes real growth rate as endogenous variable and investigates whether it is significantly or insignificantly related to foreign aid. The endogenous variables taken to study this relationship are per capita foreign aid receipt, balance of payments, budget deficits, financial depth, human capital base and the variable trend has been taken to control for the policy variable. Regression and correlation analysis show that real per capita foreign aid and real per capita GDP has a strong and positive association as indicated by correlation coefficient of 0.884. However, to the contrary of common understanding human capital and real per capita GDP has a very strong and negative association. The evidence shows that foreign aid does not have a positive impact on economic growth of Pakistan. Foreign aid has a negative and insignificant relationship with per capita gross domestic product (GDP). Therefore, instead of foreign aid, Pakistan economy may focus on growing foreign and domestic investments. With stable and sustainable sources of internal and external financing like foreign direct investment (FDI) and exports, the economic development of the country can be stimulated.
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