Tashkent, Uzbekistan
Despite the economic growth, which was present in several countries from Asian and sub-Saharan African continents in the last years, as well as large flows of foreign assistance, the selected nations struggle to meet sustained economic development, which raises questions about the effectiveness of foreign assistance in spurring GDP growth. Thus, this study tries to uncover the impact of foreign aid, determined by net Official development assistance, on economic growth, denoted as GDP per capita growth during the period of 1993-2017. Specifically, this paper examines whether the effect of net ODA is dependent on institutional qualities. This research implements the econometric analysis such Random Effects model. The findings reveal that foreign aid by itself play a stimulating role in fostering economic development. Nevertheless, the inclusion of the interaction term of net ODA and institutions causes insignificant and negative effect of foreign aid itself, while the interaction variable positively impacts GDP per capita growth. Moreover, a theoretical model of Harrod-Domar was tested, which states that foreign assistance is necessary to fill the investment gap, which is present in the low-income countries. We concluded that the regression results of this paper are consistent with the theoretical framework. We believe that institutional qualities determine the causal direction of foreign aid in facilitating economic growth. Thus, we suggest paying more attention to reinforcing institutional structures, conduct efficient aid management, and provide adequate environment to attract foreign investment. Furthermore, it is suggested to ensure employment protection policies and improvement of educational quality.
foreign aid, economic growth, institutional qualities, Random Effects model, Harrod-Domar model
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