Foreign Aid and Growth Trajectory in Bhutan: A Time Series Analysis

Debate over the effectiveness of foreign aid is a great concern to the aid-receiving countries. Empirical studies using multi-country data shows mixed results while studies with single country data reveal positive impact of aid. Bhutan accepts foreign aid to finance development requirements due to lack of domestic savings and petty export earnings. This paper focuses on the effectiveness of foreign grants in case of the economy of Bhutan. Statistical analysis of time-series data, fitting a vector auto-regression (VAR) model, shows that external aid in Bhutan is effective in raising income as well as domestic savings. Granger causality tests too show similar results.  Notwithstanding the primacy of self-reliance in Bhutan’s development philosophy, foreign aid might play a significant role for development in Bhutan, at least for the time being.