Foreign Aid and Economic Development: Exploring the Empirical Linkage for India, Sri Lanka and Maldives

Foreign aid or Official Development Assistance (ODA) is considered as an essential foreign capital in the modern era of global development finance. The main goals of the foreign aid programs towards developing economies is to accelerate their economic development such that the threshold level is confined to one at which a self-sustainable and satisfactory rate of growth can be achieved. The present study examines the causal relationships between foreign aid (ODA) and economic development for India, Sri Lanka and Maldives. We have used the annual time series data from 1960-61 to 2010-11. The study also tries to find out the causal relationship among foreign aid with other macroeconomic variables such as domestic investment, financial sector development and trade performance of these countries. We find foreign aid is one of the major determinant factors for contributing to the development process of India, Sri Lanka and Maldives. These countries need to maintain high growth rate to create more employment opportunities and to reduce poverty. Considering the long run causal relationship among foreign aid, trade performance, financial sector development, domestic investment and economic growth, the countries should focus on the efficient utilization of foreign aid where the rate of return should be greater than rate of investment. However, the direction of inter-linkage between foreign aid and economic development contradicts to each other in case of India and Sri Lanka. Our study suggests that the government should be more concerned about its efficient utilization rather than its amount of inflows. The empirical results show that there is a long run equilibrium relationship exists between foreign aid and economic development in these countries. Our study suggests that the government should be more concerned about its efficient utilization rather than its amount of inflows. The empirical results show that there is a long run equilibrium relationship exists between foreign aid and economic development in these countries.