Aid and Growth in Bangladesh: A Reassessment

Abstract

Although the amount of foreign aid received by Bangladesh as a share of GDP has declined over the years, Bangladesh remains one of the heavily aid- dependent countries in Asia. The results of most empirical studies that have ex- amined the effectiveness of foreign aid or other forms of development assistance for economic growth have varied considerably depending on the econometric methodology used and the period of study. As the debate and controversy over aid-effectiveness for economic growth continue to grow, this paper re- investigates the short-run and long-run effects of foreign aid received on per- capita real income of Bangladesh over the period 1972–2015. A vector error cor- rection model is estimated. The results indicate lack of any significant short-run and long-run relation between foreign aid and per-capita real income. Results fur- ther indicate short-run unidirectional causalities from per-capita real GDP to domestic investment (in proportion to GDP), from government expenditure (in proportion to GDP) to inflation rate, from inflation rate to domestic investment (in proportion to GDP), and from domestic investment to foreign aid (as percentages of GDP). Short-run bidirectional causality is observed between per-capita electricity consumption and per-capita real GDP, and between per-capita real GDP and government expenditure (in proportion to GDP).