Foreign Aid, Domestic Savings, And Economic Growth In South Asia

Abstract

The role of foreign aid in promoting growth by complimenting domestic savings has been an issue of considerable controversy. This study examines the role of foreign aid on domestic savings and economic growth in South Asian countries - Bangladesh, India, Nepal, Pakistan, and Sri-Lanka - by using simultaneous equation system in which growth and savings are jointly determined. The results indicate that aid has a positive and significant effect on the growth rates of the five nations studied during 1960 to 2008. However, foreign aid appears to crowd out domestic savings rather than complementing it.