An Empirical Investigation into the Contribution of Foreign Aid to Economic Growth in Developing Countries: Exploring the Role of Democracy

Abstract

The significance of the study lies in the fact that this study will enable developing countries to find the benefits that they can get by establishing and strengthening democratic institutions in order to augment the positive effects of foreign aid for their economic growth. This study aims to explore the role of democracy in determining the effectiveness of foreign aid in economic growth. This study utilizes the growth rate of real GDP as an explained variable while foreign aid (FAID), official development assistance (ODA), Political regimes (DEM), gross capital formation (GCF), real financial consumption expenditures (GFCE), and Consumer price index (CPI) are used as explanatory variables. For this, the present study uses the panel data of selected developing countries for the period of 2006 to 2018. The results of the generalized method of moments (GMM) indicate that foreign aid is not beneficial for the economic growth of selected countries whereas, democracy is favorable for higher economic growth. When foreign aid is granted to democratic countries, it accelerates economic growth. Hence, the policy makers of donors’ institutions should consider the democratic attributes to make decision about foreign aid towards developing countries.