Research Paper about Foreign Aid

📌Category: Economics, World
📌Words: 979
📌Pages: 4
📌Published: 30 April 2022

Foreign aid is often granted from “advanced” countries to developing countries to improve human development, often through social or economic infrastructure(Yiew & Lau 21). It has been commonly implemented for decades through global and dyadic agreements but has received mixed conclusions from studies on its effectiveness in increasing economic growth. Extensive research exists, in which some scholars point to widely improved social conditions to support the effectiveness of foreign aid, while others call attention to decreased labor supply and capital as an indicator of failure in foreign aid. However, in their paper, Thian-Hee Yiew and Evan Lau, attempt to answer the question of whether foreign aid impedes or contributes to economic growth. They suggest a more complex relationship exists between a nation’s economic growth and foreign aid. Through an empirical analysis in which 95 developing countries were observed, Yiew and Lau, build their argument by examining how the gross domestic product(GDP) as a means of economic growth is impeded or aided by foreign aid, in terms of official development assistance(ODA). 

Yiew and Lau argue economic growth and foreign aid is represented by a “U-shape” relationship. According to Yiew and Lau, foreign aid will initially positively affect economic growth, however, over time a negative trend will occur. The authors include two additional control variables in their study: population of the labor force(POP), and foreign direct investment(FDI). Yiew and Lau expect GDP to increase with FDI, as well as GDP to increase with POP. 

After first examining four regression models, the authors choose to implement the Fixed Effects and Fixed Effects Robust Models to determine how ODA impacts GDP. The results confirm Yiew and Lau’s hypothesis, concluding that a “U-shape” trend exists between ODA and GDP. Information gathered from the World Development Indicators and the United Nations Conference on Trade and Development comprise the data used, which included 95 countries examined from 2005-2013. From the results, the authors posit that ODA correlates to a negative trend with economic growth, however, “ODA² has a positive relationship,” thus the previously mentioned U-shape (Yiew and Lau 26). The authors defend this conclusion with possible explanations put forth by existing studies, like a recipient nation’s mismanagement of ODA. The “bad policy” of a recipient government may cause ODA to inhibit economic growth(Yiew and Lau 26). Additionally, the authors suggest the negative relationship may be explained by increased citizen consumption and leisure time as a result of ODA. They argue this leads to a decrease in labor supply and productivity which ultimately negatively impacts economic growth. The positive relationship found between ODA² and economic growth is explained by Yiew and Lau as potentially resulting from multiple consequences of ODA. Firstly, the development of “social infrastructure, economic infrastructure and services and production sector,” which in turn, might produce more jobs(Yiew and Lau 21). Eventually, by investing ODA into existing social and infrastructure projects and ultimately putting more money into the pockets of citizens, the economy will grow.

Furthermore, the authors found interesting results regarding the relationship between their two control variables, POP and FDI, and economic growth. In their study, both POP and FDI has statistically significant positive effects on economic growth. Yiew and Lau quantify these relationships, finding that a 1% increase in FDI leads to a .036% economic growth increase. According to Yiew and Lau, FDI’s linkage to increased transfer technology and foreign capital can be attributed to this finding. Their model also finds a .746% economic growth increase for every 1% increase in population, where a larger population contributes to a larger labor market and thus, economic growth. Ultimately, POP and FDI account for more influence on economic growth than ODA among the states included in this study. 

Yiew and Lau create a logical argument in their study of economic growth in relation to foreign aid and ODA. However, their research falls short in a few areas which lend to the limitation of credibility in their findings. Firstly, the authors’ research omits several critical variables which historically have impacted the economic growth of nations. In this study, POP and FDI are examined, however, I would argue other global and domestic factors of states should be discussed. For example, the model used does not account for the occurrence of war, which at the time was present in many of the countries analyzed. A state’s engagement in war decreases human capital and often increases political instability, which through loss of labor, infrastructure damage, and hindered foreign relations may easily impede economic growth. Yiew and Lau do mention the influence of government “mismanagement” in their paper, however, it is not accounted for in their model. Additionally, factors like a state’s natural resources and fluctuations in their global demands might influence economic growth, separate from foreign aid. This factor is especially relevant given many developing countries are economically dependent on the export of their commodities. While quantifying these factors may prove difficult in this study, the discussion of their influence is important to understanding the extent to which foreign aid is responsible for economic growth, and the omission of these factors may risk oversimplification in diagnosing the complexity of what drives economic growth. 

Another issue arises in the depth of analysis. Despite a large sample size of states and extensive data from multiple global organizations, the information presented in this study lacks 

The variables observed, namely GDP and ODA, are inherently quantifiable, however, with the exception of controls(POP and FDI) the relationship and main focus of the study is discussed solely in a qualitative manner. The authors merely describe the relationship of ODA and GDP as a “U-shape” with a highly limited explanation. While qualitative data has value, in this scenario I would argue a quantitative approach would prove more effective in gaining validity and clarity of results. Lastly, I would suggest the inclusion of case analyses of economic growth of dyads including those in the sample. While the study includes a rather extensive sample size, not one of the included states is mentioned in this paper. Yiew and Lau reference multiple existing studies as explanations to their results, however, to elucidate their findings further, specific examples should be included. 

Thian-Hee Yiew and Evan Lau attempt to interpret the influence of foreign aid on the economic growth of developing countries. Numerous references to studies and explanations offered strong support to the authors’ hypotheses, however, they ultimately fell short in the consideration of potentially significant variables, as well as clarity in their model results.

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