NEXUS BETWEEN FOREIGN AID AND GDP: A PANEL DATA ANALYSIS OF TWENTY VULNERABLE COUNTRIES (V20)

Abstract

This research explores the relationship between foreign aid and the GDP in V20 countries from 2006 to 2019 using a panel data analysis. It assesses how foreign aid, specifically the Official Development Assistance (ODA) impacts the GDP; with trade, remittances, population, and foreign direct investment (FDI) as control variables. The study utilizes pooled Ordinary Least Squares (OLS), random effects, and fixed effects models, along with Hausman specification and the Business Process Lifecycle Management (BPLM) tests to ensure robust results. The findings indicate that the ODA negatively affects the GDP, whereas trade, remittances, population, and FDI positively contribute to economic growth. This suggests that foreign aid might not always promote growth in the V20 countries, possibly due to inefficient allocation or misuse of resources. Conversely, the positive effects of the other variables highlight their importance in driving economic progress in these vulnerable nations. The study concludes that foreign aid may hamper growth if not properly managed and recommends directing the foreign aid towards productive sectors such as agriculture, human capital development, and infrastructure. Policymakers are urged to focus aid on areas that foster sustainable development, reduce dependency on external funding, and stimulate domestic growth. Additionally, creating favorable conditions for FDI, trade, and remittances is crucial to support the long-term economic growth of the V20 countries.