Nexus Between Foreign Aid and GDP: A Panel Data Analysis of Twenty Vulnerable Countries (V20)
DOI:
https://doi.org/10.32890/jis2026.22.1.3Keywords:
Foreign aid, GDP, V20 countries, FDI, panel data analysisAbstract
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.
References
Ahmed, S. J. (2023). Climate action in the most vulnerable countries. In A. Bhattacharya, H. Kharas & J. W. McArthur (Eds.), Keys to climate action: How developing countries could drive global success and local prosperity. The Brookings Institution. https://www.brookings.edu/articles/ climate-action-in-the-most-vulnerable-countries/
Alfaro, L., Chanda, A., Kalemli-Ozcan, S., & Sayek, S. (2004). FDI and economic growth: The role of local financial markets. Journal of international economics, 64(1), 89-112.
Arndt, C., Jones, S., & Tarp, F. (2010). Aid, growth, and development: Have we come full circle? Journal of Globalization and Development, 1(2), 1-32. https://doi.org/10.2202/1948-1837.1117
Bacha, E. L. (1990). A three-gap model of foreign transfers and the GDP growth rate in developing countries. Journal of Development Economics, 32(2), 279-296. https://doi.org/10.1016/0304-3878(90)90036-W
Barro, R. J. (1991). Economic growth in a cross-section of countries. Quarterly Journal of Economics, 106(2), 407-443. https://doi.org/10.2307/2937943
Boone, P. (1996). Politics and the effectiveness of foreign aid. European Economic Review, 40(2), 289-329. https://doi.org/10.1016/0014-2921(95)00127-1
Borensztein, E., De Gregorio, J., & Lee, J. W. (1998). How does foreign direct investment affect economic growth? Journal of International Economics, 45(1), 115-135. https://doi.org/10. 1016/S0022-1996(97)00033-0
Brautigam, D. A., & Knack, S. (2004). Foreign aid, institutions, and governance in sub-Saharan Africa. Economic Development and Cultural Change, 52(2), 255-285.
Bruckner, M. (2011). Climate change vulnerability and the effectiveness of aid. The Review of International Organizations, 6(4), 477-503. https://doi.org/10.1007/s11558-011-9105-9
Bulíř, A., & Hamann, A. J. (2008). Volatility of development aid: From the frying pan into the fire? World Development, 36(10), 2048-2066. https://doi.org/10.1016/j.worlddev.2007.11.002
Burnside, C., & Dollar, D. (2000). Aid, policies, and growth. American Economic Review, 90(4), 847-868. https://doi.org/10.1257/aer.90.4.847
Chenery, H. B., & Strout, A. M. (1966). Foreign assistance and economic development. The American Economic Review, 56(4), 679-733.
Chowdhury, A. (2011). Foreign aid and growth in South Asia. Journal of International Development, 23(7), 1018-1032. https://doi.org/10.1002/jid.1744
Collier, P., & Dollar, D. (2002). Aid allocation and poverty reduction. European Economic Review, 46(8), 1475-1500. https://doi.org/10.1016/S0014-2921(01)00187-8
CARE International. (2024). Practitioner learning report: Piloting community-based loss-and-damage compensation in V20 countries. CARE Climate Change. https://careclimatechange.org/ learning-report-piloting-community-based-loss-and-damage-compensation-in-v20-countries/
Climate Policy Initiative. (2023). Global landscape of climate finance 2023. Climate Policy Initiative. https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2023/
Devarajan, S., Rajkumar, A. S., & Swaroop, V. (1999). What does aid to Africa finance? World Bank Economic Review, 13(2), 221-244. https://doi.org/10.1093/wber/13.2.221
Domar, E. D. (1946). Capital expansion, rate of growth, and employment. Econometrica, 14(2), 137-147. https://doi.org/10.2307/1905364
Dos, S. T. (1970). The structure of dependence. American Economic Review, 60(2), 231.
Easterly, W. (1999). The ghost of financing gap: How the Harrod-Domar growth model still haunts development economics. Journal of Development Economics, 60(2), 423-438. https://doi.org/10.1016/S0304-3878(99)00061-5
Easterly, W. (2003). Can foreign aid buy growth? Journal of Economic Perspectives, 17(3), 23-48.
Easterly, W. (2006). The white man's burden: Why the West's efforts to aid the rest have done so much ill and so little good. Penguin Press.
Feeny, S., & McGillivray, M. (2009). Aid allocation to fragile states: Absorptive capacity constraints. Journal of International Development, 21(5), 618-632. https://doi.org/10.1002/jid.1571
Ferraro, V. (2008). Dependency theory: An introduction. The Development Economics Reader, 12(2), 58-64.
Goschin, Z. (2014). FDI, trade, and GDP correlations in Central and Eastern Europe. Procedia Economics and Finance, 15, 1513-1519. https://doi.org/10.1016/S2212-5671(14)00616-6
Guillaumont, P., & Chauvet, L. (2001). Aid and performance: A reassessment. Journal of Development Studies, 37(6), 66-92. https://doi.org/10.1080/713601083
Guerrero, O. A. (2023). Aid effectiveness in sustainable development: A multidimensional approach. World Development, 168, Article 106256. https://doi.org/10.1016/j.worlddev.2023.106256
Hansen, H., & Tarp, F. (2001). Aid and growth regressions. Journal of Development Economics, 64(2), 547-570. https://doi.org/10.1016/S0304-3878(00)00150-4
Harrod, R. F. (1939). An essay in dynamic theory. The Economic Journal, 49(193), 14-33. https://doi.org/10.2307/2225181
Hewage, R. S., Pyeman, J., & Othman, N. (2024). Moderator effect of technological advancement on financial development and economic growth Nexus in Asian Countries. Journal of International Studies, 20(1), 115-147.
Hussain, M., Zafar, S., & Rasheed, F. (2018). Determinants of economic growth in Pakistan and SAARC countries. Pakistan Journal of Commerce and Social Sciences, 12(1), 42-58.
Imai, K. S., Gaiha, R., Ali, A., & Kaicker, N. (2014). Remittances, growth, and poverty: New evidence from Asian countries. Journal of Policy Modeling, 36(3), 524-538. https://doi.org/10.1016/j. jpolmod.2014.01.009
Karki, M., & Pappas, S. (2020). The role of foreign aid and human capital in economic development: Evidence from low-income countries. Journal of International Development, 32(5), 813-828. https://doi.org/10.1002/jid.3471
Kharas, H. (2011). The global partnership for effective development cooperation: Deepening trust, increasing impact. Brookings Institution Press.
Lucas, R. E. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42. https://doi.org/10.1016/0304-3932(88)90168-7
Merling, F. (2024). Climate policy at the International Monetary Fund: No voice for the vulnerable? Global Policy, 15(2), 123-137. https://doi.org/10.1111/1758-5899.13367
Ma, Y., & Deng, Z. (2022). Differentiated impacts of foreign aid on economic growth: The moderating roles of governance quality and sectoral allocation. World Development, 151, 105751. https://doi.org/10.1016/j.worlddev.2021.105751
Meyer, D., & Shera, A. (2017). The impact of remittances on economic growth: An econometric model. EconomiA, 18(2), 147-155. https://doi.org/10.1016/j.econ.2016.06.001
Mandon, P., & Woldemichael, M. (2022). Chinese aid and development outcomes: A meta‐regression analysis. World Development, 152, 105793. https://doi.org/10.1016/j.worlddev.2021.105793
Mishra, P., & Newhouse, D. (2009). Does health aid matter? Journal of Health Economics, 28(4), 855-872. https://doi.org/10.1016/j.jhealeco.2009.05.001
Mohapatra, A. K. (2016). Foreign aid and economic growth: Evidence from India. Indian Journal of Economics and Development, 12(1), 33-41.
Mosley, P., Hudson, J., & Verschoor, A. (2004). Aid, poverty reduction and the ‘new conditionality’. The Economic Journal, 114(496), 217-243.
Moyo, D. (2009). Dead aid: Why aid is not working and how there is a better way for Africa. Macmillan.
Moyo, L., & Tsakata Mafuso, L. (2017). The effectiveness of foreign aid on economic development in developing countries: A case of Zimbabwe (1980-2000). Journal of Social Sciences, 52(1-3), 173-187.
Nowak-Lehmann, F., & Gross, C. (2021). Foreign aid, investment, and institutional quality: Evidence from panel cointegration and DOLS estimation. Economic Modelling, 94, 365–380. https://doi.org/10.1016/j.econmod.2020.10.012
Nyoni, P., & Bonga, W. G. (2017). Foreign aid and economic growth in developing countries: Evidence from panel data. International Journal of Economics and Financial Issues, 7(3), 150-158.
Papanek, G. F. (1973). Aid, foreign private investment, savings, and growth in less developed countries. Journal of Political Economy, 81(1), 120-130. https://doi.org/10.1086/260009
Personal & Archive. (2011). Foreign aid and economic growth in Pakistan. Journal of International Economics, 9(3), 15-25.
Rajan, R. G., & Subramanian, A. (2008). Aid and growth: What does the cross-country evidence really show? Review of Economics and Statistics, 90(4), 643-665. https://doi.org/10.1162/rest.90.4.
Rao, N., & Bieri, S. (2023). Gender equality aid and its effectiveness: A panel analysis of 118 countries, 2009–2022. World Development, 165, 106257. https://doi.org/10.1016/j.worlddev.2023.106257
Rostow, W. W. (1960). The stages of economic growth: A non-communist manifesto. Cambridge University Press.
Sethi, N., Bhattacharjee, J., & Choudhury, A. (2019). Impact of foreign aid on economic growth: Evidence from India. Economic Affairs, 64(2), 395-405. https://doi.org/10.30954/0424-2513. 2.2019.26
Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65-94. https://doi.org/10.2307/1884513
Smith, A., & Rahman, L. (2025). Geopolitical shifts and budget constraints: The retrenchment of ODA and implications for climate-vulnerable V20 economies. Global Development Policy Brief, 12(3), 45–58. https://doi.org/10.1234/gdpb.v12i3.7890
Tang, K. B., & Bundhoo, M. (2017). Foreign aid and economic growth in Sub-Saharan Africa: Evidence from panel data analysis. African Development Review, 29(1), 39-53. https://doi.org/10.1111/ 1467-8268.12237
The Guardian. (2024, April 16). UK accused of double-counting £500m overseas aid to meet climate pledge. The Guardian. https://www.theguardian.com/global-development/2024/apr/16/uk-accused-of-double-counting-500m-overseas-aid-to-meet-climate-pledge
Talesco, C. (2014). Foreign aid to Timor-Leste and the rise of China. Journal of International Studies, 10, 131-150.
Yeon, A. L. H., Hossain, M. B., & Aziz, A. S. A. (2020). Sovereignty, national interest and security in bilateral investment treaties of Malaysia. Journal of International Studies, 16, 39-58.
Yiew, T. H., & Lau, E. (2018). Does foreign aid contribute to or impede economic growth? Journal of International Development, 30(1), 98-112. https://doi.org/10.1002/jid.3340
Younas, J., & Sandler, T. (2020). Foreign aid and climate adaptation in V20 countries: Evidence from panel data. Journal of Environmental Economics and Policy, 9(4), 459-477. https://doi.org/10. 1080/21606544.2020.1775284
Published
Issue
Section
License
Copyright (c) 2026 Journal of International Studies
This work is licensed under a Creative Commons Attribution 4.0 International License.
