Foreign Assistance and Economic Growth

Abstract

This paper examines the relationship between foreign assistance and economic growth for the period 1972 to 2010. Past literature indicates that, due to low domestic resource mobilisation, Pakistan had to resort to various forms of foreign assistance on a regular basis. Using time series data since 1972 and employing statistical tests we show that foreign assistance in the absence of macroeconomic stabilisation and structural reforms has a negative relationship with real per capita GDP. However, national savings as percentage of GDP show a positive relationship with real per capita GDP. Pakistan has a long history of dependence on multilateral and bilateral development partners. Over the decades the share of grants as percentage of total foreign assistance has declined, forcing the country to procure loans at harsh conditionalities. Given the positive impact of national savings on economic growth there is an urgent need for improving the tax base, promoting instruments that encourage savings culture in the private sector and attracting remittances from abroad. These increased savings would then have to be channelled towards productive investments, which in turn require pro-market reforms.

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