Effects of foreign aid on GDP growth and fiscal behavior: an econometric case study of bangladesh

This study estimates an aid-growth model and an aid-fiscal model to quantify the effects of foreign aid on GDP growth and fiscal behavior in Bangladesh over the 1973-1999 period. The aid-growth model applies the cointegration method to a neoclassical growth model and finds that aid has marginal effects on GDP growth, but when aid is disaggregated into loans and grants, it is found that loans significantly raise GDP growth, while grants do not. The aid-fiscal model employs a non-linear simultaneous model and finds that foreign grants mostly finance non-productive civil expenditures, but foreign loans generally finance public investment projects and human capital building programs, which eventually lead to higher output growth.