The inconsistent effect of foreign exchange earnings on economic development of Fiji: The strategies and long run relationship through vector error correction modelling

Abstract

Foreign aid, foreign direct investment (FDI), exports and remittances result critical for the economic growth of countries that are geographically isolated from the rest of the world and located at disaster prone areas such as Fiji. The research proposes these variables might have a different impact in emerging economies, based on the current social, economic and political context of the recipient country. This implies that prior to allocating scarce resources, each country's framework should have been analysed to maximise their potential impact. For this study, we applied Johansen cointegration and vector error correction model (VECM) on time series data over the period of 1979-2017. The results reveal that the variables under study have a positive impact on the economic growth of Fiji. Furthermore, the combined effect of foreign aid and FDI provides synergies, increasing its positive effects. We recommend Fiji authorities to implement appropriate government policies that prioritise exports, foreign aid, FDI and remittances in the expressed order, in order to foster sustainable economic growth. We also present a policy framework through the integration of results of our study.