Foreign aid, poverty and economic growth in developing countries: A dynamic panel data causality analysis

Abstract

This article examines the causal relationship between foreign aid, poverty, and economic growth in 82 developing countries for the period 1981–2013. Taking advantage of the recently developed dynamic panel data estimation techniques, the paper tests for both panel unit roots and cointegration before employing the panel vector error-correction model (VECM) Granger causality test. The main findings are that in the short run, there is evidence of (a) a bidirectional causal relationship between economic growth and poverty; (b) a unidirectional causal relationship from economic growth to foreign aid; and (c) unidirectional causality from poverty to foreign aid. In the long-run, the study found that (a) foreign aid tends to converge to its long-run equilibrium path in response to changes in economic growth and poverty; and (b) both economic growth and poverty jointly Granger cause foreign aid.