Dynamic inter-linkage between foreign aid and economic growth in Sri Lanka
Journal of Economic and Administrative Sciences
ISSN: 2054-6238
Article publication date: 22 June 2021
Issue publication date: 9 May 2023
Abstract
Purpose
The objective of this study is to explore the dynamic inter-linkage between foreign aid and economic growth in Sri Lanka over the period of 1960–2018.
Design/methodology/approach
Both exploratory and inferential data analysis tools have been employed to examine the objective of this study. The exploratory data analysis covered the scatter plots, confidence ellipse with kernel fit. The inferential data analysis included the augmented Dickey–Fuller (ADF) and Phillips–Perron (PP) unit root tests, the autoregressive distributed lag (ARDL) Bounds co-integration technique and the Granger causality test.
Findings
The test result of exploratory data analysis indicates that there is a positive relationship between foreign aid and economic growth. The ADF and PP unit root tests results indicate that the variables used in this study are stationary at their 1st difference. The co-integration test result confirms the presence of long-run relationship between foreign aid and economic growth in Sri Lanka. The estimated coefficient of foreign aid in the long-run and the short-run shows that foreign aid has a positive relationship with economic growth in Sri Lanka. The estimated coefficient of error correction term indicates that approximately 26.6% of errors are adjusted each year and further shows that the response variable of economic growth moves towards the long-run equilibrium path. The Granger causality test result shows that foreign aid in short-run Granger causes economic growth in Sri Lanka which means that one-way causality from foreign aid to economic growth is confirmed. Further, the estimated coefficient of error correction term confirms that there is the long-run Granger causal relationship between foreign aid and economic growth in Sri Lanka.
Practical implications
The findings of this study have some important policy implications for the design of efficient policy related to foreign aid and economic growth, the knowledge of which will help follow sustainable foreign aid and growth nexus.
Originality/value
This study contributes to the existing literature by using the newly introduced ARDL Bounds cointegration technique to investigate the dynamic inter-linkage between foreign aid and economic growth in Sri Lanka.
Keywords
Acknowledgements
The authors acknowledge the editor, associate editor and anonymous referees of the journal for their valuable suggestions to improve the quality of the article.
Funding: The authors received no financial support for this research, authorship and/or publication of this article.
Citation
Mohamed Aslam, A.L. and Samsudeen, S.N. (2023), "Dynamic inter-linkage between foreign aid and economic growth in Sri Lanka", Journal of Economic and Administrative Sciences, Vol. 39 No. 2, pp. 305-321. https://doi.org/10.1108/JEAS-12-2020-0203
Publisher
:Emerald Publishing Limited
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