Abstract

This paper examines the effects of foreign aid on economic growth in low-income nations. Though its effectiveness is still up for discussion, foreign aid is generally considered to be an essential instrument for fostering economic progress in low-income countries. This study uses a panel dataset of 16 aid-recipient nations from 1985 to 2023 to investigate the correlation between foreign aid and economic growth. The Keynesian Aggregate Expenditure Model, the Harrod-Domar Model, and the Solow Growth Model are among the theoretical frameworks used in the analysis to evaluate the effects of foreign aid on capital accumulation, investment, and consumption. Empirical evidence contradicts the models' suggestion that foreign aid and economic growth are positively correlated. The results of this study, which used panel data regression models, show that foreign aid has a statistically insignificant impact on GDP growth. On the other hand, elements like gross domestic savings and foreign direct investment (FDI) have a more robust and steady positive influence on economic growth. These findings are consistent with earlier studies like Burnside and Dollar. That suggested foreign aid might not work in countries with weak institutions, bad governance, and inefficient aid use. The results have important policy implications, suggesting that rather than depending on foreign aid, governments in low-income nations should put more effort into boosting their own financial resources and draw in more foreign direct investment. Maximizing the potential advantages of foreign aid requires structural economic reforms, better governance, and openness in aid distribution. This study adds to the current discussion on the efficacy of aid and raises the possibility that internal investment and financial stability may be more important for sustainable economic growth than reliance on outside assistance.

Advisor

Moledina, Amyaz

Department

Economics

Publication Date

2025

Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

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