Volume 6, Issue 2, December 2020, Page: 36-49
Effects of Foreign Aid Inflow on Economic Growth of Uganda: Autoregressive Distributed Lag Modelling (ARDL)
Ssemanda Patrick Edward, Department of Economics and Statistics, Kyambogo University, Kampala, Uganda
Henry Tumwebaze Karamuriro, Department of Economics and Statistics, Kyambogo University, Kampala, Uganda
Received: Feb. 14, 2020;       Accepted: Feb. 27, 2020;       Published: Aug. 27, 2020
DOI: 10.11648/j.ijsmit.20200602.11      View  178      Downloads  87
Abstract
Uganda has always relied on foreign assistance to enhance its economic development and has been a recipient of foreign assistance from individual countries and from multilateral organizations. The study aims at establishing the effects of foreign aid on the economic growth of Uganda. It used annual time series data for the period 1970-2017. The hypothesis that foreign aid can promote growth was explored. This hypothesis was tested using time series data for foreign aid. An empirical model is estimated using the Autoregressive Distributed Lag (ARDL) approach to cointegration proposed by Pesaran and Shin [59]. Results show that foreign aid inflow significantly reduced economic growth in Uganda in the short run and long run. The domestic investment was significant and had a positive sign in the short run while exports increased output in the short and long run. Dummy variable for insecurity increase output in the short run and increased it in the long run. The study identified previous periods of democracy index and effective labor to have negatively affected output in the short run. In the long run, effective Labour force, exports, Dummy variable for insecurity and democratic index was found to increase output in the long run. This study contributes to the literature on foreign aid and economic growth by providing the theoretical and empirical evidence for Uganda.
Keywords
Foreign Aid, Economic Growth, Autoregressive Distributed Lag Modelling
To cite this article
Ssemanda Patrick Edward, Henry Tumwebaze Karamuriro, Effects of Foreign Aid Inflow on Economic Growth of Uganda: Autoregressive Distributed Lag Modelling (ARDL), International Journal of Sustainability Management and Information Technologies. Vol. 6, No. 2, 2020, pp. 36-49. doi: 10.11648/j.ijsmit.20200602.11
Copyright
Copyright © 2020 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Reference
[1]
Ahmed, E. and A. Hamdani (2003): The Role of Foreign Direct Investment in Economic Growth. Pakistan Economics and Social Review 41: 1&2, 29–43.
[2]
Alesina, A., S. Ozler, N. Roubini and P. Swagel. (1992): Political instability and Economic growth. NBER Working Paper no. 3478.
[3]
Amavilah, A. V. (1998) German Aid and Trade versus Namibian GDP and Labour Productivity. Applied Economics 30, 689–695.
[4]
Artadi, E. V and Sala-i-Martin, X (2003), The Economic Tragedy of the XXth Century: Growth in Africa’, Cambridge, MA: NBER Working Paper Series WP9865.
[5]
Bacha, E. L. (1990), ‘A Three-gap Model of Foreign Transfers and the GDP Growth rate in Developing Countries, Journal of Development Economics, 32: 279–296.
[6]
Babyenda Peter (2014): Foreign Aid and Economic Growth in Uganda, Unpublished, School of Economics, Makerere University Kampala.
[7]
Barro R. (1991): Economic growth in a cross section of countries, Quarterly Journal of Economics, 106.
[8]
Barro R. and Sala-i-Martin X. (1995): Economic growth, New York: McGraw-Hill London School of Economics.
[9]
Burke, P. J. and F. Z. Ahmadi-Esfahani (2006): Aid and growth: A study of South East Asia, Journal of Asian Economics. 17: 350-362.
[10]
Burnside C. and Dollar D. (2001): Aid, policies, and growth. American Economic Review 90.
[11]
Burnside C. and Dollar D. (1997): Aid, Policies, and Growth, Policy Research Working Paper No. 1777, World Bank.
[12]
Bwire Thomas, Tim Lloyd & Oliver Morrissey (2017): Fiscal Reforms and the Fiscal Effects of aid In Uganda, The Journal of Development Studies. 53 (7).
[13]
Chenery, H. and A. Strout (1966): Foreign assistance and economic development, American Economic Review 56.
[14]
Dowling, J. M. and U. Hiemenz (1982): Aid, Savings, and Growth in the Asian Region, Economic Office Report Series 3, Asian Development Bank.
[15]
Devarajan, S., V. Swaroop, and Heng-fu Zou. (1998): The composition of public expenditure and economic growth.” Journal of Monetary Economics 37.
[16]
Dickey, D. A and Fuller, W. A. (1979): Distributions of the Estimators for Autoregressive Time Series with a Unit Root, Journal of American Statistical Association, 74 (366), pp. 427.
[17]
Durbarry R., Gemmell N. and Greenaway D. (1998): New Evidence on the Impact of Foreign Aid on Economic Growth, CREDIT Research Paper 98/8, University of Nottingham.
[18]
Easterly, W. (2003): Can foreign aid buy growth? Journal of Economic Perspectives Vol. 17.
[19]
Edwards J. R. (1994): Regression analysis as an alternative to difference scores. Journal of Management, 20, 683-689.
[20]
Edwards, S. and G. Tabellini (1990): Explaining Fiscal Policies and Inflation in Developing Countries, NBER Working Paper No. 2493.
[21]
Engle Robert F. and C. W. J. Granger (1987): Co-Integration and Error Correction, Representation, Estimation, and Testing, Econometrica, 55 (2): 251-276.
[22]
Ekanayake E. M. and Dasha Chatrna (2011): The effect of foreign aid on economic growth in developing countries, Journal of International Business and Cultural Studies Bethune-Cookman University.
[23]
Elbadawi, I. A. (1999), ‘External Aid: Help or Hindrance to Export Orientation in Africa?’ Journal of African Economies, 8 (4): 575-616.
[24]
Fafchamps Marcel (2000): ‘Engines of Growth and Africa’s Economic Performance’, mimeo, Centre for the Study of African Economies, University of Oxford.
[25]
Feeny Simon (2005): The Impact of Foreign Aid on Economic Growth in Papua New Guinea, Journal of Development Studies, Vol. 41, No. 6, August 2005, pp. 1092–1117 ISSN 0022-0388.
[26]
Feyzioglu, T., V. Swaroop and M. Zhu (1998): A panel data analysis of the fungibility of Foreign aid, World Bank Economic Review vol. 12.
[27]
Fosu, A. K. (2001): Political Instability and Economic Growth in Developing Economies: Some Specification Empirics, Economics Letters 70, 289–294.
[28]
Frankel, J. A. and Romer, D. (1999), ‘Does Trade Cause Growth? American Economic Review, 89 (3): 379-399.
[29]
Gitaru, Kelvin, 2015: Impact of Foreign Aid on Economic Growth, MPRA Paper 68145, University Library of Munich, Germany, revised 30 Jun 2016.
[30]
Ghani Ejaz And Din Musleh -Ud (2006): The Impact of Public Investment on Economic Growth in Pakistan, Pakistan Development Review 45: 1 pp. 87–98.
[31]
Gonamee K., Girma S. and Morrissey O. (2005): Aid and Growth in Sub-Saharan Africa. Accounting for Transmission Mechanisms, CREDIT Research Paper No. 02/05, University of Nottingham.
[32]
Gounder, R., (2001): Aid-Growth Nexus: Empirical Evidence from Fiji, Applied Economics, Vol. 33, pp. 1009–19.
[33]
Granger C. W. J. (1987): Developments in the Study of Cointegrated Economic Variables, Oxford Bulletin of Economics and Statistics, 48, (3), 213-28.
[34]
Griffin, K. and J. Enos (1970): Foreign Assistance: Objectives and Consequences. Economic Development and Cultural Change, 18. Cambridge MA, MIT.
[35]
Gupta, K. L. (1975): Foreign Capital Inflows, Dependency Burden and Savings Rates in Developing Countries; A Simultaneous Equation Model. Kyklos, Vol. 28.
[36]
Gupta, K. L. and M. A. Islam (1983): Foreign Capital, Savings and Growth: An International Cross-Section Study, Boston, D. Riedel Publishing Company.
[37]
Hadjimichael, M. T., D. Ghura, M. Mühleisen, R. Nord, and E. M. Uçer (1995): Sub-Saharan Africa; Growth, savings, and Investment (1986-93), Occasional Paper 118.
[38]
Harrison Ann (1996), ‘Openness and Growth: A Time-Series, Cross-Country Analysis for Developing Countries’, Journal of Development Economics, 48: 419-447.
[39]
Hudson, John, and Paul Mosley, (2004): Aid Volatility, Policy and Development, Wider Conference.
[40]
Husain, I. (1992): External Debt and Foreign Aid to Pakistan. In Anjum Naseem (eds.) Financing Pakistan’s Development in the 1990s. Oxford University Press.
[41]
Johansen, S. and Juselius, K. (1990), Testing Structural Hypothesis in a Multivariate Cointegration Analysis of the PPP for UK, Journal of Econometrics, 53: 211-244.
[42]
Jones, C. I. (1998): Introduction to Economic Growth, New York: W. W. Norton & Company.
[43]
Karras, G. (2006), Foreign aid and long-run economic growth: empirical evidence, a panel of developing countries, Journal of International Development, vol. 18, no. 7, p. 15–28.
[44]
Lavy V. and Sheffer (1991): Foreign Aid and Economic Development in the Middle East, Egypt, Syria and Jordan, New York and London, Praeger.
[45]
Lensink R. and White H. (1999): Is there an Aid Laffer Curve? CREDIT Research Paper 99/6, University of Nottingham.
[46]
Levine Ross and Renelt David (1992): A Sensitivity Analysis of Cross-Country Growth Regressions’, American Economic Review, Vol. 82, Issue 4, 942-963.
[47]
Levy, V. (1987): Aid and Growth in Sub-Saharan Africa, the Recent Experience. European Economic Review, Vol. 32.
[48]
Lloyd, T., Morrissey, O. and R. Osei, (2001): ‘Aid, Exports and Growth in Ghana’, CREDIT Research Paper 01/01, University of Nottingham.
[49]
Mahembe Edmore, Nicholas Mbaya Odhiambo and Christian Nsiah (2019): Foreign aid, poverty and economic growth in developing countries: A dynamic panel data causality analysis, Cogent Economics & Finance, 7: 1, DOI: 10.1080/23322039.2019.1626321.
[50]
M’Amanja, D., Lloyd, T. and Morrissey, O. (2005): Fiscal Aggregates, Aid and Growth in Kenya: A Vector Autoregressive (VAR) Analysis, School of Economics, University of Nottingham: CREDIT Research Paper 05/07.
[51]
Mauro, P. (1995): Corruption and Growth, Quarterly Journal of Economics, Vol. 110, pp. 681–712.
[52]
Mavrotas, G., and B. Ouattara (2006). Aid Disaggregation and the Public Sector in Aid Recipient Economies. Review of Development Economics.
[53]
McGillivray, M., Feeny, S., Hermes, N. and R. Lensink (2006): Controversies over the impact of development aid: Journal of International Development, vol. 18, no. 7.
[54]
Meier M. and Stiglitz J. (2001): Frontiers of Development Economics: The Future in Perspective, WB and Oxford University Press.
[55]
Mosley, P. (1980): Aid, Savings and Growth Revisited, Bulletin of the Oxford University Institute of Economics and Statistics, Vol. 42.
[56]
Mosley, P. (1987): Overseas Aid, Its Defence and Reform, Wheat sheaf, Brighton.
[57]
Papanek, G. (1973): Aid, Private Foreign Investment, Savings and Growth in Less Developed Countries, Journal of Political Economy, Vol. 81.
[58]
Pesaran, H. and Shin, Y. (1996): Autoregressive Distributed Lag Modelling Approach to Co-integration Analysis, DAE Working Paper No. 9514, Department of Applied Economics, University of Cambridge.
[59]
Pesaran, H. R. Smith and Shin, Y. (2001): Testing for existence of Long Run relationship, DAE working paper no. 9622, Department of Applied Economics University of Cambridge.
[60]
Quartey, P. (2005): Innovative ways of making aid effective in Ghana: tied aid versus direct budgetary support, Journal of International Development, vol. 17, p. 1077-1092.
[61]
Ram, R. (2004), "Recipient country’s ‘policies’ and the effect of foreign aid on economic growth in developing countries: additional evidence, Journal of International Development, vol. 16, no. 2, p. 201–211.
[62]
Sala-i Martin Xavier. (1997): I Just Run Four Million Regressions, American Economic Review, May 1997, v. 87, iss. 2, pp. 178-83.
[63]
Siddique, H, M. A., Kiani, A. K. and Batool, S. (2017): The Impact of Foreign Aid on Economic Growth: Evidence from a Panel of Selected Countries. International Journal of Economics and Empirical Research. 5 (1).
[64]
Tendongho Charles (2016): The Impact of Foreign Aid on the Economic Growth of Cameroon (1960-2013) Using a Multivariate Autoregressive Model. Available at SSRN: https://ssrn.com/abstract=2948664.
[65]
Tasew Tadesse (2010): Foreign Aid and Economic Growth in Ethiopia, MPRA is a RePEc service hosted by the Munich University Library in Germany.
[66]
Voivodas C. (1973): Exports, Foreign Capital Inflow and Economic growth, Journal of International Economics, Vol. 3.
[67]
Weisskopf T. (1972): Impact of Foreign Capital Inflow on Domestic Savings in.
[68]
Underdeveloped countries, Journal of International Economics, 2: 25-38.
[69]
Xayavong V. (2002): Macroeconomic Analysis of Aid in Economic Development, A case of the Lao People’s Democratic Republic, Palmerstone North, New Zealand.
[70]
Yohannes B (2011): The Impact of Foreign Aid on Economic Growth in Ethiopia: Accounting for Transmission Mechanisms. Ethiopia.
Browse journals by subject