Foreign Aid and Economic Growth: Panel Cointegration Analysis for Cambodia, Lao PDR, Myanmar, and Vietnam

Given the paradoxical results of impact studies of foreign aid on economic growth in aid-growth literature, the effectiveness of aid for growth still remains a subject of intense debate. Thus, applying panel cointegration tests, and panel fully modified ordinary least squares (FMOLS) and panel dynamic ordinary least squares (DOLS) estimators, this paper estimates the magnitude of long run relationship between aid and economic growth in Cambodia, Lao PDR, Myanmar, and Vietnam using panel data from 1997 to 2014. The results of panel cointegration tests revealed that aid and economic growth cointegrate in a panel framework for the period of the study, indicating a robust long run relationship between the variables. Panel FMOLS and Panel DOLS estimation results revealed a positive impact of aid on economic growth. Thus, study concludes that foreign aid has a favorable effect on economic growth in the sample of four countries from ASEAN region.