Foreign Aid vs. Economic Development: Exploring the Empirical Linkage for India, Sri Lanka and Maldives

Abstract

This study empirically examines the causal relationships between foreign aid (ODA) and economic development for India and Sri Lanka using the annual data 1960-61 to 2010-11.Both India and Sri Lanka need to maintain high growth to create more employment opportunity and to reduce poverty. Considering the long run causal linkage among foreign aid, trade performance, financial sector development, domestic investment and economic growth, both the countries should focus on the efficient utilization of foreign aid where the rate of return should be greater than rate of investment. The study suggests that the government has to be more concerned about its efficient utilization rather than its amount of inflows. The government of India should further try to raise its growth rate and liberalize its external sector to attract foreign capital i.e. foreign aid and FDI inflows. The government of Sri Lanka should focus on the efficient utilization of foreign aid in some productive activities, directly linked with the welfare of the people. Both the countries adopt outward-looking development strategy through appropriate measures such as more flexible labour market, political stability, infrastructural facilities, human capital generation, institutional efficiency and good macro-economic policies to attract more foreign capital.