Foreign Aid, Human Capital and Economic Growth: The case of South Asian Countries

This study empirically investigates the long-run association between foreign aid, human capital, and economic growth in selected South Asian countries over a 34-year period. Specifically, this study is based on a human capital augmented growth model, which consider the absorptive capacity of recipient economies. We utilize panel data settings, such as, Dynamic Ordinary Least Squares (DOLS) and Dynamic Feasible Generalized Least Squares (DFGLS), to find robust long-run relationships. Empirical findings suggest that foreign aid is has an indirect effect on per capital income through the channel of domestic investment, domestic savings, and, real exchange rate. Further, foreign aid decreases both the level of domestic investment and savings, which results in crowding out. The study also reveals that foreign aid contributes positively to real exchange rate. Similarly, human capital has a significant and positive impact on per capital income. These empirical findings underline the vital role of human capital in amplifying the influence of foreign aid and offer valuable insights for decision makers to improve aid usefulness in the selected South Asian economies.