Does Japanʼs Aid Promote the Economic Growth of Pacific Island Countries?

ABSTRACT Pacific Island countries (PICs) are among the worldʼs most aid‐dependent nations. This study examines relations between Japanʼs aid and the economic growth of 13 PICs during 2000–2023. After evaluating overall effects of Japanʼs aid, specific types are analysed: economic, social, production, and multi‐sector aid. Findings reveal that effects of Japanʼs total aid and social aid on growth are nonlinear, indicating increasing returns. This nonlinearity primarily reflects Japanʼs counter‐cyclical granting of aid to the PICs. Further results confirm that Japanese total aid, including aid of all types, is more effective at mitigating adverse effects of natural disasters on the economic growth of PICs. This effectiveness suggests that Japanese aid is growth‐enhancing when responding to recipient needs. No evidence indicates that Japanese aid influences growth under strong institutional quality. Therefore, the PICs must continue to implement appropriate institutional reforms to ensure the wise use of nationsʼ resources, including donor funding.