FOREIGN-AID AND ECONOMIC-GROWTH - AN ECONOMETRIC STUDY OF BANGLADESH

Bangladesh is one of the poorest countries in the world. Since independence in 1971, Bangladesh has received a large inflow of foreign capital from various countries for rapid economic progress. Bangladesh thus provides a test case for examining the effectiveness of foreign capital in promoting economic growth. Focussing on the supply side of the economy, an econometric model is developed to quantify the effects of foreign aid and its various components on economic growth. The model is tested using available time series data on Bangladesh from 1972 to 1988. Keeping data limitations, measurement problems and other econometric problems in mind, the empirical results indicate the domestic resources exert a stronger impact on growth than foreign resources. Foreign resources, in its highly aggregative form, do not show any significant contribution to growth. However, its decomposition into various components show that loans are more effective than grants and food aid is more effective than commodity or project aids.