Academic journal article Journal of Political Studies

Interrelationship between Foreign Aid, Fiscal Decentralization and Economic Growth in Pakistan: An Econometric Analysis

Academic journal article Journal of Political Studies

Interrelationship between Foreign Aid, Fiscal Decentralization and Economic Growth in Pakistan: An Econometric Analysis

Article excerpt

(ProQuest: ... denotes formulae omitted.)


The existing literature have concluded that foreign resources have played significant role in raising the pace of economic development in developing countries. Most of the developing countries have been facing shortage of resources failing to meet the rising demand of capital over time. In order to overcome this problem these countries have been receiving heavy doses of external resources in the form of loans and grants from developed countries and international financial institutions World Bank, IMF and Asian Development Bank. The developing countries depend on foreign aid due to the desire of achieving rapid pace of economic development in the shortest period of time. Furthermore, for bridging their saving investment gap and export import gap these countries are forced to receive foreign aid from foreign sources. On the other side, developed countries provide loans and foreign assistance to developing countries keeping in view that developing countries cannot borrow from commercial sources due to their limited debt servicing capacity.

Oates (1972) stressed that decentralization is one of the important factors which helps the donor countries in transferring resources because the government officials of recipient countries can make correct and appropriate decisions regarding the development projects as decentralization helps in bringing government and people closer. There are two serious problems which may come up in this regard. Firstly, it is very difficult to know about the real needs of the society. Secondly, allocation of the resources under political pressure to meet these requirements is not an easy task.

The resource allocation in developing countries remained controversial due to the political pressure and conditions attached to foreign aid. The need for decentralization, comes up because of the existence of gap between spending needs and availability of revenue. There are three levels of government working in Pakistan and the allocation and distribution between them remained under debate. There exists a well-defined process through which resources are redistributed to provincial government by the federal government through National Finance Commission (NFC).

The introduction of new formula in 2009 for the share of all provinces in the dividable pool has altered significantly. In the 1990 the Punjab's share was 57.87 according to NFC award based on the population, while there was an insignificant decline observed in 2006. There is decline in the share of Punjab recorded from 57.37 percent in 2006 to 51.74 percent in 2009. The share of Sindh has gone up from 23.71 percent in 2006 to 24.55 percent in 2009. The share of KPK has gone up from 13.82 percent in 2006 to 14.62 percent in 2009. The Baluchistan's share has increased to 9.09 percent on the basis of the revised formula.

Several studies have analyzed the effect of foreign aid, fiscal decentralization on economic growth but there is no consensus among the researchers regarding the role of decentralization in economic growth.

Easterly (2003) concluded that corrupt institutions having weak policies had adverse impact on foreign aid in achieving its desired objectives. Morrissey (2006) stressed that private investment has appeared to be inversely related to imports and directly related to foreign aid. Aurangzeb (2010) failed to find the evidence related to the impact of foreign aid on economic growth in Pakistan. Javid (2011) concluded that foreign aid may have positive effect on economic growth in Pakistan only in the presence of sound economic policies. The present study is highly important as the results of this study would help the policy makers to formulate and implement better policies consistent with the economic and political conditions prevailing in Pakistan.

The rest of the study is organized as follows. Section-II presents theoretical framework. Model specification and interpretation of results are presented in Section-III. …

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