The Effects of Multilateral and Bilateral Aid on Economic Growth in Pakistan

Abstract

This research work intends to estimate the effects of bilateral as well as multilateral aid on economic growth in the case of Pakistan. For this purpose, the study has been used annual data from 1985 to 2015. Our dependent variable is economic growth and the model is including Labor Force, Net Gross Capital Formation, Bilateral and Multilateral aid as explanatory variables. The study objective is to find out that either bilateral or multilateral aid effect the country’s economic growth.  In empirical exercise first use Unit Root test to check for the stationarity of the data, and then the Johnsen Co-integration approach and Error Correction Model have used to estimate long run and short run parameter estimates of the model. Finally, in diagnostic test the LM test for serial correlation and the CUSUM and CUSUM Square test have used to check the parameters stability in model. In results, we found that multilateral and bilateral have negative relationship with the economic growth and their coefficient are (-0.15, -0.33) percent respectively. However, it means that if there is 1% percent increase in the multilateral and bilateral aid it will decrease the economic growth by -0.15% and -0.33% respectively. Similarly, the labor force and Net Capital Formation has positive relationship with dependent variable (economic growth) and their coefficient are (4.52, 0.61) percent respectively. It also means that if there is 1% increase in labor force and Net Gross capital Formation it will enhanced the economic growth by 4.52% and 0.61% respectively.