Foreign aid and economic growth in the developing countries - a  (Page 18/21)

Sri Lanka’s Country Assistance Strategy (CAS) strongly supports the government’s view that it is imperative thatthe peace process must be accompanied by an equally determined economic reform process to unleash the strong potential of theeconomy. It supports the government’s efforts to create an environment conducive to healthy growth of the privatesector, which includes improvements in the financial sector, utilities, and regulatory capacity. Much of this support would bein the form of budgetary assistance, to help finance the implementation of “Regaining Sri Lanka.”

The common perception from the experience of the above-mentioned countries is that they have been implementingsuccessful macroeconomic management stabilization, trade promotion, economic liberalization and intensive human capital investment.Foreign aid is effective when it supports reforms trigged by local government, which is clearly illustrated by the case of Botswanaand Sri Lanka. Jordan and Sri Lanka show a great example of how important human capital investment is in the development process.The role of an active and empowered NGO community is vital, with good partnership and coordination with local government. This canbe learnt from the case of Bangladesh. The valuable experience of these inland countries and South Asian nations provides good “foodfor thought” to donors and policy makers across the world. This finding is consistent with the previous result of Burnside and Dollar (1998), which is shown in Figure 3.

Chapter VI

Concluding remarks

In this study, I have investigated several questions regarding the relation between foreign aid and economicgrowth. The primary concern has been the impact of aid on growth in developing countries. Overall, foreign aid is found to besignificantly and negatively correlated with growth. This finding is another evidence showing the negative relation between economicgrowth and aid, which implies that there may be problems in the present aid providing system. There are a number of underlyingcauses, such as the fungibility of aid, aid dependency, bad economic management, corruption and poor coordination andcooperation among aid agencies etc.

The second issue which the thesis addressed has been how the relation between aid and growth varies across theregions. Aid to the Sub-Sahara has had an adverse effect on growth. This is consistent with findings of other authors. Sub-Sahara isthe region with largest amount of aid provided by donors but the economic performance remains fairly poor. This shows that largeamount of aid does not necessarily guarantee growth. What really matters is the quality of aid. From donors’ side, it requires theappropriately designed programs, timely and sufficient disbursement, good conditionality and strict penalty upon deviationor violation etc. From the recipients’ side, it requires good macroeconomic management and institutions. These actually areproblems, with which Sub-Sahara region is facing now. Therefore, aid programs should be designed in such a way that they supportcountries in this region to build their own capacity in management. Policymakers training, intensive human capital investments andbetter partnership between donor community and local governments should be first priorities. Needless to say, fighting againstcorruption and aid dependency is extremely important.