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Macro economic Impact of foreign in Bangladesh Paper review presentation

Research Working paper review

SunnaChowdhury
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Macro economic Impact of foreign in Bangladesh Paper review presentation

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  1. The Macroeconomic Impact of Foreign Aid inBangladesh Before and After the Paris Declaration. NuzatTasnimDristy University of Glasgow Bangladesh Development Research Working Paper Series (BDRWPS)

  2. Table of Content • Introduction • Macroeconomic Background • Literature review and assessment • Concept of pairs declaration • Methodology • Presentation of result • Summary of Findings and Discussion • Conclusion

  3. Introduction : The impact of foreign aid on economic growth has been at the center of the development debate for many decades. International agreement : • The Paris Declaration on Aid Effectiveness, • The Accra Agenda for Action, and • The Busan Partnership for Effective Development Cooperation This paper explores the relationship between aid and growth along with the possibly perverse macroeconomic consequences of aid dependency, volatility and Dutch Disease in Bangladesh, prior to and following the joining of the Paris Declaration forum.

  4. Macroeconomic Background : **During 1970’s Bangladesh viewed as a bottom-less Basket for negative per-capita GDP ** At present age Bangladesh maintaining a stable growth rate of per capita income of around 5 percent per year during the last 10 years.

  5. Pattern of foreign aid in Bangladesh : Bangladesh receives various kinds of external assistance such as 1.Bilateral and multilateral Official Development Assistance (ODA) 2.Non-Government Organization (NGO) support, 3.Private donations and so on.

  6. Literature review and assessment: 1.Foreign Aid and Economic Growth *The theHarrod-Domar growth model : States that the growth rate of GDP, g, is proportional to the domestic savings ratio, s and national capital-output ratio, k. **According to this model, in order to grow, the economy must save and invest a certain portion of their national income. ***The main obstacles to growth in an under-developed country are the relatively low level of savings and thus investments.

  7. Chenery and Bruno (1962) and Chenery and Strout (1966) : 1.Expansion of the Harrod-Domar gap model to the two-gap model. Here the second gap in addition to the savings gap is the ‘foreign exchange gap’. 2. The two gap model foreign exchange shortage is another growth constraint which can also be met by foreign aid.

  8. Foreign aid has a positive effect on economic growth: 1.According to Banarjee and Duflo (2011), people in the underdeveloped countries are usually landlocked, malaria infested, hot and infertile for which they lack the capacity to live a productive life and are trapped in poverty. ***Without a substantial initial investment, it is impossible for them to come out of this poverty trap. 2.Oya and Pons-Vignon, 2010) The efficient use of the concessional foreign finance shall provide the necessary foreign exchange for investments in basic infrastructure, health, education, technology, industries and so on. 3 Hansen and Tarp (2000) studied three phases of empirical work and concluded that the aid-growth association was significant in the majority of the cases.

  9. Foreign aid has a negative or no effect on economic growth 1.Easterly (2003) argued that investment and growth do not usually have a constant linear relationship, as stated in the financing gaps model. ***Moreover, aid supports investment in the aid-recipient countries only if the incentives to invest are favorable in those economies. 2.Boone (1996) stated that instead of enhancing the long-term investments, the rationale for Harrod-Domer growth model, aid results in disincentives to save and invests and mobilizes domestic resources through various forms of taxation on the part of the LDC governments.

  10. Foreign aid has a conditional effect on economic growth 1.The hypothesis of Burnside and Dollar (2000)states that aid affects growth, but the magnitude of the effect depends on some of the characteristics of the recipient countries. 2.Collier and Dollar (2002)revisit Burnside and Dollar’s empirical work, the result of Collier and Dollar is such that aid may be subject to diminishing returns, i.e., growth increases until a certain threshold after which additional unit of support yields smaller and smaller increases in growth.

  11. Assessing the Impact of Aid Effectiveness : Paris Declaration in 2005: Donors around the world have suggested various measures about how their funds can be better utilized. One such initiative is the Paris Declaration in 2005. The five pillars of the Paris Declaration are as follows (OECD, 2005): • Ownership • Alignment • Managing for results • Mutual accountability • Hermonization

  12. Methodology: 1.The methodology used in this research is similar to Connors (1979), Noorbakhsh and Paloni (1998) and Noorbakhsh and Paloni (1999), where the before-after approach is used to explain the progress. 2. The period of analysis is from 2000 to 2015 .This sample period is broken down in the following sub-periods Pre-Paris Declaration: FY2000/2001- FY2004/2005 Post-Paris Declaration: FY2005/2006 - FY2009/2010 (Short-term) FY2010/2011- FY2014/2015 (Long-term) FY2005/2006 - FY2014/2015 (Overall)

  13. Statistical tools: 3. The correlation coefficient between foreign aid and economic growth has been scrutinized to determine the aid-growth relationship in the above-stated periods. 4. The statistical significance of the correlation coefficient is tested using both the parametric and non-parametric tests and the results are accordingly compared among pre and post-reform periods. *The Pearson product-moment correlation coefficient test-----parametric test *Spearman rank correlation coefficient test ---Nonparametric test

  14. Presentation of result :By comparing Pearson product-moment correlation coefficient between foreign aid and GDP per capita of Bangladesh *Correlation Coefficient significant at 10 percent level 1.There hardly any correlation between income per capita and the total development assistance before and after the signing of Paris Declaration in 2005. 2.The significance level is not strong enough

  15. Spearman rank-order correlation coefficient between GDP per capita and development assistance Source: Author’s Computation *Correlation Coefficient significant at 10 percent level The relationship between GDP per capita and total development assistance is almost zero during Pre and Post-Paris Declaration

  16. Aid-dependency ratios in Bangladesh Measurement : source : Author's computation According to analysis the aid/GNI ratio is only 2 percent before 2005; then it declined slightly to below 2 percent in the aftermath of the Paris Declaration. Thus, aid/GNI ratio suggests that Bangladesh is not aid–dependent in the pre and post-Paris Declaration phases

  17. Summary of Findings And Discussion 1.The relationship between foreign resource flows and domestic savings/investments is very weak or negligible in Bangladesh during the observation period. 2. Foreign assistance in Bangladesh could not convert to sufficient investment and economic growth, even after joining the Paris Declaration. 3. One of the fundamental limitations of the implementation of the Paris Declaration in Bangladesh is the inadequate capacity of the public sector institutions. As a result, enormous amounts of aid are available but unutilized within the economy.

  18. 4. There is little improvement in ownership and operational development strategies in the case of Bangladesh. 5. Aid-dependency is at a minimum in Bangladesh and has declined further after the Paris Declaration. However, the relationship between aid and growth is approximately zero. 6. One of the fundamental limitations of the implementation of the Paris Declaration in Bangladesh is the inadequate capacity of the public sector institutions. As a result, enormous amounts of aid are available but unutilized within the economy

  19. Conclusion The macroeconomic impact of foreign aid in Bangladesh is very much mixed. 1.On the positive side, the country is not aid-dependent and external flows have not appreciated the domestic currency. 2.However, on the negative side, foreign assistance is volatile and its relationship with economic growth is approximately zero..

  20. References 1.Banerjee, Abhijit V. and Esther Duflo (2011). Poor Economics (London, United Kingdom: Pengun Books). 2.Bangladesh Bank (2015). Vibrant Bangladesh A Stable and Potential Economy: An Illustrative Time SEries Approach 2015 (Dhaka: Bangladesh Bank). 3.Boone, Peter (1996). Politics and the Effectiveness of Foreign Aid. European Economic Review, Vol. 40, No. 2 (February), pp. 289-329.

  21. 4.Burnside, Craig and David Dollar (2000). Aid, Policies and Growth. The American Economic Review, Vol. 90, No. 4 (September), pp, 847-868. 5.Busan Building Block (2014). The Busan Commitments on Managing Diversity and Reducing Fragmentation: Stock-take and Emerging Issues. Busan Building Block Managing Diversity and Reducing Fragmentation. 6.Dalgaard, Carl-Johan; Henrik Hansen; and Finn Tarp (2004). On the Empirics of Foreign Aid and Growth. The Economic Journal, Vol. 114, No. 496 (June), pp. F191-F216. 7.Easterly, William (2003). Can Foreign Aid Buy Growth? The Journal of Economic Perspectives, Vol. 17, No. 3 (Summer), pp. 23-48.

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