The role of foreign aid and human capital in the economic growth of developing countries.

Abstract

The primary objective of this research is to analyze the impact of foreign aid and human capital on the economic growth of developing countries. Other sources of economic growth such as raw labor, export sector growth, and the degree of political and civil liberties (PCL) have also been considered. Using recent modern economic growth theories as a guide, the study is conducted on a sample of 80 developing countries. The data are averaged for one of three separate time periods: 1971-1980, 1981-1990, or the total period spanning 1971-1990.

The analysis shows that foreign aid is positively associated with economic growth in developing countries for the periods under study. The findings are consistent with the economic theory of foreign aid which asserts that overseas development assistance accelerates economic growth by supplementing the domestic capital formation. The study also finds that foreign aid significantly contributes to investment which lends support to the notion that most foreign aid which is intended for capital formation may indeed be used for that purpose.

Although foreign aid has played an important role in developing countries, gross domestic savings remains crucial for economic growth in developing countries because it serves as an important source of the investment. Moreover, the export sector growth is found to have a consistent and substantial positive effect on economic growth. The results also support the view that export promotion policies will have significant effects on growth in developing countries.

Furthermore, the inclusion of human capital into the growth equation reveals that it has a statistically significant positive effect on economic growth. These results suggest that government policies that augment human capital can have high returns. Human capital also positively contributes to investment which implies that it serves as an agent in attracting physical capital. In addition, the study demonstrates that political and civil liberties have had a direct effect on economic growth. The analysis, however, shows that the impact of political and civil liberties on economic growth is not significantly different from zero over the observation period (1971-1990).