The Impact of Foreign Aid and FDI on Sustainable Development: A Panel Analysis of Developing World
Author: Hassan Sardar

The Development Assistant Committee (DAC) has been providing huge amount of foreign aid to developing economies for achieving the sustainable development, both economic and environment. Beside foreign aid, foreign direct investment (FDI) has also the potential for contribution in development and social welfare of recipient countries. The present study has analyzed the impact of foreign aid and FDI on sustainable development for developing countries where these countries have been divided into three categories: low income, lower middle income and upper middle-income countries. An indicator of sustainable development is constructed by managing both the environmental and Human Development Index (HDI) variables. A loss function is attached to this HDI value based on CO2 emissions, natural resource depletion and permanent crop land. Panel data estimation technique is applied on data ranging from 1990-2015. Kao (2000) co-integration test confirmed the presence of long run relationship among sustainable development and explanatory variables used in the study.1 Fully Modified Ordinary Least Square (FM-OLS) is applied to estimate the long run estimates which states that both foreign aid and FDI have positive and significant contribution in sustainable development. The short run estimates and speed of adjustment is obtained by applying Vector Error Correction Mechanism. VECM results state that foreign aid has a significant positive contribution in sustainable development of low income and upper middle-income countries. In lower middle-income countries foreign aid is less significant for its contribution in sustainable development. FDI contributes positively and significantly in sustainable development of low income and lower middle-income countries in the short run. Supervisor:- Dr. Shujaat Farooq

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Supervisor: Shujaat Farooq

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