Topics: Economics, Development aid, Development Assistance Committee Pages: 12 (3199 words) Published: November 28, 2013
International Journal of Economics and Financial Issues
Vol. 3, No. 3, 2013, pp.743-751
ISSN: 2146-4138

Foreign Aid and Economic Growth in Egypt: A Cointegration Analysis Hoda Abd El Hamid Ali
Department of Economics and Foreign Trade,
Faculty of Commerce and Business Administration,
Helwan University, Cairo, Egypt. Tel: 00201003452575.
ABSTRACT: There is a current and growing debate on the effectiveness of foreign aid, especially in Egypt, as the country is going through a critical period in its transition to democracy. The obvious question is to what extent foreign aid to Egypt will be effective in promoting economic growth. By using Johansen Cointegration test and Vector Error Correction Model (VECM), the paper finds a negative and significant impact of foreign aid on economic growth in the long and short run. It is highly suggested that Egypt must rely upon the indigenous resources to promote development rather depending on external factors.

Keywords: Economic Growth; Foreign Aid; Johansen Cointegration Test; Vector Error Correction Model; Egypt
JEL Classifications: F3; F35; 01
1. Introduction
In the area of development economics, economists and policy analysts have always considered the impact of foreign aid, in addition to domestic resources, on economic growth in developing economies. Several recent studies, typified by the work of Burnside and Dollar (2000) ,and Collier and Dollar (2002), argue that aid assists growth but only in a good policy environments, others suggest that aid is found to be effective but with diminishing returns (see for example, Hansen and Trap, 2000, 2001; Dalgaard and Hansen, 2001; Lensink and White, 2001; Hudson and Mosley, 2001; Clemens et al., 2004; Dalgaard et al., 2004) ( See Ang, 2010:197). One recent attempt to quantify the effect of foreign aid on economic growth in Egypt is found in Bassam (2008),the author examines the long-run relationship between per capita real foreign aid and per capita real GDP for Jordan (1965-2005), and Egypt (1960-2005) and by using a newly developed approach to cointegration by Pesaran et al. (2001), the empirical results find that in the case of Jordan, there is a long-run relationship exists between the variables, while there is no evidence to support that a long-run relationship exists in the case of Egypt. Also the study by using the Granger causality test, it supports that there is a long-run causality from foreign aid to GDP in the case of Jordan. However, in the case of Egypt, the results show no support of Granger causality between foreign aid and GDP.

This research will contribute to the literature in the following respect. First, most of the research in the literature has dealt with the relationship between foreign aid and economic growth in developing countries in general with little emphasis on the Arab region in particular Egypt, there is a current and growing debate on the effectiveness of foreign aid, as the country is going through a critical period in its transition to democracy and the economic performance in Egypt has been poor since the revolution began in January 2011.

Second, this study uses cointegration and error correction modeling that have been used widely in applied econometrics as compared to basic ordinary least squares (OLS) regression method which did not investigate the properties of time series, and therefore suffers from misleading and fallacious results.

Third, by not using cross-section data, as other previous studies have, it will make the results and the findings easier to apply in the case of Egypt. Therefore, the findings will provide the policymakers with a better guideline to formulate their policies, specifically on how to best use foreign aid to enhance economic growth and development in their country. 743

International Journal of Economics and Financial Issues, Vol. 3, No. 3, 2013, pp.743-751 This study aims to estimate the impact of...
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