Foreign aid and economic growth: The impact of aid on determinants of growth - The case of Vietnam

Abstract

The present thesis investigates the relationship between foreign aid and economic growth in Vietnam from 1993 to 2012. The main objective is to contribute to a better understanding of the reality of aid-growth relationship in Vietnam, how and through which channels aid may influence outcomes, and what make aid works better or less well.

In the research, growth accounting analysis is conducted to regconize contributions of foreign assistance to production factors. An empirical model is estimated using the Autoregressive Distributed Lagged (ARDL) approach to cointegration for the purpose of evaluating of the direct impact of aid on final economic outcome. Additionally, the study conducts an analysis reviewing both positive and negative effects of foreign aid across different sectors.

The empirical results indicate that foreign aid has a significantly positive role in promoting economic growth in Vietnam. The results of growth accounting exercise and the analysis of fundamental channels through which aid has contributed to development outcomes also obtain more evidence supporting the beneficial impacts of aid, especially on macroeconomic management, infrastructure, and human capital accumulation. However, at the same time, such aid-related problems as high volatility and unpredictability of the inflow, absorptive capacity constraints, and rent seeking behavior could burden the recipient's administration and in turn, undermine the aid effectiveness.

Based on these findings, a set of policy implications has been suggested. Firstly, Vietnamese government and its donor community should put more effort into improving the coordination among involved parties. Secondly, the analysis implies the importance of systematic evaluations of completed aid programs and projects. Thirdly, the quality of institution and managerial capacity should be strengthened in addition to aid effort. Fourthly, Vietnam needs to be acutely conscious of the problems involving due to high volatility and unpredictability of aid and then implement necessary measures to alleviate pressure on fiscal management. Finally, there is a need to adopt a more self-sustainable approach in enhancing economic growth in the long-run.