Interrelationship between Foreign Aid, Fiscal Decentralization and Economic Growth in Pakistan: An Econometric Analysis

The present study analyzes the relationship between foreign aid and economic growth taking into account the process of fiscal decentralization in Pakistan. The main objective of the present study is to observe the role of foreign aid in increasing economic growth considering federal structure of Pakistan. The study uses time series data for the period 1980-2014 and employs 3SLS econometric technique for estimating the model. The results of the study indicate that foreign aid and fiscal decentralization have positive impact on economic growth of Pakistan. Furthermore economic growth and fiscal decentralization both exert positive impact on foreign aid. The results of the study show that economic growth has negative relation with fiscal decentralization and foreign aid has positive effect on fiscal decentralization. The study finds bidirectional causality between: economic growth and foreign aid, economic growth and fiscal decentralization and between foreign aid and fiscal decentralization.