The Macroeconomic Impact of Foreign Aid in Bangladesh Before and After the Paris Declaration

Abstract

Foreign aid effectiveness has been a hot topic for several decades. Bangladesh has been receiving foreign assistance since its independence in 1971 and has taken various initiatives in enhancing the effectiveness of aid. The signing of the Paris Declaration is one such initiative where the government has committed to improve aid delivery and management so as to ensure the proper utilization of aid in its development programs. This paper examines the impact of foreign aid on Bangladesh’s economic growth before and after the signing of the Paris Declaration in 2005. The result of the analysis is such that there is almost no change in the aid-growth relationship before and after adopting the Paris Declaration principles. Moreover, even though aid-dependency and Dutch Disease effects were always minimal in Bangladesh, the inflow of external assistance was to some extent volatile in the pre-declaration phase. However, the fluctuation of aid has not progressed further in the post-declaration phases. Hence, the overall macroeconomic impact of foreign aid remains the same, concluding that the Paris declaration has not yet played a constructive role in enhancing the aid-growth relationship within the economy.

Keywords: aid, aid effectiveness, macroeconomics, Dutch Disease, Bangladesh

JEL Classification: O11, O19, O41