Foreign aid, domestic savings and economic growth: The experience of Bangladesh, 1972-1991

Abstract

The central purpose of this dissertation is to undertake an inquiry into the effectiveness of use of foreign aid inflow into the economy of Bangladesh. This inquiry is divided principally into two parts: an econometric analysis regarding the macroeconomic contribution of foreign aid on economic growth and domestic savings and, based on secondary data and information, detailed impact studies of some selected aided-projects whose importance for the economy of Bangladesh is well-established. Another topic examined, which is thought to be inextricably related to the purpose of this dissertation, is the mobilization of domestic resources by the Bangladesh Government which is also the sole recipient of a large amount foreign aid each year.

In order to assess the impact of foreign aid on economic growth and domestic savings, a simultaneous-equations model of growth and domestic savings was chosen and estimated for Bangladesh for the period 1972 through 1991. The results of the model show that foreign aid and economic growth are inversely related while domestic savings seem to have been supplemented by aid.

The mobilization of domestic resources by the Bangladesh Government has been grossly inadequate. Particularly for the 1980s, there is evidence to suggest that foreign aid has provided a means whereby the Government has been able to postpone its efforts at domestic resource mobilization while at the same time expanding current expenditures. Despite a priori reasoning, the hypothesis of an inverse relationship between dependence on trade taxes and economic development is not established for Bangladesh.

A study of the foreign-aided projects completed in Bangladesh conveys the impression that the Government has not been serious about the implementation of these projects. At the same time, donors also channel funds for projects which they later admit to have been based on wrong assessments about the socio-economic and political realities.