The Impact of Foreign Aid on Economic Growth in Papua New Guinea

Abstract

This article investigates the impact of foreign aid on economic growth in Papua New Guinea (PNG) using time-series data for the period 1965 to 1999. Following the most recent literature, the article examines whether aid effectiveness is conditional on levels of economic policy and governance. An empirical model is estimated using the Autoregressive Distributed Lag (ARDL) approach to cointegration proposed by Pesaran and Shin [1995 Pesaran HM Shin Y 1995 An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis DAE Working Paper Series, No.9514, Department of Applied Economics, University of Cambridge [Google Scholar]]. Results provide little evidence that aid and its various components have contributed to economic growth in PNG. There is some evidence that aid is more effective during periods when the country has undertaken a World Bank Structural Adjustment Program (SAP). An alternative interpretation is that a SAP may be more effective at spurring growth when supported by foreign aid.