Date of Award

8-1-2014

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Lahiri, Sajal

Abstract

This dissertation is compiled of three chapters in determining the effect of bilateral foreign assistance on the economy of Pakistan. The effect of foreign assistance will be measured in terms of public expenditure and revenue. The factors associated in the provision of aid commitments and disbursements, and the effect of bilateral assistance on the production efficiency of Pakistan. Chapter 1 uses an aid disaggregation approach to examine the impact of different types of bilateral donors on the fiscal sector of Pakistan, an important aid recipient in recent years. The purpose of this study is to determine the impact of bilateral aid on the economy of Pakistan, from the four largest donors, which include the USA, Japan, the United Kingdom, and Germany. Time series data for the period 1972-2010 were analyzed along with an estimation of a fiscal response model following Mavrotas (2005) that combines both aid disaggregation in terms of types of aid and the treatment of endogeneity. The empirical estimation of the structural equations and reduced form equations, using nonlinear three stage least squares estimation clearly suggests the importance of the above approach for delving deeper into aid effectiveness issues. Since different bilateral donors have different effects on key fiscal variables, an impact could not be revealed if a single figure for aid were employed. While aid from Japan increases public investment, aid from the USA, the UK, and Germany appears to cause a reduction in public investment. Similarly, aid from Japan reduces public consumption, but the aid from other donors causes an increase in public consumption. In regards to tax revenue, the aid flows from the USA, the UK and Germany leads to a reduction in tax revenue, but aid flow from Japan increases tax revenue. Chapter 2 investigates the relation between aid disbursements and aid commitments from the fourteen largest donors to Pakistan, and determine the factor that effects commitments and the disbursements. The time series data was employed for the period 1972-2010. The estimation of the model through fixed effect approach and two stage least squares approach showed that aid disbursements, aid commitment from donors to African countries, and Pakistan's membership at the United Nations Security Council effects aid commitments positively and significantly. But, the inverse relation existed between GDP per capita of Pakistan and aid commitments. Similarly, aid commitments relation with the aid disbursements was positive and significant. The war in Afghanistan during any time between1972-2010 increases the aid disbursement to Pakistan. It was also determined that if the level of primary education increases, the aid disbursement to Pakistan decreases. The results also showed that when Pakistan is ruled by the military government the aid disbursements to Pakistan reduces. Chapter 3 focus is to see the impact of different bilateral donors on the production inefficiency of the Pakistan. To empirically estimate the effect of bilateral aid heterogeneity on production inefficiency, we use the time series data for Pakistan for the period 1972-2010. The stochastic frontier analysis was conducted using maximum likelihood estimation. The results determined that the aid from the United Kingdom (UK) and Germany tends to increase production efficiency of Pakistan. However on the contrary aid from Japan tends to decrease production efficiency. It was also concluded from the results that foreign direct investment and public investment also increases production efficiency. But, the relation between human capital and production efficiency was negative. Also, the results indicated that when Pakistan is ruled by the military government the aid flows from the USA and UK reduces production efficiency.

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