Thesis summary: The impacts of official development assistance on economic growth in developing countries

The overall objective of the thesis is to assess the impact of official development assistance on economic growth in developing countries. Besides, considering how ODA affects economic growth in terms of public administration quality, capital absorption and corruption management quality of developing countries. On the basis of the thesis findings, a thesis will provide an appropriate solution for this capital source, contributing to the economic growth in developing countries, including Vietnam.

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY HO CHI MINH

*****

VU DUC BINH

THE IMPACTS OF OFFICIAL DEVELOPMENT ASSISTANCE

ON ECONOMIC GROWTH IN DEVELOPING COUNTRIES

Major: Finance - Banking

Code: 9.34.02.01

THESIS SUMMARY

HO CHI MINH CITY – 2019

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

BANKING UNIVERSITY HO CHI MINH

*****

VU DUC BINH

THE IMPACTS OF OFFICIAL DEVELOPMENT ASSISTANCE

ON ECONOMIC GROWTH IN DEVELOPING COUNTRIES

Major: Finance – Banking

Code: 9.34.02.01

THESIS SUMMARY

ACADEMIC ADVISOR

ASSOCIATE PROFESSOR., PHD DANG VAN DAN

HO CHI MINH CITY – 2019

INTRODUCTION

1 The necessity of the study

Practical researchs in many countries receiving ODA in the world shows that ODA capital is not always effective Sometimes, ODA capital negatively impacts economic growth or negative impact reduces the national economy For example, the scale of public debt increases rapidly, the nation's debt repayment burden increased, there may be risks associated with fluctuations in interest rates and exchange rates, official development assistance does not contribute to economic growth when this capital is put into investment but ineffective, rampant and wasteful investment, problems of corruption, group benefits… An Official development assistance may has a positive or negative impact on economic growth

in the country receiving this capital This shows the significance of the need for a clear thorough study of the impact of official development assistance on economic growth

2 Objectives of the study

The overall objective of the thesis is to assess the impact of official development assistance on economic growth in developing countries Besides, considering how ODA affects economic growth in terms of public administration quality, capital absorption and corruption management quality of developing countries On the basis of the thesis findings, a thesis will provide an appropriate solution for this capital source, contributing to the economic growth in developing countries, including Vietnam

3 Scope of the study

The thesis studies the impact of official development assistance capital on economic growth The scope of the thesis research for 68 developing countries with the study period is 21 years from 1996 to 2016

4 Methodology of the study

In order to achieve the objectives of the study, the main research methods used methods of econometric analysis

The author used classical linear estimation methods of panel data model such

as Pooled OLS, Fixed effect (FEM) and Random effect (REM) The thesis uses the method of moment 2-step (SGMM two-step) because this method handles some defects of the model such as: self-correlation, heteroscedasticity and endogenous

5 Scientific and practical significance of the thesis

Scientific significance: currently, assessing the impact of official development assistance on economic growth is still a controversial issue Especially

in Vietnam, the previous studies related to the topic of official development assistance only used qualitative analysis studies Therefore, this research direction contributes in terms of scientific significance to the field of research on this topic The results of quantitative analysis and empirical evaluation of the thesis will contribute to scholarly research for a specific developing country like Vietnam and other developing countries in the world

Practical significance: the results of empirical analysis and evaluation of the

thesis are used to make more basic recommendations, provide important evidence to help policy makers and government regulators The state in developing countries has an orientation to regulate suitable macro policies for this source of capital to ensure the goal of actively supporting economic growth, creating more jobs and improving living standards spiritual qualities of people, stability and socio-economic development In addition, the thesis's completion of this research topic also contributes to forming the research foundation for further studies for Vietnam alone and create a more scientific perspective in making strategic decisions for official development assistance

CHAPTER 1: OVERVIEW OF RESEARCH AND THEOREOTICAL BASIS ABOUT THE IMPACTS OF OFFICIAL DEVELOPMENT ASSISTANCE

ON ECONOMIC GROWTH

1.1 Theoreotical basis about official development assistance

1.1.1 Theories about official development assistance capital

According to the Organization for Economic Cooperation and Development (OECD), the concept of ODA is given as follows: “ODA is the official transfer of support established with the main purpose of promoting socio-economic development of developing countries The financial condition of this transfer of support is of a preferential nature and the non-refundable element is at least 25%” (OECD, 1991) According to the World Bank, the definition of ODA is as follows:

“ODA is part of the official development financing (ODF), which includes refundable aid plus preferential loans accounting for at least 25% of total aid, called ODA Official Development Finance (ODF) is all the financial resources developed

non-by governments of developed countries and multilateral organizations for developing countries” (WB, 1999)

1.1.2 Classification of official development assistance

Under according to the nature of capital supply of the official development assistance capital, there are 3 types: non-refundable ODA capital, preferential ODA loan capital and ODA capital from mixed loans.Under sponsors provide official development assistance, there are 2 types: bilateral ODA and multilateral ODA Under the terms and conditions of official development assistance, there are two types: non-binding ODA and binding ODA In the form of providing official development assistance, there are 7 types: relief and emergency aid, food assistance, independent technical cooperation, budget support, bar balance support math, project support and non-project support

1.2 Theoreotical basis about economic growth

1.2.1 Theories about economic growth

According to Simon Kuznets (1959), economic growth is a long-term increase in per capita output or output per worker According to Douglass C.North and Robert Paul Thomas (1973), economic growth only occurs if output grows faster than the population According to Adam Smith (1923-1970): labor is a source

of social value and is considered a decisive factor for economic growth According

to David Ricardo (1772-1823): agriculture is the most important economic sector, the basic elements of economic growth are land, labor and capital Meanwhile, according to the World Bank (WB), the definition of economic growth is: the change or expansion in quantity in the economy of a country Economic growth is often measured by the growth rate of gross domestic product (GDP) or gross national product (GNP) in a year Economic growth has two forms: firstly, growth

in width by using more resources such as material, labor, natural capital; The second is deep growth using more efficient resources

1.3 Theories about the impact of official development assistance on economic growth

1.3.1 Harrod-Domar model

This model shows the relationship between output growth and investment demand, which emphasizes the investment rate needed to achieve a target growth rate and is described by the formula: g = (s / k) In which: g is the rate of output increase (∆Y / Y), s is the saving rate, k is the increase rate between capital - output output (also called Icor coefficient (The Incremental Capital - Output Ratio) means that to achieve 1 unit of increased output, how much additional investment capital is needed: ∆K / ∆Y) The model Harrod-Domar focuses on the role of savings and capital for economic growth Therefore, economies need to increase savings, increase investment and reduce Icor coefficients to boost economic growth The Harrod-Domar model allows countries to estimate the domestic savings rate (or

investment level) corresponding to a targeted economic growth rate Increasing domestic savings or reducing the Icor coefficient (reducing the capital-output correlation) all shortened the gap between the demand for capital and the capital supply of the economy to achieve the expected growth However, both are not easy

to implement in the short term, especially for poor countries Therefore, other declaration of foreign capital flows is paid attention in practice through foreign direct investment, foreign aid or borrowing from other indirect sources However, the flow of international capital from private (FDI, other indirect) flows into poor countries is very small and foreign aid is really a necessary resource to shorten the gap between investment and information savings for poor countries and developing countries

1.3.2 Two gap model

The two gap model suggests that foreign funding can offset these two gaps

of developing countries, in order to achieve the expected economic growth, the necessary foreign financial flow will support support fills the two above-mentioned gaps, but will overcome any more shortages in the two types of shortages Consider

a specific economy that needs to import production materials to meet growth needs and assume that import demand is a constant ratio to domestic production Thus the condition for economic growth is: g = i.m In which: g is the economic growth rate,

i is the import rate and m is the increase in output per unit of increase in imports (∆Y / ∆M) To achieve economic growth, the largest distance of the two types of distances must be filled because these distances are not cumulative, and foreign aid

is the best resource to offset this gap in the early stages of economic construction in developing countries

1.3.3 Neoclassical models

Neoclassical models did not support the previous models in the absence of capital and labor substitution effects, as well as assuming that linear relationships did not change in the beginning investment and growth Since then, neoclassical

models have been developed trying to solve the limitations of the previous model and contribute to the theoretical basis to assess the impact of foreign aid with economic growth The neoclassical model pioneered by Robert Solow (1956), used

in which capital and labor can have an alternative effect and support the diminishing influence of the scale of capital on growth economy The Solow model used a production function that has a declining productivity of production factors, in which the coefficient between capital and output is adjustable instead of constant The neoclassical growth model is considered as an alternative to Harrod – Domar models, thereby confirming the important role of capital accumulation with foreign aid as an important part of the promotion

1.3.4 Endogenous growth models

Continuing to develop the neoclassical growth model, endogenous growth models

in addition to using investment capital has added a set of input factors as a determinant of growth economics such as technology, human resources, product development, organizational capital, social capital, institutions (Easterly, 2003) This model has become a popular theory used in empirical research on the factors affecting economic growth because it overcomes shortcomings of the neoclassical model, adding side factors In addition and increase the ability to explain In particular, assumptions about increasing profits when increasing capital, the endogenous growth model also supports the importance of official development assistance, foreign aid can improve the growth rate in long-term and thus support the estimation of the long-term economic impact of appropriate aid than neoclassical (Kargbo, 2012) Furthermore, the model assumes non-linear relationships between investment and growth that make analysis diverse with different angles and the impact of external factors on growth that can be estimate more appropriately The endogenous growth model also emphasizes the important role of human capital in the process of economic development so this model better explains the impact of foreign aid on human resource development in the next countries receiving aid

1.4 Overview of researches about the impact of official development assistance

of source foreign support, foreign investment and domestic savings The overall research results for 85 countries in the 1950s and 1960s are: savings and components of foreign capital flows: official development assistance, private investment and other capital flows explained more than a third of the economic growth rate

Levy (1988) conducted a quantitative analysis of the relationship between official development assistance and economic growth in low-income countries in Africa, a sample of 22 regional countries this area was in the period 1968-1973 and 1974-1980 The two main findings in this empirical study are: first, official development assistance is positively correlated with investment and economic growth; secondly, social investment has contributed significantly to the growth rate

Karras (2006), investigating the relationship between development aid and annual GDP growth per capita in the period 1960-1997 for a sample of 71 developing countries This article concludes that the impact of development aid on economic growth is positive, long-term and statistically significant

Dimitrios Asteriou (2009) conducts research on both short-term and term relationships between major development assistance and economic growth in five South Asian countries: Bangladesh, Nepal, India, Sri Lanka, Pakistan in period

long-1975-2002 This study has demonstrated that the main source of development assistance and economic growth has cointegrated relationships, meaning that these two variables are interrelated in the long term and this is a mutual relationship

Fasanya, I.O and Onakoya (2012) analyzed the impact of official development assistance on economic growth in Nigeria in the 1970-2010 period The two authors used quantitative analysis with Johansen cointegration test and application of ECM model, Granger causality test resulted in the result that official development assistance capital has a positive impact on increase Economic leaders, and the quality of government in the recipient country will also affect the efficiency

of this source of capital

Galiani et al (2016) by empirical research with a sample of 35 countries worldwide in the period 1987-2010 found that 1% increase in ODA / GNI rate will increase by 0.031 % GDP growth rate in the short term and 0.35% GDP growth rate in the long term

1.4.1.2 Empirical studies prove that official development assistance has a negative impact or does not affect economic growth

The study of Enos and Griffin (1970) examined the impact of official development assistance on economic development in 15 countries in Africa and Asia in the period 1962-1964, research results Research shows that there is no close relationship between the amount of ODA received and the GNP growth rate, the correlation coefficient between these two variables is very low The author also performed tests with 12 Latin American countries in the period 1957-1964, the author found a negative relationship between official development assistance and GNP

Snyder (1993) based on the research model of Papanek (1972, 1973) and added the national scale variable into the model, the national scale was measured by GDP (Gross Product) The data used to estimate in the model are 69 developing countries in the three periods of 1960-1969, 1970-1979 and 1980-1987 When

putting national scale variables into the model, it is clear how significant the positive impact of official development assistance on economic growth is But when not considering the size of the country, the results show that the effectiveness of this capital to economic development is negligible

Jensen and Paldam (2003) conducted a study that estimated 56 developing countries in the period 1970-1993 with a model consisting of two main research variables, ODA and ODA2, the study found that important result As the ODA variable has a positive impact but the ODA2 variable has a negative impact on economic growth, this result proves that ODA has a positive support to economic growth but when ODA increases to the maximum point then The increase in ODA will have a negative impact on economic growth

Hamid (2013) uses the VECM (Vector Error Correction Model) model for time data in the 1970-2010 period in Egypt to estimate the impact of official development assistance (ODA) to increase economic growth both in the short and long term The short-term and long-term research results have in common that ODA capital does not support and negatively affect the economic growth of Egypt

Jean (2015) studies the impact of official development assistance on domestic savings, domestic investment and economic growth rate in Haiti in the period 1975-2010, research results show Foreign aid does not increase the rate of economic growth in Haiti during this period

1.4.1.3 Experimental studies on factors affecting official development assistance

Boone (1996) studied the official development assistance fund in terms of the influence of political regimes on the effectiveness of official development assistance for the recipient country The author performed regression using OLS and FE methods with data of 96 countries in the period 1971-1990 to test whether there is a difference in ODA efficiency when there are differences in the main regime treatment In the research model, the author used a political regime dummy

variable to distinguish the regime of freedom or democracy, and use the variable of political regime to measure by the index of political freedom The results of the study indicate that liberal or democratic political regimes do not affect ODA efficiency, but ODA has a role as a tool to positively change political regimes in a self-directed manner Due to human development, encouraging better political regimes, social freedom, this will be meaningful in promoting sustainable development and poverty reduction for ODA-funded programs

Knack (2000) used OLS and 2SLS estimation methods with data tables including 68 countries in the period 1982-1995 to test and analyze the impact of government management quality on major development assistance awake The research results show that the level of receiving high aid capital will undermine the quality of government management, the level of legal regulation and increase the level of corruption The quality of Government management is measured through the International Country Risk Guide (ICRG), the ICRG index is constituted based

on three criteria: the level of corruption in the Government, the quality of administrative procedures, and the level of laws

Craig Burnside and David Dollar (2000) study with the topic "Aid, policy and growth: empirical research", a focused study examining the relationship between official development assistance, major economic books and the growth rate

of GDP per capita The authors collected data samples from 56 developing countries in the period 1970-1993 and used OLS estimation and 2SLS methods to regress variables in the model The research results have found that official development assistance has a positive impact on economic growth in developing countries with good fiscal policy and monetary and policy policies good trade, but when these policies are not good, official development assistance funds still have a positive impact on low-level economic growth

Chauvet and Guillaumont (2003) with a set of research data of 59 developing countries during the period 1965-1999 and using the 1-step and 2-step GMM

estimation methods to estimate the relationship between development assistance funds Official and economic growth when additional factors affecting ODA efficiency include: economic policy, economic shock, political instability and absorption The economic policy variable measures through inflation and trade openness, the shock variable in the economy measures through the export / GDP ratio, the political instability measurement through the number of demonstrations One million people, turn the absorption capacity measured through the power supply factor and the number of secondary graduates over the total population Research results in support of good economic policies, political stability, high absorption ability will positively impact aid effectiveness

Feeny and Ashton de Silva (2012) focused on the absorptive factor of the recipient country affecting the effectiveness of official development assistance in developing countries during the 1990s -2005 Research using regression methods for panel data including OLS, FE and System GMM has demonstrated that the limits on absorption effectively hinder official development assistance (ODA), through which ant The proposal to aid countries in providing programs using ODA and allocating this capital should focus on the absorption capacity of the recipient country

Recently, Jonathan and Nicolas (2017) have emphasized the relationship between official development assistance (ODA) and the absorptive capacity of the country receiving ODA through studying "the source of water support outside and absorbing the country ”The two authors used data from 88 countries that have received ODA during the period of 1971-2012, the research model includes independent variables: household expenditure, spending government, social investment, export and import, all of these variables are calculated in proportion to GDP The estimation results show that the official development assistance fund has

a positive impact on the total household expenditure and the government contributes to economic growth, ODA also positively affects investment but the

degree of cooperation the impact is weaker than the impact on total household and government expenditure

1.4.2 Researches in Vietnam

Currently, domestic studies focus on qualitative analysis of issues related to development aid from the perspective of state management and at the same time point out the causes and solutions to overcome, contribute to raising High efficiency

of development aid in Vietnam There have been some research projects in Vietnam related to research topics as follows:

Pham Hoang Mai (1996) argued that there is a need for government intervention in ODA management and use: The Government needs to restructure ODA flows, attracting donor partners to increase government spending , thereby stimulating private sector investment and increasing disbursed capital, focusing on direct social infrastructure projects aimed at social goals instead of economic goals Tran Anh Tuan (2003) with the research paper "Japanese ODA for Southeast Asian countries and lessons learned for Vietnam", the author presented the role and impact

of ODA funds for recipient countries In Southeast Asia, it also presents an ineffective ODA perspective in some countries, from which some lessons are proposed for Vietnam

Nguyen Ngoc Son (2008) with the topic "Savings - investment and economic growth in Vietnam", the study provides a conclusion about the relationship between savings - investment and economic growth in Vietnam In addition, the study also presents solutions to improve the efficiency of savings and investment, contributing

to economic growth in Vietnam

Nguyen Thi Huyen (2008) with the topic "Exploiting ODA capital in the cause of industrialization and modernization in Vietnam", the paper focuses on analyzing ODA exploitation activities and the role of capital sources This is in the cause of industrialization and modernization in Vietnam

Ho Huu Tien (2009) points out the causes and points out the advantages and disadvantages in Vietnam's ODA management, and sets out solutions for the government in ODA management and use

Central Institute for Economic Management (2013) has a research project with the theme: "Attracting and using the official development assistance, foreign direct investment and foreign indirect investment" The research results have pointed out some useful solutions in how to access and use ODA in Vietnam

Pham Thuy Hong (2014) has a research article "Japanese ODA fund and economic development of Vietnam" The paper summarizes the achievements and remaining limitations related to Japanese ODA funding for Vietnam today

CHAPTER 2: CURRENT SITUATION OF THE IMPACT OF OFFICIAL DEVELOPMENT ASSISTANCE ON ECONOMIC GROWTH

Figure 2.1 Commitment and disbursement of ODA in developing countries

In the field of investment, in the period of 1996-2016, the detailed comparison of ODA funded sectors in developing countries, the infrastructure sector accounted for the highest proportion with 46% of the total source ODA capital in all fields Next, humanitarian aid accounted for 16%, and the third was transportation and communication with 12% The sectors that receive ODA are limited in the fields of agriculture, environment and clean water and energy

Figure 2.2 ODA signed by sector and sector in developing countries

during 1996-2016

Source: Organization for Economic Cooperation and Development (OECD)

2.1.2 Current situation of the impact of official development assistance on economic growth in developing countries

Unexpected adverse events occurred in the 1996-2016 period These are crises: the Asian financial crisis of 1997, the global economic crisis of 2008 and the European public debt crisis in 2010 Economic growth in developing countries can

be divided into two period: from 1998 to 2007 GDP growth rate tended to increase during this period, while in the period of 2007-2016, the economic growth rate in developing countries was significantly reduced due to affected by successive economic crises Based on Figure 2.3, it was found that in 1998 GDP growth rate was the lowest with only 1.8% due to developing countries in Asia affected by the Asian crisis beginning in 1997 in Thailand The second lowest economic growth

Environment and clean water Energy

Traffic and communication system Agriculture

Humanitarian aid

rate occurred in 2009 at 2.5% due to the 2007-2008 global financial crisis Overall, during the 1996-2016 period, the average economic growth rate in developing countries was about 5%

Figure 2.3 Economic growth in developing countries during 1996-2016

Source: World Bank (WB)

Figure 2.4 Changes in economic growth and ODA in developing countries

during 1996-2016

Source: World Bank (WB)

0 5E+12 1E+13 1.5E+13 2E+13 2.5E+13 3E+13

Economically, ODA capital is assessed to contribute positively to economic development in developing countries ODA capital has a strong influence

socio-on social welfare, in particular, supporting investment capital, human resource development, poverty reduction (Buck and Kuckulenz, 2010; Rao and Hassan, 2012) Correlation assessments show that GDP and ODA are positively correlated, ODA flows are relatively in the same direction as economic growth and there is a certain lag time in developing countries However, overall, ODA capital is only one

of the sources of capital to support economic development and social security, so that ODA capital can really contribute to promoting economic growth, then It is important to improve the efficiency of this capital source through improving factors affecting ODA attraction, management and use A number of important factors affecting ODA efficiency include: ODA institutional environment must be favorable, ensure good quality of public administration and anti-corruption governance in countries receiving this capital, improve the ability to absorb the capital of the ODA-receiving country thus, it can bring into full play the strength

of this capital source, and create an attractive investment environment to attract other capital sources in countries and foreign countries thereby creating great momentum to promote economic growth

CHAPTER 3: MODEL AND RESEARCH METHODOLOGY

3.1 Research data

The data of the thesis was collected including 68 developing countries in the world in the period from 1996 to 2016 The selection of developing countries and the range of 1996-2016 time comes from World Bank data set, since 1996 data for all selected countries in the new full study and the latest updated data up to 2016

3.2 Research models

In order to quantitatively analyze the impact of official development assistance on economic growth in developing countries, the thesis inherits Lucas's (1988) research model to develop research models of the thesis are as follows:

The first research objective: to analyze the impact of official development

assistance (ODA) on economic growth in developing countries To address this research goal, the author examines both static and dynamic table form models

Model 1: analyzing the impact of official development assistance (ODA) on static

table economic growth:

GDPit = β1+ β2ODAit + β3INVESTit + β4LABORit + β5INFit + β6OPENit

+ β7INFRASit + αi + uit (1)

Model 2: analyzing the impact of official development assistance (ODA) on

dynamic economic growth:

GDPit = β1+ β2GDPit-1 + β3ODAit + β4INVESTit + β5LABORit + β6 INFit

+ β7OPENit + β8INFRASit + αi + uit (2)

The second research objective: to analyze the impact of official

development assistance (ODA) on economic growth in the case of Vietnam To solve this research goal, the author put into the model (2) VN dummy variable The