Foreign aid, domestic savings, and growth in LDCs: An application of likelihood-based panel cointegration

The foreign aid, domestic saving, and economic growth relationships are investigated for a panel of African countries over the period 1965-2000. The departure from earlier studies of the role of foreign aid on economic growth is in the asymptotic theory of likelihood-based panel cointegration allowing for multiple cointegrating vectors. The results reveal that the variables contain a panel unit root and they cointegrate in a panel perspective. The findings show that foreign aid and domestic saving enhance economic growth for all countries in the sample.