Impacts of Foreign Aid and Democracy on ASEAN Economic Growth

Abstract

This study aims to examine the effects of foreign aid and democracy on the economic growth of ASEAN by adopting the parameter estimation from Panel Vector Error-Correction Models. The data used in the study ranged from 2010 to 2017, totaling eight years. The study is divided into 2 cases, namely model with democracy variable and model without democracy variable. From the empirical test that showed the long-term relationship, it was found that all 6 variables, which consist of the growth of gross domestic product, proportion of foreign aid to gross domestic product, proportion of gross capital accumulation to gross domestic product, proportion of government expenditures to gross domestic product, proportion of foreign direct investment to gross domestic product and democracy all has a long-run equilibrium relationship with each other. When comparing the coefficients between the absence of democracy involved and the presence of democracy involved, it was observed that the addition of democratic variables contributes to the model more positively than the non-democratic one. For test on the growth of gross domestic product affecting the foreign aid received, it was found that if there is an increase in gross product growth, this will result in lower foreign aid. However, if there is a low growth in gross domestic product, it will lead to higher foreign aid payments. Democracy and foreign subsidies are one of the components that generate disruption to economic growth. This may be because those countries still adopt policy that is not adequate to allocate the subsidies they receive. This demonstrates the need for the government of the receiving country to establish policies on guidelines and allocate funds from foreign aid accordingly.