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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 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 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 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 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 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 socioeconomic 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 nonrefundable aid plus preferential loans accounting for at least 25% of total aid, called ODA Official Development Finance (ODF) is all the financial resources developed 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 types: non-refundable ODA capital, preferential ODA loan capital and ODA capital from mixed loans.Under sponsors provide official development assistance, there are 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 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 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 on economic growth 1.4.1 Foreign researches 1.4.1.1 Empirical studies prove that official development assistance has a positive impact on economic growth Many studies show that there is a positive relationship between official development assistance (ODA) and economic growth Initially, the study of Papanek (1973) analyzed regression data of 34 countries in the 1950s and 51 countries in the 1960s, using independent variables as the main research variables 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 longterm relationships between major development assistance and economic growth in five South Asian countries: Bangladesh, Nepal, India, Sri Lanka, Pakistan in period 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 4.2 Estimation result and discussion 4.2.1 Estimation result and discussion about the impact of official development assistance on economic growth in developing countries First, the thesis performed regressions in turn with models of Pooed OLS, FEM and REM for model (1) static table After that, the dissertation performs the testing of selecting the appropriate model The test results in Table 4.5 show that: for p-value F-test test α significance level (1%) so REM model is more suitable than FEM model, for Breusch-Pagan Lagrangian test has p-value