The Impact of Official Development Assistance (ODA) on the Economic Growth of Liberia

Abstract

The required capital to boost economic growth and development is inadequate domestically. As a result, the external capital is needed. Official Development Assistance (ODA) is one of important external capitals which contribute on economic development in developing countries significantly. The existing empirical literature implies inconclusive impact of the official development assistance on economic growth. The empirical findings on the impact of official development assistance on economic growth are either positive, negative or even insignificant. Consequently, this thesis examines the impact of official development assistance on the economic growth of Liberia, a country where an empirical study on official development assistance effectiveness has not been conducted yet. Using time series data for the period 1974 to 2014, this thesis employed the Autoregressive Distributed Lag (ARDL) model in the empirical estimation. Our theoretical framework is derived from the Endogenous Growth Model. The empirical results show that a 1 percent increase in official development assistance leads to 0.37 percent increase in real GDP of Liberia at 5 percent level of significance. The causality test based on the Toda-Yamamoto approach also confirms that the official development assistance leads to an increase in economic growth of Liberia.