Asymmetric effects of foreign aid on economic growth in Uganda: a nonlinear ARDL approach

Abstract

Foreign aid is often considered to be conducive for economic growth. However, the effectiveness of foreign aid on economic growth has been surrounded by controversy. The study solves this controversy by examining the asymmetric effects of foreign aid on economic growth in Uganda. This study uses data from World Development Indicators and employs a Nonlinear Autoregressive Distribution Lag framework. The study results reveal that a shot- and long- run increase in foreign increases economic growth while a decrease in foreign aid in the short- and long-run has a positive association with economic growth. Furthermore, the study finds capital and investment are positively associated with economic growth in the long run. The study recommends that the country should seek for more capital support inform of foreign aid and create a sound macroeconomic policy and institutional environment to foster the efficient allocation of these resources. Furthermore, the government should allocate more resources towards boosting local and foreign investors. This can be through subsdizing land for investment and offering tax holidays to local investors.