Online

Ahmadi, Fareed

Community Development and Applied Economics

2023

M.S.

The aim of this thesis is to study the impact of aggregate foreign aid (FAID), foreign direct investment (FDI) and exports on economic growth measured by real gross domestic product (GDP) and Human development index (HDI) in Afghanistan from 1960 to 2020. The effectiveness of foreign aid on economic growth is highly contested among scholars and it is open to further research. The existing literature also lacks a comprehensive analysis on Afghanistan; thus, this study will add significant findings to this debate by using Afghanistan as a case study. After the 9/11 attacks on the World Trade Center, the U.S. and its European allies invested heavily in Afghanistan to promote democracy and establish a functioning state. In addition, many other nations such as Japan, Canada, India, and Australia also provided humanitarian assistance to the war-ravaged economy of Afghanistan. This study uses time series regression (1960-2020) and an auto-regressive distributed lag model (ARDL) to explore relationships between foreign aid and economic growth and foreign aid and human development index. ARDL is utilized because it includes the lag effect which allows the use of lagged values of the dependent variable. Other variables such as exports and foreign direct investment are also included to make the analysis more comprehensive. Findings suggest foreign aid has a positive and significant impact on GDP in the long-run and short-run. However, foreign aid didn't impact HDI in Afghanistan. Foreign aid did increase the income and livelihood of many Afghans. However, it was not sustainable as data shows that since the U.S. withdrawal from Afghanistan in August 2021, the GDP has contracted almost 30%.