The relationship between foreign aid and corruption: a case of selected Asian countries

Purpose: The purpose of this study is to examine the effect of foreign aid (FA) on corruption in selected Asian countries (Pakistan, India, Srilanka and Bangladesh) using the panel data from 2000 to 2014. Design/methodology/approach: The author used Levin-Lin-Chu and Im-Pesaran-Shin panel unit root tests to check the stationary properties of the variables. The Pedroni’s and Kao panel cointegration approach was applied to analyze the variable’s long-run relationship. The author used panel dynamic ordinary least squares (PDOLS) and fully modified ordinary least squares (FMOLS) framework to estimate the coefficients of cointegrating vectors. Additionally, the panel granger causality test was performed to check the causal relationship between the variables. Findings: The results from PDOLS and FMOLS indicate that FA has a significant negative impact on the level of corruption. This infers that the foreign assistance decrease the level of corruption perception index, hence, more corruption in the country. Originality/value: Overall, the study fulfills the need to understand the aid-corruption nexus, particularly in the case of the Asian region.