Pakistan's Development Dilemma: An Empirical Analysis of Aid, Governance, and Human Development

Abstract

This study examines the role of foreign aid and governance in Pakistan’s human development from 1991 to 2021 utilizing the autoregressive distributed lag (ARDL) technique. It not only explores the individual impact of foreign aid and governance but also investigates how good governance affects human development. A governance indicator has been constructed by employing Principal Component Analysis based on six different governance dimensions. It is found that both good governance and foreign aid have significant and positive relationships with human development in Pakistan and good governance facilitates and reinforces the contribution of foreign aid in advancing human development. The results show that trade openness, income growth, and government expenditure also have a positive impact on human development. The Granger Causality test further verifies the causality running from foreign aid and governance to human development. The analysis implies that enhancing governance quality is important to optimizing the positive impact of foreign aid on human development. Likewise, policies to stimulate trade openness, boost government expenditure on social sectors, and more consistent income growth can play an important role in improving human development in Pakistan.