Econometric Approach to Analyzing Determinants of Sustained Prosperity

TL;DR

This study uses econometric methods to analyze how different types of foreign aid and foundational metrics influence prosperity, finding education aid and rule of law positively impact prosperity, while overall aid and innovation show negligible effects.

Contribution

It applies FMOLS and GMM techniques to panel data across 74 countries, revealing nuanced effects of aid and institutional factors on prosperity, and includes a case study on Reliance Jio's ecosystem development.

Findings

Foreign aid to education positively impacts prosperity.

Rule of law correlates with increased prosperity.

Overall aid and innovation indices show negligible relationship.

Abstract

Every year, substantial resources are allocated to foreign aid with the aim of catalyzing prosperity and development in recipient countries. The diverse body of research on the relationship between aid and gross domestic product (GDP) has yielded varying results, finding evidence of both positive, negative, and negligible associations between the two. This study employs econometric techniques, namely Fully Modified Ordinary Least Squares Regression (FMOLS) and the Generalized Method of Moments (GMM), to explore the intricate links between innovation and different types of official development assistance (ODA) with the overarching construct of prosperity. The paper also reviews the linkages between foundational metrics, such as the rule of law, education, and economic infrastructure and services, in enabling self-sustaining prosperity. Drawing upon panel data of relevant determinants for 74 countries across the years 2013 to 2021, the study found that there was a negligible relationship between both ODA and innovation indices with prosperity. Notably, foreign aid targeted specifically toward education was observed to have a positive impact on prosperity, as was the presence of rule of law in a state. The results of the study are then examined through the lens of a case-study on Reliance Jio, exemplifying how the company engineered an ecosystem that harnessed resources and facilitated infrastructure development, thereby contributing to self-sustaining economic growth and prosperity in India.