Socio-Economic Planning Sciences 88 (2023) 101649

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Socio-Economic Planning Sciences

journal homepage: www.elsevier.com/locate/seps

Does foreign aid procurement in resource-rich countries depend on these

countries’ financial development and institutional quality? Evidence from
PVECM and quantile-on-quantile regression☆
Rudra P. Pradhan a, *, Sara E. Bennett b, Mahendhiran S. Nair c, Mak B. Arvin d
a
Vinod Gupta School of Management, Indian Institute of Technology Kharagpur, WB, 721302, India
b
College of Business, University of Lynchburg, Lynchburg, VA, 24501, USA
c
Sunway Institute of Global Strategy & Competitiveness and Sunway University Business School, Sunway University, Bandar Sunway, 47500, Selangor, Malaysia
d
Department of Economics, Trent University, Peterborough, Ontario, K9L 0G2, Canada

A R T I C L E I N F O A B S T R A C T

JEL classification: The underlying structure of the global economy has undergone major structural changes over the last two de­
O11 cades. These transformations have been powered by globalisation, technological development and multilateral
O43 trade agreements. The more open global economy has benefitted the global community, but many resource-rich
O33
developing countries are struggling to keep pace with more developed countries. As these resource-rich countries
H54
attempt to catch up with more developed economies, many rely on foreign aid to develop their institutions of
Keywords:
governance and financial sector for a more knowledge-intensive economy. This study analyses the long- and
Foreign aid procurement
Institutional quality
short-run associations between foreign development aid procurement, financial development, and institutional
Financial development quality in resource-rich countries from 2005 to 2020, employing the panel vector error-correction (PVECM)
Resource-rich countries model and Quantile-on-Quantile Regression (QQR). Our analysis shows that, in the short run, there is a strong
PVECM endogenous nexus between foreign aid procurement, quality of institutions and financial development.
QQR Furthermore, the results reveal that financial development and higher institutional development assist resource-
rich countries in procuring foreign developmental aid in the long run. These findings suggest that a financial
system which functions well, and favourable institutional governance are critical for these countries to secure
foreign aid to put them on a path to sustainable development.

1. Introduction and background
The last two decades have seen rapid changes to the underlying
structure of the economies of countries worldwide. The force global­
isationation, technology and multi-lateral trade agreements have played
a strong role. The COVID-19 health pandemic and the resulting dis­
ruptions in global supply chains [1] have also had a severe adverse
impact, especially for developing economies, whose weaker institutional
and financial systems magnified the effects of the pandemic. To assist
developing countries, particularly to help them to mitigate global shocks
to their economic system, various foreign aid schemes have been
introduced over the years. Foreign aid is provided by a donor country or
a multilateral agency to a developing nation to promote economic
development and improve human welfare in the recipient country.
Foreign aid can take many forms including economic, military, and
humanitarian aid. This study focused on Official Development Aid

☆
South Korea provides a compelling case regarding the effective use of foreign development aid procurement. From 1945 to the early 1990s, South Korea received
approximately 12.7 billion USD in foreign aid from a number of nations, although Japan and the US were the two largest donors of foreign aid [66]. After procuring
significant foreign aid for five decades, South Korea joined the Development Assistance Committee in 2009 and officially became a major donor country. South Korea
is the first major donor country that was once a recipient of significant foreign aid. Government commitment was important to the effective use and management
from aid to promote economic growth [67]. Kalu and Kim (2009) conclude that in the case of South Korea, strong governance leads to the effective use of aid which
then leads to economic growth. The success of foreign aid procurement, seen through economic growth, encourages more foreign aid which then leads to further
economic growth.
* Corresponding author.
E-mail addresses: rudrap@vgsom.iitkgp.ernet.in (R.P. Pradhan), bennett.se@lynchburg.edu (S.E. Bennett), mahendhiransn@sunway.edu.my (M.S. Nair),
marvin@trentu.ca (M.B. Arvin).

https://doi.org/10.1016/j.seps.2023.101649
Received 16 August 2022; Received in revised form 2 May 2023; Accepted 7 June 2023
Available online 16 June 2023
0038-0121/© 2023 Elsevier Ltd. All rights reserved.
R.P. Pradhan et al.
(ODA) which is “government aid that promotes and specifically targets
the economic development and welfare of developing countries” and is
considered the “gold standard” for measuring foreign aid [2].
Modern foreign aid has its roots in post-World War II aid, where
donor nations provided much-needed economic and social aid to
recipient nations but also sought to promote their own interests, as such
support allied them to stable governments, gave them access to natural
resources, and allowed them to attain better trade agreements, and
offered other benefits. The best known of these aid plans, the Marshall
Plan, was signed into law by United States (US) President Harry Truman
in 1948. In the next four years, the US provided approximately 13 billion
USD in economic assistance to post-war Europe to allow Europe to
rebuild its economic infrastructure. There were altruistic reasons for
providing this aid, as many European nations were in desperate need of
financial resources after years of war and devastation, but the US itself
wanted to benefit from this aid. The Marshall Plan ensured that the US
obtained stable and reliable trade partners. It also helped to develop or
support strong democratic governments in the face of Soviet expansion
in Eastern Europe. President Harry Truman’s inaugural speech in 1949
(the year after the adoption of the Marshall Plan) indicated that
providing aid to poor countries was an important element in US foreign
policy and argued that greater production was the key to prosperity and
peace.
In line with the Marshall Plan, developed donor nations have pro­
vided foreign aid to developing nations with the aim of fostering eco­
nomic growth and improving human welfare, but also promoting their
own self-interests. From 2005 to 2020, the sample period for this study,
the US disbursed more than $750 billion to various countries for a range
of different purposes. However, despite the proclaimed positive in­
tentions of many foreign aid disbursements, there is some debate
regarding the effectiveness of such foreign aid [3]. already denounced
the failure of foreign aid, providing numerous examples of foreign aid
helping bureaucrats in recipient countries rather than those starving and
supposed to benefit from the aid provided to their countries. It has been
argued that foreign aid encourages reliance on “handouts” and that it is
often given to “irresponsible, corrupt, and oppressive” governments [3].
Bovard concludes that foreign investment can do better in developing
countries than foreign aid. If he is correct, policy-makers need to
consider the impact of institutional quality on foreign aid procurement
and utilization. Do countries with better institutional quality manage
the aid that is received better? If so, does the aid in turn benefit their
citizens more?
Over the decades, donor nations have shifted aid to different nations
and regions, in different economic income sectors, and for various
purposes. Despite the important unanswered questions regarding the
true benefits of providing aid, it could be argued that foreign aid is still
very much needed to achieve the goals of economic stability and humans
and environmental well-being across the globe [4]. In 2015, the United
Nations (UN) declared 17 Sustainable Development Goals (SDGs) and
169 targets to be met by 2030. These SDGs cover a variety of goals, such
as ending poverty and hunger, promoting well-being and healthy lives,
ensuring inclusive and equitable quality education, attaining clean
water and sanitation, building resilient and innovative infrastructure
and industries, and promoting sustained economic growth and full
employment for all, to name only a few. Unlike the preceding Millen­
nium Development Goals (MDGs), which pertained only to developing
countries, the SDGs apply to every country, regardless of its level of
development or national income. Given that these goals apply to all
countries, it is obvious that many countries will need substantial foreign
assistance (in the form of aid and/or foreign investment) if they hope to
achieve these 17 goals. The UN estimates that, globally, there is a need
for a $7 trillion/year global investment, and that $3.3 to 4.5 trillion/­
year needs to be invested in developing countries alone, to meet the SDG
targets [4].
Based on the UN’s estimates of a need of $7 trillion per year in­
vestment to meet SDGs [4], it can be argued that foreign aid is needed to
2
Socio-Economic Planning Sciences 88 (2023) 101649
achieve a sustainable global future. If foreign aid can be more effectively
allocated and implemented, it has the potential to benefit developing
countries whose economies are constrained by challenges such as a lack
of capital, human resources and infrastructure. Aid can potentially
address deficiencies in the production capabilities of poor countries,
whose development has been stifled by a lack of capital and savings,
foreign exchange reserves, infrastructure, and human resources.
It is perhaps challenging to measure the success of foreign aid in
promoting human welfare, but it is easier to measure economic growth.
Nevertheless, the empirical evidence on the success in respect of the
declared goal of improving economic growth through foreign aid is
varied.1 The question of how (and even whether) foreign aid improves
economic growth or human welfare for recipient countries thus remains
unanswered, given conflicting results in development literature. Com­
plaints regarding problems such as ineffective aid, government corrup­
tion, and aid dependency persist; hence, it may be posited that
institutional quality may play a role in the effectiveness of aid. In this
context, Wright and Winters (2010) suggest that the political processes
in recipient countries play an important role in how aid is used. Different
institutional settings (which are in their turn influenced by institutional
quality) place different constraints on the effective use of aid. Foreign
aid can indirectly cover for poor government policies, and may
encourage rent-seeking behaviour, perpetuating weak institutions that
impede economic growth.
Professor Angus Deaton, recipient of the 2015 Nobel Memorial Prize
in Economic Sciences, has questioned the effectiveness of foreign aid. He
points out that, in some African countries, government expenditure re­
lies almost entirely on foreign sources [5]. This has possibly created a
situation where these governments have little incentive to answer to
their citizens, and instead have every incentive to please aid agencies.
This implies that, effectively, the high inflow of foreign aid has funda­
mentally changed the relationship between the government and its cit­
izens. The concern that Deaton’s criticism raises is twofold: Is aid
allocated effectively and in meaningful ways that improve the welfare of
a country’s citizens? Does the flow of aid, coupled with the change in the
relationship between governments and their people, effectively keep
bad and/or corrupt governments in power? If so, could better institu­
tional quality keep poor governments in line in such a way that foreign
aid could be more productive?
Financial development can also play an important role in making aid
effective, for example, in working towards the UN MDGs, and since
2015, the SDGs). Nkusu and Sayke (2004) considered the importance of
well-developed, deep financial markets in recipient countries in facili­
tating the allocation of funds received through foreign aid to productive
endeavours that enhance socioeconomic development. They reported
that financial development was important for effective use of foreign aid
and suggested that this criterion was important in meeting the (then)
MDGs. The implication for meeting the current SDGs, given the need for
substantial foreign aid to developing countries, is that the role of
financial development and institutional quality must be areas of interest
in whether or not the SDGs can be met.
Our interest in this study is possible interrelationships between
foreign development aid procurement, institutional development, and
financial development. Considering that foreign aid continues to flow
into developing countries, this article assesses whether a strong insti­
tutional quality-financial development nexus improves the procurement
of foreign aid. Similarly, does the procurement of foreign aid influence
or affect the financial development and quality of institutions? There is
currently a lack of consensus on the direction of temporal causality of
these variables. In order for aid to be effective and to meet certain goals,
1
It is not feasible to include all the empirical literature on this link within the
scope of this article [68–72]. have already provided a comprehensive review of
work assessing links between economic performance and foreign development
aid.
R.P. Pradhan et al.
such as the SDGs, policy-makers need to understand these relationships
better.
Compared with earlier research, this study explores the inter-
relationships between the procurement of foreign developmental aid,
financial development, and institutional development in a trivariate
framework. Conceivably the biggest challenge in the literature has been
the need to go beyond documenting correlations (or a lack thereof) to
demonstrating causation (or a lack thereof) between foreign aid pro­
curement, financial development, and institutional quality. The current
research reported in this article uses causality tests in the form of
Granger causality tests (focusing on temporal causality) to examine the
connection between these three variables.
The novelty of our work lies in four contributions: (1) we look at a
large group of resource-rich countries2 over the period from 2005 to
2020 to ascertain the relationship between the three variables of interest
which have not been studied together in the literature; (2) we use
composite indices (composed of multiple variables) to provide robust­
ness and depth in measuring for both finance development and institu­
tional quality; (3) we employ an advanced panel data technique to assess
the Granger causal nexus between the variables of interest; and (4) we
uncover complex endogenous interactions among the variables and link
the key co-development policies that enable countries to accomplish the
intended objectives of the foreign aid programmes which give them
access to such aid. In our study, we ascertain the short- and long-run
connections among foreign aid procurement, financial development,
and institutional quality by applying the panel vector-error correction
(PVECM) model.
The remainder of this article is organised into five sections: Section 2
explores the literature on the links between foreign aid procurement,
financial development, and institutional quality. Section 2 also provides
the research questions, along with the proposed hypotheses. Section 3
describes the variables and our empirical process. Section 4 discusses the
results of the analyses. In Section 5, we provide conclusions and policy
implications. In the final section, we outline the limitations of the study
and areas of potential future research that will provide more valuable
insights in this area of research.
2. Literature review and hypothesis development
Many studies in the development literature provide sound theoret­
ical frameworks for and empirical analysis of the factors that determine
the flow of foreign aid to developing countries. However, few studies
have used advanced econometric methods to examine the endogenous
connections between the selected variables of interest in either the short
run or the long run. These relationships have imperative policy impli­
cations for overall economic development. In this section, we consider
three key areas of the literature relating to the possible causal nexus
among foreign aid procurement, institutional quality and financial
development.
2.1. Causality between foreign development aid procurement and
financial development
Currently, foreign aid needs are still high in developing countries,
especially if these countries are to try to meet the UN’s SDGs by 2030. If
such aid is to be procured, there are some questions regarding the role of
financial development in a country, and how effectively any financial
support given will be allocated to key development projects and initia­
tives. Additionally, in light of the concerns over institutional quality and
aid, it is logical that a sound financial system is required to prevent or
2
There are many resource-rich countries around the globe. They are typically
middle-income countries. For the purposes of this study, the sample of resource-
rich countries consists of middle-income countries that have natural resources
such as oil, minerals, fertile land, timber, water, etc. (see Appendix B).
3
Socio-Economic Planning Sciences 88 (2023) 101649
overcome poor management of the aid given, and to avoid rent-seeking
and other negative externalities that prevent the objectives of foreign
development aid support from being reached. If there are more highly
developed financial systems, this often means that there are also strong
regulations, mechanisms for monitoring flows of capital, and the crea­
tion of tools to assess risk. This leads to the question of whether foreign
aid procurement enhances financial development or whether evidence
of financial development allows the procurement of foreign aid (see, for
instance, Ref. [6].
Despite a significant literature on foreign aid and financial perfor­
mance, the debate is far from settled when it comes to the aid-growth
nexus (see, for example, [7–11]. In this context, a supply-leading hy­
pothesis (SLH) proposes that the procurement of foreign aid causes
financial development. The argument is that donors commit resources to
support emerging countries to boost financial infrastructure. Increases
in foreign aid then enable these countries to undertake reforms to
modernise their financial institutions. These reforms include adopting
new technology, financial management systems and appropriate capa­
bility development programmes to ensure that effective financial ser­
vices are provided to various stakeholders in the economy. Reforms also
include developing new financial regulations, monitoring mechanisms,
risk assessment tools and introducing an extensive range of modern
financial instruments and services for the diverse stakeholders in the
economy. Several studies such as those by Refs. [6,12]; and [13] have
reported results that support the supply-leading effect.
A demand-following hypothesis (DFH) proposes that causality goes
from financial development to foreign aid procurement. The demand-
following hypothesis postulates that countries with sound financial
systems are more likely to attract foreign aid, based on the argument
that donor countries are only willing to channel financial aid to coun­
tries that continue to strengthen their financial sector. A concern among
donor nations is that weak financial sectors in many resource-rich
economies result in much of donor funding being ‘tunneled-out’ from
the economic system to the underground economy. Thus, the worry is
that the intended objective of the donor funds in raising economic
development in these countries may not be realized. Findings reported
by Refs. [8,10,14]; and [15] support the DFH hypothesis.
The feedback hypothesis (FBH) maintains that financial development
and foreign aid procurement can deepen their impact on one another,
making official development assistance and financial development
conjointly causal. The logic supporting bidirectional causality is that
foreign assistance is closely linked to financial development and finan­
cial development inevitably requires favourable official development
assistance. The final hypothesis tested is the neutrality hypothesis (NH),
specifying that there is no connection between foreign developmental
aid and financial development. Key studies that support the above hy­
potheses include those by Refs. [8,9,16,17]; and [10].
2.2. Causal relationship between foreign aid procurement and
institutional quality
Given significant concerns over weak institutions, a high incidence of
rent-seeking behaviour and its impact on the management of foreign
development aid, it is important to understand the relationship between
such aid and institutional quality. On one hand, foreign aid might offer a
valuable investment in health, education, public sector institutions and
other development programmes which in turn enhance the quality of the
overall governance system and stability of a political system. On the
other hand, as both [3,5] point out, foreign aid might undermine po­
litical accountability by providing governments in developing and
emerging countries with funds that are independently (or perhaps even
negatively) correlated with their performance in office. Hence, there are
considerable disagreement in the literature about whether foreign aid
procurement causes institutional quality or whether it is the institutional
quality that allows foreign aid procurement (see, for instance, Refs. [18,
19].
R.P. Pradhan et al.
In this context, the supply-leading hypothesis (SLH) postulates that
foreign development aid procurement causes institutional quality. The
motivation for this proposal is that foreign development assistance is
critical in providing valuable financial and non-financial resources to
improve the quality of institutions in many resource-rich countries.
Since aid may come in the forms of financial aid, technological support
and capability development programmes, it follows that it should
improve the public sector and corporate governance, both of which
reduce the power of the bureaucracy and rent-seeking behaviour, which
could in turn bolster investor confidence and economic development in
these countries. Studies that found evidence to support this hypothesis
were conducted by Refs. [19–24].
By contrast, the demand-following hypothesis (DFH) contends that
causality moves from institutional quality to foreign aid procurement.
The economic rationale for this relationship is that improving institu­
tional governance in resource-rich countries engenders greater confi­
dence among donors that foreign aid will yield a greater return in terms
of value and socio-economic development in these countries. Studies
that support this hypothesis were done by Refs. [25–28]; and [29].
The feedback hypothesis (FBH) proposes that aid procurement and
institutional development reinforce one another. In this scenario, insti­
tutional quality is critical in attracting foreign aid, and foreign aid
provides valuable resources to improve institutional quality in resource-
rich countries. Finally, we consider the neutrality hypothesis (NH), which
posits that there is no association between institutional development
and foreign aid procurement. There are many studies that have exam­
ined the relationships between these two variables, including those by
Refs. [16,18,30–33]; and [34].
2.3. Causality between financial development and institutional quality
The association between financial performance and institutional
quality is a widely researched area in development economics. However,
there is an ongoing debate on whether financial development causes
institutional quality, or whether it is the level of institutional quality that
causes financial system development in a developing economy (see, for
instance, Pradhan, Bahmani, & Abraham, 2023; Pradhan, Nair et al.,
2023, Pradhan, Nair, Arvin & Hall, 2023; [35–37].
In this article we explore several hypotheses pertaining to institu­
tional quality and financial development in resource-rich countries. The
first is the supply-leading hypothesis (SLH), which postulates that insti­
tutional quality is an essential pre-requisite to financial performance.
The argument is that institutional reforms in the form of the use of better
technology, adherence to global best practices, a strong regulatory ar­
chitecture, and effective implementation of policies, regulations and
strategies will have a positive spill-over influence on financial in­
stitutions. The institutional reforms result in a modernisation of the
financial system, providing more robust financial regulations, business-
friendly financial services and more extensive financial instruments for
investors to increase their return on value (ROV) and return on invest­
ment (ROV) from their investments. Proponents of this hypothesis are
[34,38,39]; and [40].
The second is the demand-following hypothesis (DFH), which proposes
that causality can run from financial development to institutional
quality. Proponents of this hypothesis maintain that the financial sector
in any economy is closely tied to international markets. Over the last few
years, the global financial system has undergone radical transformation
due to new technology and regulatory reforms to ensure the seamless
flow of global financial transactions, to mitigate the risk associated with
financial crimes, and to support the sustainable development of econo­
mies [41]. These global financial developments and reforms have had a
significant impact on the financial systems in many resource-rich
countries. They have also had a knock-on effect on these countries’
institutional quality. In a sense, financial sector transformation initia­
tives may be seen as drivers of institutional development in many
countries. Proponents of this hypothesis are [42,43].
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Socio-Economic Planning Sciences 88 (2023) 101649
The third proposition is the feedback hypothesis (FBH), which posits
that financial performance and institutional quality deepen one another,
suggesting that financial development and institutional quality are
mutually causal. The justification for arguing a bidirectional causal
relationship is that institutional quality is indispensable to financial
development and financial development inevitably requires a well-
established institutional environment. The fourth proposition is the
neutrality hypothesis (NH) which postulates that there is no impact be­
tween financial performance and institutional quality. Developmental
studies that support the above hypotheses include those by Refs. [34,
38–40,44,45]; and [46].
2.4. Research questions and hypotheses
In our study, we explore the causality of foreign aid procurement and
financial development together with institutional quality. This tri-
partite relationship has been largely ignored in the development liter­
ature. The key research questions examined in this study are the
following:
• What is the effect of foreign aid procurement on both financial
development and institutional quality?
• What is the influence of financial development on foreign aid pro­
curement and institutional quality?
• What stimulus does institutional quality exercise on foreign aid
procurement and financial development?
In order to answer these questions, we test the following six
hypotheses:
• H1A: Financial development Granger-causes foreign aid procurement.
• H1B: Foreign aid procurement Granger-causes financial development.
• H2A: Institutional quality Granger-causes foreign aid procurement.
• H2B: Foreign aid procurement Granger-causes institutional quality.
• H3A: Financial development Granger-causes institutional quality.
• H3B: Institutional quality Granger-causes financial development.
Fig. 1 illustrates these hypotheses, with the probable causality be­
tween the variables of noted interest.
Fig. 1. Possible causal relationships among financial development, institu­
tional quality, and foreign aid procurement.
Note: The hypotheses are
H1A, B: Financial development Granger-causes foreign aid procurement and vice
versa.
H2A, B: Institutional quality Granger-causes foreign aid procurement and vice
versa.
H3A, B: Financial development Granger-causes institutional quality and
vice versa.
R.P. Pradhan et al. Socio-Economic Planning Sciences 88 (2023) 101649

2.5. The theoretical relationships
The endogenous growth literature elaborates on how financial
development and institutional development can stimulate foreign aid pro­
curement and vice versa. For a theoretical discussion, see Refs. [35,47];
and [48]. The transmission mechanism between these variables has
already been explained in the section above, and against a theoretical
backdrop. At the same time, how foreign aid procurement influences the
relationship among financial development and institutional quality has
been studied in the empirical literature (for example, [49]. In this
article, we use a unified framework to examine the links between foreign
aid procurement, financial development, and institutional quality.
Following [50,51]; the theoretical relationship between these three
variables is characterized by the Cobb-Douglas functional form:
ODAit = B0 FIN β1i β2i εit
it INQit e [1]
where ODA is official development assistance (relating to foreign aid),
FIN is financial development (used as a proxy for the banking sector,
stock market and overall financial markets), and INQ is institutional
quality.
A logarithmic transformation of Equation (1) gives
ln(ODAit ) = β0 + β1i ln(FINit ) + β2i ln(INQit ) + εit [2]
where β0 = ln (B0); i denotes country; t is time period for each country;
and βj (for j = 1, 2, 3) represents long-run elasticity.
Equations [1] and [2] express foreign aid procurement as the
dependent variable. However, this is not necessarily the case in our
empirical model – we also assess the likelihood that causation flows in
other directions by considering variants of Equations [1] and [2], which
are not shown here for the sake of brevity.
3. Variables, data, and estimation procedures
In this study, the panel Granger causality method was used to un­
derstand the dynamics among three variables of interest: foreign aid
procurement, financial development and institutional quality. Using a
panel dataset from 2005 to 2020, we examined the short- and long-term
associations among these variables of interest. The main objective of our
study was to answer the research questions set out in Section 2.4, which
have important policy implications that are presented in Section 5 of the
article.
(a) banking sector development (CBD), (b) development of the stock
market (CSD), and (c) inclusive financial development (CFD). The CBD
is an index of five individual banking sector indicators: claims on other
sectors of the domestic economy (CDE), domestic credit to the private
sector (DCP), domestic credit provided by the financial sector (DCF),
domestic credit to the private sector by banks (DCB), and the broad
money supply (BRM). All five are represented as a percentage of gross
domestic product (GDP). The CSD is an index of four individual stock
market indicators: the turnover ratio of domestic traded shares as a
percentage (STU), traded stocks in value as a percentage of the GDP
(STR), stock market capitalization as a percentage of the GDP (SMC),
and number of registered domestic companies in one million people
(LDC). Finally, the CFD is an index of the five banking factors and the
four stock market factors.
Institutional quality (INQ) is an index (CIQ) based on ten different
institutional quality indicators. These ten INQ factors are the CPIA-
building human resources rating (CHR), the regulatory business envi­
ronment rating (CBR), the debt policy rating (CDP), the management
(economic) cluster average rating (CEM), the efficiency of revenue
mobilization rating (CRM), the financial sector rating (CFS), the mac­
roeconomic management rating (CMM), the quality of budget and
financial management rating (CBF), the quality of administration
(public) rating (CQP), and the rating of accountability, transparency,
and corruption in the public sector (CTC).3
Principal Component Analysis (PCA) was employed to derive CIQ,
CBD, CSD, and CFD. The PCA provides a statistical approach to forming
an integrated index for institutional quality and financial development.
These two composite indices were derived using multiple institutional
and financial indicators. Statistical information, with detailed tables and
graphs, on how the four composite were derived using PCA can be
requested from the authors.4
Our study provides results for three cases, with each case using a
different financial development indicator, namely, CBD, CSD, and CFD.
Appendix C, Table C.1, Part I sets out the descriptive statistics for the
variables.
A unified empirical modelling framework was used to inspect the
causality pattern between foreign aid procurement, financial develop­
ment, and institutional quality. The empirical model estimates three sets
of simultaneous equations as follows:
q
∑ ∑
r ∑
s
ΔODAit = Ω1j + δ1ik ΔODAit− k + λ1ik ΔFINit− k + μ1ik ΔINQ
k=1 k=1 k=1

Our study looked at 79 countries that are classified as resource-rich + ρ1i ECTit− 1 + ξ1it [3]
countries. The list includes lower- and upper-middle income economies.
The typical clustering is based on the World Bank’s definition. These q
∑ ∑
r ∑
s
ΔFINit = Ω2j + δ2ik ΔFINit− k + λ2ik ΔODAit− k + μ2ik ΔINQit−
countries are typically endowed with rich natural resources such as oil, k
k=1 k=1 k=1
minerals, fertile land, timber, and water (for more details, see Ref. [52].
+ ρ2i ECTit− 1 + ξ2it [4]
We selected a sample of countries that, according to the World Bank,
belong to groups of nations that contain approximately 75% of the q
∑ ∑
r ∑
s
world’s population and have considerable resources, and are drivers of ΔINQit = Ω3j + δ3ik ΔINQit− k + λ3ik ΔFINit− k + μ3ik ΔODAit− k
the world economy [53]. Annual time-series data were used for this k=1 k=1 k=1

empirical study. The data were obtained from the WDI database. The
choice of indicators deployed in this study relate to official development
assistance (ODA), financial development (FID), and institutional quality
(INQ). Table A.1 of Appendix A offers a detailed explanation of all the
selected variables. All monetary variables are expressed in real terms
and presented in constant US dollars.
Foreign aid procurement was measured as bilateral official devel­
opment aid. This, according to the OECD guidelines, is classified as
direct government support that stimulates and precisely steers the eco­
nomic development and well-being of developing economies. It should
be noted that military aid (loans and credits) was not included in this
measurement. Specifically, we use official development assistance (net)
per capita (ODA). ODA is the “gold standard” of foreign aid measure­
ments (see Footnote 1).
Financial development (FIN) was measured in the following ways:
+ ρ3i ECTit− 1 + ξ3it [5]
where ODA is official development assistance; FIN is financial devel­
opment, for which we used CBD, CSD, or CFD; and INQ is institutional
quality, which is captured by the index CIQ; t and i are the year and
country in the panel set-up respectively, Δ is the forward operator, ξ is
∑
the error term ~i.i.d. In Equation (5), Nm (0, ) has a normal distri­
∑
bution with a mean zero, and is a r x r positive definite matrix.
3
The relevance of these institutional indicators, in the context of develop­
mental performance, can be seen from Refs. [27,73–76].
4
For a general approach on how PCA may be used in different studies to
derive composite indices see, for instance, Refs. [51,77]; Pradhan, Nair, Arvin &
Hall (2023), and [78,79].

5
R.P. Pradhan et al. Socio-Economic Planning Sciences 88 (2023) 101649

Table 1
Short-run and long-run results of panel granger causality tests.
Dependent Variable Independent variables and ECT-1

Case 1: ODA, CBD, CIQ Short-run Inferences

ΔODA ΔCBD ΔCIQ ECT-1

ΔODA – 0.22 11.7* − 0.006* ODA → CBD

ΔCBD 7.45* – 5.62** − 0.002 ODA ← CIQ
ΔCIQ 1.76 0.06 – − 0.013 CBD ← CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
ΔODA ΔCSD ΔCIQ ECT-1
ΔODA – 5.19** 15.4* − 0.002* ODA ← CSD
ΔCSD 0.39 – 0.14 − 0.027 ODA ← CIQ
ΔCIQ 1.60 0.05 – − 0.002 CSD ∤ CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 0.03 15.3* − 0.003* ODA → CFD
ΔCFD 5.62** – 0.97 − 0.005 ODA ← CIQ
ΔCIQ 1.18 0.51 – − 0.002 CFD ∤ CIQ

Note 1: ODA is official development assistance, CBD is the index of banking sector development, CSD is the index of stock market development, CFD is the index of
financial development, and CIQ is the composite index of institutional quality.
Note 2: * and ** indicate significance at the 1% and 5% levels, respectively.
Note 3: ←/→ indicates the direction of Granger causality; and ∤ indicates absence of Granger causality.
Note 4: The results reported in Table 1 are for the composite index of institutional quality (CIQ) with ODA and CBD/CSD/CFD. We also estimated the model for each
indicator of institutional quality with ODA and CBD/CSD/CFD, but do not include these results here (they can be requested from the authors).

Furthermore, the lag lengths are q, r and s for the variables of interest in
the corresponding equations. In line with the Engle-Granger framework,
ECT is the error-correction term. The statistical significance of the ECT
term indicates the presence of a long-term relationship between the
variables. The differenced variables in such systems capture the short-
run dynamics among the three variables.
We used three statistical criteria to choose the optimal lag lengths for
Equations (3)–(5). These were the Akaike (AIC), the Schwarz (SBC) and
the Likelihood Ratio (LR) criteria. The AIC, SBC and LR details can be
provided upon request.
4. Estimation results
4.1. Main estimated results
The first step in our analysis was to check the cross-sectional
dependence and stationarity properties of the selected variables of in­
terest. We first deployed a series of cross-sectional dependency (CD)
tests, namely the Breusch Pagan LM test, the Pesaran scaled LM test, the
Bias-corrected scaled LM test, and the Pesaran CD test, to determine
cross-sectional dependence between the variables. We found no cross-
sectional dependence.
Once the absence of cross-sectional dependence had been confirmed,
we employed first-generation panel unit root methods, namely the Im-
Pesaran-Shin (IPS) test (see Ref. [54], the Levin-Lin-Chu (LLC) test,
the Phillips and Perron (PP) test, and the Augmented Dickey-Fuller
(ADF) test,5 to investigate the stationarity of the variables of interest
in our panel framework. On the basis of these test results, we rejected the
null hypothesis of a unit root at less than 1% for the first difference of the
variables of interest (see Appendix D). This suggests that the variables
used in this study (ODA, CBD, CSD, CFD, and CIQ) were non-stationary,
and hence, integrated of order one, I [1].
Since all the variables were found to be integrated of I (1), we
employed the cointegration test to assess the presence of long-run re­
lationships between ODA, CBD/CSD/CFD, and CIQ. The [55] and Fisher
panel cointegration methods were then applied to assess any cointe­
gration relationship between the three variables. Based on these
5
We chose these methods on the basis of cross-sectional independence
testing using the Pesaran CD test (see Ref. [80].
cointegration results, the null hypotheses of no cointegration between
foreign aid procurement, financial development, and institutional
quality were rejected at the 1%, 5% and 10% significance levels,
respectively (see Appendix D). Therefore, we propose the likelihood of
cointegration relationships between the variables – in other words, there
is indeed a long-run relationship between foreign development aid
procurement, financial development, and institutional quality in
resource-rich countries. This relationship was found to exist for all three
cases.
The findings noted above indicate that the PVECM is appropriate to
examine the Granger causal dynamics between foreign aid procurement,
financial development and institutional quality. The results of the
PVECM for the three cases are presented in Table 1.
One key finding relates to the long-run outcomes, which were
determined by assessing the statistical outcome of the ECT-1s. The
empirical analysis shows that for ΔODA (as a predicted variable), the
ECT-1s are significant at 1% (p ≤ 0.01). This implies that official
development assistance (procured in the form of foreign aid) converges
to its long-run equilibrium path in response to changes in financial
development and institutional quality. This result was observed for all
three cases. Therefore, we can conclude that, in the long term, foreign
aid inflows to resource-rich countries are significantly influenced by
both financial development and the institutional quality in those coun­
tries. This robust finding implies that to enhance the procurement of
foreign aid, resource-rich countries must endeavour to undertake insti­
tutional reforms and financial sector development to ensure that both
the institutions of governance and the financial sector in these countries
can create good socioeconomic value for key stakeholders in their
countries. This result is not surprising, as many of donors have expressed
policy concerns regarding weak and rent-seeking behaviour in many of
these countries that lead to ineffective aid allocation and investment in
unproductive activities.
The short-run findings were not uniform. The short-run Granger
causality results differed across the three cases. The results for the short-
run findings are set out in Table 1, and are discussed below. In the short
run, in two out of three cases (CFD and CBD), foreign aid procurement
Granger-caused financial development, and in one case (CSD), financial
development led foreign aid procurement. With regard to the relation­
ship between foreign aid procurement and institutional quality, in all
three cases, institutional quality led foreign aid procurement. This in­
dicates that policy-makers need to improve institutional quality to

6
R.P. Pradhan et al. Socio-Economic Planning Sciences 88 (2023) 101649

increase foreign aid flow into these countries in the short run. Finally, Table 2
the results support a neutrality hypothesis with regard to the short-run Summary of Additional Granger Causality Results between ODA, INQ, FIN
relationship between financial development and institutional quality – (different clusters: income, borrowing, and regional classifications).
this was true in all cases. Samples/Clusters Cases Possible Direction of Causality between the Variables

ODA and FIN CIQ and ODA CIQ and FIN

4.2. Supplementary test results Cluster 1: Income Classification

1.1 1 ODA → CBD CIQ ↔ ODA CIQ ↔ CBD
2 ODA ∤ CSD CIQ ↔ ODA CIQ ∤ CSD
We also undertook supplementary tests to ensure the robustness of 3 ODA → CFD CIQ ↔ ODA CIQ ↔ CFD
our estimated results and findings. Although the sample countries have 1.2 1 ODA ← CBD CIQ → ODA CIQ → CBD
something in common, namely that they are countries rich in resources, 2 ODA ← CSD CIQ → ODA CIQ → CSD
3 ODA ← CFD CIQ → ODA CIQ → CSD
they differ in respect of their income, region, and borrowing from the
1.3 1 ODA ← CBD CIQ ↔ ODA CIQ ∤ CBD
World Bank categories. Hence, our first robustness check involved 2 ODA ← CSD CIQ → ODA CIQ ∤ CSD
examining the Granger causalities by breaking up the sample into 3 ODA ← CFD CIQ ↔ ODA CIQ ∤ CFD
distinct categories. Cluster 2: Borrowing Classification
These results are available in Appendix E.6 Table E.1 shows the re­ 2.1 1 ODA ← CBD CIQ ↔ ODA CIQ ∤ CBD
2 ODA ← CSD CIQ → ODA CIQ CSD
sults based on country groupings into low, lower-middle, and upper-
∤
2 ODA ← CFD CIQ ← ODA CIQ ∤ CFD
middle income countries (see Appendix B for the income category and 2.2 1 ODA ← CBD CIQ → ODA CIQ ∤ CBD
regional classifications of the countries in this study). Table E.2 provides 2 ODA ← CSD CIQ → ODA CIQ ∤ CSD
the results based on country groupings as countries borrowing from the 3 ODA ← CFD CIQ → ODA CIQ ∤ CFD
2.3 1 ODA ← CBD CIQ → ODA CIQ CBD
International Bank for Reconstruction and Development (IBRD), coun­ ∤
2 ODA ← CSD CIQ ↔ ODA CIQ ∤ CSD
tries borrowing from the International Development Association (IDA), 3 ODA ← CFD CIQ → ODA CIQ ∤ CFD
and countries that borrow from both.7 Table E.3 details the results based Cluster 3: Regional Classification
on grouping by region (East Asia, Europe and Central Asia, South Asia, 3.1 1 ODA ←CBD CIQ ↔ ODA CIQ ← CBD
the Middle East, Latin America, and Sub-Saharan Africa). A summary of 2 ODA ← CSD CIQ ↔ ODA CIQ ← CSD
3 ODA ← CFD CIQ ↔ ODA CIQ ← CFD
the short-run results for the estimations by group is provided in Table 2.
3.2 1 ODA ↔ CBD CIQ → ODA CIQ ∤ CBD
The long-run results by group were consistent with the results from the 2 ODA ← CSD CIQ → ODA CIQ ← CSD
entire sample. The short-run results were less consistent, as was the case 3 ODA ← CFD CIQ → ODA CIQ ∤ CFD
with the entire sample. 3.3 1 ODA ↔ CBD CIQ → ODA CIQ ∤ CBD
2 ODA ← CSD CIQ → ODA CIQ ∤ CSD
For our second robustness check, we examined the relationship be­
3 ODA ↔ CFD CIQ → ODA CIQ ∤ CFD
tween the variables using the FMOLS method [56], the DOLS method 3.4 1 ODA ← CBD CIQ → ODA CIQ ∤ CBD
[57], and generalized methods of moments (GMM) [58]. These methods 2 ODA ← CSD CIQ → ODA CIQ ∤ CSD
show that financial performance and institutional quality positively impact 3 ODA ← CFD CIQ → ODA CIQ ∤ CFD
foreign aid procurement. These findings are in line with the results of 3.5 1 ODA ← CBD CIQ ↔ ODA CIQ ∤ CBD
2 ODA ↔ CSD CIQ ↔ ODA CIQ ∤ CSD
[59,60] and with our main results. The findings from these comple­
2 ODA ↔ CFD CIQ → ODA CIQ ∤ CFD
mentary estimation approaches are illustrated in Table F.1.8 (see Ap­ 3.6 1 ODA ← CBD CIQ → ODA CIQ ∤ CBD
pendix F). 2 ODA ← CSD CIQ → ODA CIQ ∤ CSD
Our third test of robustness involved using panel Quantile-on- 3 ODA ↔ CFD CIQ → ODA CIQ ∤ CFD
Quantile regression (QQR). The empirical outcomes from the QQR for Note 1: FIN is used for CBD, CSD and CFD.
Cases 1, 2, and 3 are set out in Table F.1 (also see, for illustration, Ap­ Note 2: All notations as defined for Table 1.
pendix G). These findings again support the hypothesis that both insti­ Note 3: ←/→/↔ arrows indicate the direction of Granger causality; and ∤ shows
tutional quality and financial development have a positive influence on absence of Granger causality.
foreign aid procurement. Most importantly, these findings are observed
and validated for the 10th to 90th per cent quantiles of the distribution. sustainable foreign aid into their economies. These results are also
The empirical analysis using the panel QQR show that both financial consistent with the findings from the VECM, FMOLS, DOLS and GMM
performance and institutional development are positively inter­ estimates.
connected and that they are statistically significantly associated at all As a fourth robustness check, generalized impulse response functions
the quantiles (see Table G.1).9 The causality between the variables of (GIRFs) were used to gain insight into the way in which a shock to one of
interest was found to be stronger in the higher quantiles for all three the explanatory variables could affect an endogenous variable. Specif­
cases (banking development [CBD], development of stock market ically, GIRFs are useful to study how one variable responds to stochastic
[CSD], and combined financial performance [CFD]). The stronger pos­ shocks (the adjustments or sudden changes) in another variable. Fig. 2
itive impact between financial development and institutional quality on shows the GIRF results for Cases 1 to 3, confirming the presence of a
foreign aid procurement implies that countries with strong financial long-run relationship between foreign aid procurement, financial
sector development and sound institutional quality can attract development and institutional quality.10
The fifth check was to use generalized forecast error variance
(GFEVD) decomposition analysis to examine the strength of the Granger
6
The results of preliminary tests relating to the GC test, such as the CSD test, causal dynamics between foreign aid procurement, financial develop­
panel unit root test and panel co-integration tests, are not reported here due ment and institutional quality. This approach is not sensitive to the
space constraints. ordering of the variables. The results from this analysis highlight that
7
The IBRD provides loans to middle income and creditworthy low income any perturbation in or shock to the financial development and institu­
countries. The IDA provides interest-free loans and grants to governments of the
tional quality variables ultimately leads back to the long-run path of the
poorest countries. The IBRD and IDA comprise the World Bank.
8 foreign aid procurement variable. The estimates from the approach used
The estimation of FMOLS, DOLS and GMM for all sub-sample results are not
reported here, due to space constraints. These results were consistent with main
results.
9 10
The estimation of QQR for all sub-sample results is not presented here, due The GIRFs’ sub-sample results are not reported here, but can be requested
to space constraints. These results are consistent with main results. from the authors.

7
R.P. Pradhan et al.
Fig. 2. GIRF results.
Note 1: All variables are defined in Table 1.
in this study strengthen the argument that in resource-rich countries,
financial development and institutional quality do have an impact on
foreign aid procurement over a long time horizon. These results are
reported in Fig. 3.11
5. Concluding remarks and policy implications
We examined the nexus between the procurement of foreign devel­
opment aid, financial development and institutional quality in resource-
rich countries. This empirical study offered important findings, as it
shows strong Granger causality between three variables of interest, both
in the short run and in the long run. In the short run, we observed that
foreign development aid procurement has a positive impact on financial
11
The GFEVD results for all sub-samples are not reported here, but can be
requested from the authors.
8
Socio-Economic Planning Sciences 88 (2023) 101649
and banking sector development. This result also has important policy
implications, as it shows that the procurement of foreign aid plays an
important role in helping resource-rich countries to improve their
financial and banking sector. Thus, foreign aid is critical in allowing
resource rich-countries to invest in the adoption of the best technology,
talent and knowledge systems to modernise their financial and banking
sectors. Development of these two important sectors will have signifi­
cant positive knock-on effects on other sectors of the economy in these
countries.
Conversely, development of the stock market in these countries will
have a positive impact on foreign developmental aid inflow into
resource-rich countries. This result is interesting in that it suggests that
reforms in the fledgling stock markets in these countries have the po­
tential to attract foreign aid. Improvements in the stock market signal
that firms listed on the stock exchange have the potential to build strong
return on value and return on investment (ROV and ROI) for economic
prosperity in these countries. Where that is the case, donor countries are
R.P. Pradhan et al.
Fig. 3. GFEVD results.
Note 1: All variables are defined in Table 1.
more likely to be willing to continue foreign aid to support institutional
reforms that create better ROV and ROI for private sector investors
through the stock markets in these countries.
The short-run analysis also shows that developing institutional
quality has a strong positive causal influence on foreign aid procurement
and the financial sector, the banking system and development of stock
market. These results have important implications for the sample
countries, in that institutional reforms to modernise institutions of
governance appear to lead to more robust, transparent, effective and
efficient financial sector and banking systems. These enable investors to
manage their assets and risk more effectively, and help them to obtain
better ROV from their investments, all of which help to create a vibrant
9
Socio-Economic Planning Sciences 88 (2023) 101649
stock market.
In terms of the long-run dynamics, foreign aid procurement was
found to be significantly and positively impacted by financial develop­
ment and institutional quality for all three financial indicators. The long-
run results obtained from our analysis were consistent with those of
[61]. These results show that an important pre-condition for
resource-rich countries to gain access to foreign development aid is to
improve their institutional governance and financial sector. Strong and
dynamic institutions and a healthy financial sector will channel foreign
development aid to productive economic and development initiatives.
More importantly, it will enable these countries to transition towards
self-sustainability.
R.P. Pradhan et al.
Our results have important implications for countries participating in
foreign aid programmes. Foreign aid is meant to assist less developed
countries to undertake reforms to create greater economic opportunities
and enhance the quality of life of people in such resource-rich countries.
Our empirical results show that donor countries are taking a
performance-based approach to continued foreign aid support for
recipient countries that undertake appropriate institutional and finan­
cial sector reforms. To procure foreign aid and support, recipient
countries must commence reforms to strengthen the institutions and
continuously improve public and corporate governance. Such reforms
include channelling foreign aid to assist in the adoption of new tech­
nology and digital governance systems to reduce bureaucracy and red-
tape; strengthening capability development programmes and good
ethical practices among public servants to minimize rent-seeking and
moral hazard behaviours; developing sound regulations and imple­
mentation mechanisms that are supported by effective tracking and
monitoring systems; strengthening the enforcement of the rule of law;
and holding economic agents accountable for their actions and
behaviour.
The results also demonstrate that efforts put in place to improve the
financial sector are critical for resource-rich countries to procure foreign
aid from donor economies. Hence, recipient countries should use part of
such aid to promote a modern and well-organized financial system,
which uses the best technology, attracts the best talent into the system
and ensures adherence to global best banking, financial and stock
market practices. These strategies will transform financial services to
allow them to be integrated into the global financial system. A well-
developed financial sector will enable these countries to attract and
use foreign aid and other resources optimally to ensure sustainable
economic development. The prospect of strong economic performance
will in turn attract foreign investors into these countries, supplying
additional funds to create dynamic economic ecosystems, open up new
business opportunities, create new high-income employment and
expand the quality of life of people in these resource-rich countries.
One example of a country where such a strategy was fruitful is
Singapore, which was an unimportant under-developed island state in
South-East Asia in the 1960s, but transitioned itself into a middle-
income country by the 1970s. By the beginning of the 21st century,
Singapore had become a globally competitive, vibrant and developed
country. This island nation with a small population did not have many
natural resources when it became independent in 1965. It received
foreign aid and support from more developed countries in the 1960s and
used these support systems effectively to build sound and efficient in­
stitutions of governance and transform the island nation into a global
financial hub. The Singaporean government put in place well-curated
co-development policies to leverage foreign aid to build an efficient
and corruption-free public sector. It also undertook continuous reforms
of the financial sector (financial services, the banking sector and stock
market) to become an important service sector to propel economic
performance. Its institutional and financial sector reforms enabled the
country to transition from being a foreign aid recipient to a country that
attracted foreign direct investment to power its industrial development.
These institutional reforms enabled Singapore to minimize rent-seeking
behaviour and become a globally competitive financial hub. By 2020,
Singapore had emerged as one of the top four countries for successfully
combatting corruption [62]. The Global Financial Index that measures
the quality and reputation of 126 financial centres across the globe
positioned Singapore as among the top five most developed and
competitive financial hubs in the world in 2021 [63]. The country’s
institutional and financial sector development increased the economic
wealth of the nation from a per capita income of US$428 in 1960 to US
$65,233 in 2019, providing Singaporeans with one of the best quality of
life indexes in the world [64,65].
The Singaporean case study demonstrates that well-curated foreign
development aid, institutional reforms and financial sector development
can transform a country with limited resources into a resource-rich
10
Socio-Economic Planning Sciences 88 (2023) 101649
country. In Singapore’s case, a highly skilled workforce, large finan­
cial assets and ocean resources became the key resources that enabled
this small island nation to become a competitive international tran­
shipment and container hub – by 2021, Singapore was ranked as the
second biggest shipping hub in the world after Shanghai, China (Marine
Digital, 2023).
In summary, the global economy is undergoing rapid transformation.
Many resource-rich countries are grappling with changes in the global
economic architecture. Many of them do not have the kinds of resources
that allow them to develop more resilient institutions of governance and
their financial sector. Hence, many of them will require financial and
other support from international agencies and wealthier countries to
develop their financial sector and institutions. This study shows the
presence of strong endogenous relationships between institutional
quality, financial development and inflows of foreign aid to resource-
rich countries. The dynamics (short- and/or long-run) between our
variables highlight how resource-rich countries should carefully curate
co-development policies relating to institutional and financial sector re­
forms. Such reforms must ensure that the support provided by donor
countries is used effectively to strengthen the institutional pillars that
underpin sustainable economic development of resource-rich countries.
Improving institutional governance and financial sector development
will enable these countries to transition from being recipients of foreign
aid to countries that attract foreign direct investments to develop their
economies, as the case of Singapore demonstrates.
An important value addition of this project to the development
literature is that it revealed the complex endogenous relationships be­
tween foreign developmental aid procurement and institutional devel­
opment, and financial development. The article also reinforces the need
for co-development policies to ensure sustained development in
resource-rich economies.
6. Limitations and scope for future research
The study has provided valuable insights into the dynamic re­
lationships between foreign aid procurement, institutional quality, and
financial development in resource-rich countries. Notwithstanding these
contributions, this work has two significant limitations. Although we
provide insight into the nexus between institutional quality and finan­
cial development that explains short- and long-term foreign aid pro­
curement in resource-rich countries, other important variables are not
included in the model. These variables include infrastructure, economic
growth, and intensity of government investment in institutional quality
and financial development, and other macroeconomic variables. The
absence of these variables in the present model may cause omitted
variable bias, which can affect the robustness of our findings.
Moreover, the econometric method used in this study captures linear
associations between the three variables of interest. This model may not
capture more complex non-linear relationships between the variables. If
the nexus between these variables is non-linear, a more appropriate
model would be the non-linear panel autoregressive distributive lag
(NPARDL) model or the quantile autoregressive distributive lag
(QARDL) model. The state of financial sector development can also be
used as a threshold variable to explore the non-linear relationship be­
tween foreign aid procurement and institutional quality. In that case, a
more appropriate model would be the threshold VECM (TVECM). The
application of these methods is left for future studies. Overall, the future
application of advanced dynamic methods are likely to provide more
and deeper insights into the complex endogenous relationships between
the variables used in our model.
In spite of the limitations in our study, our empirical analysis has
provided valuable insights into the complex temporal causal relation­
ships between financial development, institutional quality, and foreign
aid procurement. Our results indicate that co-development policies per­
taining to financial development as well as institutional quality are likely
to increase foreign aid for rich-resource countries and lead these
R.P. Pradhan et al. Socio-Economic Planning Sciences 88 (2023) 101649

countries onto a path toward sustainable development. Future studies Data availability
should address the above-mentioned limitations to identify more robust
short-run and long-run relationships between foreign aid procurement Data will be made available on request.
and other related factors. Such studies will deliver additional valuable
insights on key policy levers to help resource-rich countries to become Acknowledgment
more self-sustaining and globally competitive.
Useful comments from anonymous reviewers and the Editor of this
Author statement journal have greatly improved the final version of the paper. We thank
the reviewers and the Editor for their helpful inputs.
All authors have equal credit with reference to:
Conceptualization, Writing, Reviewing, and Editing.

Appendix A. List of Chosen Variables

Table A.1
Variable Details

Variable Variable

Acronym Definition
ODA Official development assistance: net per capita official development assistance (ODA) and official aid received.
CBD Index of banking sector development: index using CDE, DCF, DCP, DCB, and BRM – obtained by authors using PCA.
CSD Index of stock market development: index using STU, STR, SMC, and LDC – derived by authors using PCA.
CFD Index of financial development: index using CDE, DCF, DCP, DCB. BRM, STU, STR, SMC, and LDC – derived by authors using PCA.
CIQ Composite index of institutional quality: composite index using CHR, CBR, CDP, CEM, CRM, CFS, CMM, CBF, CQP, and CTC – derived by authors using PCA.
Note: All notations are as given in the text.

Appendix B. Countries in Different Income Groups and Regional Classification

Table B.1
List of Low Income and Lower-Middle Income Countries

Lower-middle income Regional classification Low income Regional classification

1. Vietnam East Asia & Pacific 1. Sudan Sub-Saharan Africa

2. Vanuatu East Asia & Pacific 2. Syrian Arab Republic Middle East & North Africa
3. Uzbekistan European & Central Asia 3. Yemen Republic Middle East & North Africa
4. Ukraine European & Central Asia 4. Zambia Sub-Saharan Africa
5. Tunisia Middle East & North Africa
6. Timor-Leste East Asia & Pacific
7. Tajikistan Europe & Central Asia
8. Sri Lanka South Asia
9. Solomon Islands Sub-Saharan Africa
10. Sao Tome and Principe Sub-Saharan Africa
11. Samoa East Asia & Pacific
12. Papua New Guinea East Asia & Pacific
13. Philippines East Asia & Pacific
14. Pakistan South Asia
15. Nigeria Sub-Saharan Africa
16. Nicaragua Latin America & Caribbean
17. Myanmar East Asia & Pacific
18. Morocco Middle East & North Africa
19. Mongolia East Asia & Pacific
20. Mauritania Sub-Saharan Africa
21. Lesotho Sub-Saharan Africa
22. Lebanon Middle East & North Africa
23. Lao PDR East Asia & Pacific
24. Kyrgyz Republic Europe & Central Asia
25. Kiribati East Asia & Pacific
26. Kenya Sub-Saharan Africa
27. Iran Middle East & North Africa
28. Indonesia East Asia & Pacific
29. India South Asia
30. Honduras Latin America & Caribbean
31. Ghana Sub-Saharan Africa
32. El Salvador Latin America & Caribbean
33. Egypt Arab Republic Middle East & North Africa
34. Djibouti Middle East & North Africa
35. Cote d’Ivoire Sub-Saharan Africa
36. Congo Republic Sub-Saharan Africa
37. Comoros Sub-Saharan Africa
38. Cameron Sub-Saharan Africa
39. Cambodia Sub-Saharan Africa
40. Cabo Verde Sub-Saharan Africa
41. Bolivia Latin America & Caribbean
(continued on next page)

11
R.P. Pradhan et al. Socio-Economic Planning Sciences 88 (2023) 101649

Table B.1 (continued )

Lower-middle income Regional classification Low income Regional classification

42. Bhutan South Asia

43. Bangladesh South Asia
44. Angola Sub-Saharan Africa
45. Algeria Middle East & North Africa

Table B.2
List of Upper Middle Income Countries

Upper-middle income Regional classification

1 Albania Europe & Central Asia

2. Argentina Latin America & Caribbean
3. Azerbaijan Europe & Central Asia
4. Belarus Europe & Central Asia
5. Belize Latin America & Caribbean
6.Bosania and Herzegovina Europe & Central Asia
7. Botswana Sub-Saharan Africa
8. Brazil Latin America & Caribbean
9. Bulgaria Europe & Central Asia
10. China East Asia & Pacific
11. Colombia Latin America & Caribbean
12. Costa Rica Latin America & Caribbean
13.Cuba Latin America & Caribbean
14. Dominican Republic Latin America & Caribbean
15. Ecuador Latin America & Caribbean
16. Equatorial Guinea Sub-Saharan Africa
17. Fiji East Asia & Pacific
18. Gabon Sub-Saharan Africa
19. Guyana Latin America & Caribbean
20. Iraq Middle East & North Africa
21. Jamaica Latin America & Caribbean
22. Kazakhstan Europe & Central Asia
23. Libya Middle East & North Africa
24. Malaysia East Asia & Pacific
25. Maldives South Asia
26. Mauritius Sub-Saharan Africa
27. Mexico Latin America & Caribbean
28. Montenegro Sub-Saharan Africa
29. Namibia Sub-Saharan Africa
30. Panama Latin America & Caribbean
31. Paraguay Latin America & Caribbean
32. Peru Latin America & Caribbean
33. Russian Federation Europe & Central Asia
34. Serbia Europe & Central Asia
35. South Africa Sub-Saharan Africa
36. Suriname Latin America & Caribbean
37. Thailand East Asia & Pacific
38. Turkey Europe & Central Asia
39. Turkmenistan Europe & Central Asia
40. Venezuela Latin America & Caribbean
41. Armenia Europe & Central Asia
42. Georgia Europe & Central Asia
43. Guatemala Latin America & Caribbean
44. Jordan Middle East & North Africa
45. Moldova Europe & Central Asia

Appendix C. Descriptive and Unit Root Test Statistics

Table C.1
Basic and Unit Root Statistics

Variables

Part I: Basic Statistics

Mean Median Standard Deviation Skewness Kurtosis Jarque Bera Inference

ODA 1.43 1.56 0.74 − 0.59 2.92 P < 0.01

CBD 0.34 0.36 0.31 − 0.16 2.63 P < 0.01
(continued on next page)

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Table C.1 (continued )

Variables

Part I: Basic Statistics

Mean Median Standard Deviation Skewness Kurtosis Jarque Bera Inference

CSD − 0.23 0.000 0.74 − 3.39 15.5 P < 0.01

CFD 0.20 0.19 0.37 0.21 3.59 P < 0.01
CIQ 0.56 0.00 0.65 0.31 1.11 P < 0.01
Part II: Cross Sectional Dependence Test

BPL PCL BSL PCD

ODA NA NA NA NA
CBD NA NA NA NA
CSD NA NA NA NA
CFD NA NA NA NA
CIQ NA NA NA NA
Note 1: All notations are mentioned in the text.
Note 2: * and ** are statistically significant at the 1% and 5% levels, respectively.

Appendix D. Empirical Cointegration Results

Table D.1
Panel Cointegration Method Results for FIN, ODA, and CIQ

Part I: Pedroni Test Results Cases

Case 1 Case 2 Case 3

WI WI&T WI WI&T WI WI&T

Statistics
Panel υ 1.11** − 2.86 − 0.50 − 2.22 1.15 − 7.50
Panel ρ − 1.99** 0.55 0.12 1.48 − 1.67*** 2.16
Panel PP − 8.06* − 11.6* − 2.36* − 3.24* − 7.52* − 11.7*
Panel ADF − 5.11* − 5.60* − 4.41* − 3.59* − 4.86* − 6.41*
Group ρ 0.44 2.48 1.86 2.52 0.76 5.30
Group PP − 10.8* − 19.5* − 1.64*** − 6.30* − 9.72* − 14.8*
Group ADF − 4.42* − 6.11* − 4.22* − 3.22** − 3.96* − 3.28*
Part II: Fisher Test Results

Cases

Case 1 Case 2 Case 3

Trace max-eigen Trace max-eigen Trace max-eigen

WI/WI&T WI/WI&T WI/WI&T WI/WI&T WI/WI&T WI/WI&T

None 636*/907* 530*/714* 142*/245* 124*/189* 628*/846* 637*/657*

At Most 1 336*/629* 291*/303* 75*/66* 70*/61* 305*/639* 271*/299*
At Most 2 200*/151* 200*/151* 36**/27.3 36**/27.3 176*/142* 176*/142*
Part III: Westerlund (2007) panel cointegration test

Case 1 Case 2 Case 3

WI WI&T WI WI&T WI WI&T

Statistics
Gt 1.11** − 2.86 − 0.50 − 2.22 1.15 − 7.50
Ga − 1.99** 0.55 0.12 1.48 − 1.67*** 2.16
Pt − 8.06* − 11.6* − 2.36* − 3.24* − 7.52* − 11.7*
Pa − 5.11* − 5.60* − 4.41* − 3.59* − 4.86* − 6.41*
Note 1: FIN is used for CBD, CSD and CFD; and all variables are as defined earlier.
Note 2: WI is with intercept, and WI&T is with intercept and trend.
Note 3: *, ** and *** are statistically significant at the 1%, 5%, and 10% levels, respectively.

Appendix E. Additional Granger Causality Test Results

Table E.1
On the Basis of Income Classification

Dependent Variable Independent variables and ECT-1

Cluster 1.1: For Low Income Countries

Case 1: ODA, CBD, CIQ Short-run Inferences
ΔODA ΔCBD ΔCIQ ECT-1
ΔODA – 3.00 5.54* − 0.004* ODA → CBD
ΔCBD 13.7* – 11.2* − 0.006 ODA ↔ CIQ
ΔCIQ 5.88* 6.24* – − 0.015 CBD ↔ CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
(continued on next page)

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Table E.1 (continued )

Dependent Variable Independent variables and ECT-1

ΔODA ΔCSD ΔCIQ ECT-1

ΔODA – 1.77 7.92* − 0.002* ODA ∤ CSD
ΔCSD 0.41 – 0.27 − 0.049 ODA ↔ CIQ
ΔCIQ 4.61*** 2.16 – − 0.018 CSD ∤ CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 2.08 8.58* − 0.046* ODA → CFD
ΔCFD 11.2* – 6.02* − 0.058 ODA ↔ CIQ
ΔCIQ 5.16** 5.16** – − 0.012 CFD ↔CIQ
Cluster 1.2: For Lower-Middle Income Countries
Case 1: ODA, CBD, CIQ Short-run Inferences
ΔODA ΔCBD ΔCIQ ECT-1
ΔODA – 7.74* 6.94* − 0.063* ODA ← CBD
ΔCBD 2.13 – 12.7* − 0.010 ODA ← CIQ
ΔCIQ 0.83 1.55 – − 0.012 CBD ← CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
ΔODA ΔCSD ΔCIQ ECT-1
ΔODA – 7.29** 8.28* − 0.009* ODA ← CSD
ΔCSD 2.38 – 11.6* − 0.054 ODA ← CIQ
ΔCIQ 0.67 2.80 – − 0.008 CSD ← CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 7.17* 5.83* − 0.001* ODA ← CFD
ΔCFD 1.73 – 13.7* − 0.002 ODA ← CIQ
ΔCIQ 0.78 1.90 – − 0.002 CFD ← CIQ
Cluster 1.3: For Upper-Middle Income Countries
Case 1: ODA, CBD, CIQ Short-run Inferences
ΔODA ΔCBD ΔCIQ ECT-1
ΔODA – 5.37** 7.74* − 0.043* ODA ← CBD
ΔCBD 0.44 – 0.20 − 0.059 ODA ↔ CIQ
ΔCIQ 5.86** 0.08 – − 0.034 CBD ∤ CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
ΔODA ΔCSD ΔCIQ ECT-1
ΔODA – 7.77** 8.92* − 0.041* ODA ← CSD
ΔCSD 4.59 – 2.94 − 0.040 ODA ← CIQ
ΔCIQ 4.64 3.61 – − 0.016 CSD ∤ CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 5.71** 6.85** − 0.044* ODA ← CFD
ΔCFD 1.47 – 0.96 − 0.001 ODA ↔ CIQ
ΔCIQ 6.06** 0.58 – − 0.034 CFD ∤ CIQ
Note 1: ODA is official development assistance, CBD is the index of banking sector development, CSD is the index of stock market development, CFD is the
index of financial development, and CIQ is the composite index of institutional quality.
Note 2: * and ** indicate significance at the 1% and 5% levels, respectively.
Note 3: ←/→ indicates the direction of Granger causality; and ∤ indicates absence of Granger causality.
Note 4: The results reported in Table 1 are for the composite index of institutional quality (CIQ) with ODA and CBD/CSD/CFD. We also estimated the
model for each indicator of institutional quality with ODA and CBD/CSD/CFD but these results are not presented here (they can be requested from the
authors).

Table E.2
On the Basis of Borrowing Classification

Dependent Variable Independent variables and ECT-1

Cluster 2.1: For IBRD Borrowing Countries

Case 1: ODA, CBD, CIQ Short-run Inferences
ΔODA ΔCBD ΔCIQ ECT-1
ΔODA – 7.11* 5.18** − 0.048* ODA ← CBD
ΔCBD 1.03 – 0.87 − 0.006 ODA ↔ CIQ
ΔCIQ 7.29* 0.57 – − 0.042 CBD ∤ CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
ΔODA ΔCSD ΔCIQ ECT-1
ΔODA – 5.88** 5.75*** − 0.009* ODA ← CSD
ΔCSD 2.17 – 4.90 − 0.049 ODA ← CIQ
ΔCIQ 2.16 4.90 – − 0.006 CSD ∤ CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 5.75** 3.05 − 0.043* ODA ← CFD
ΔCFD 2.15 – 1.82 − 0.003 ODA → CIQ
ΔCIQ 7.27* 0.38 – − 0.041 CFD ∤ CIQ
Cluster 2.2: For IDA Borrowing Countries
Case 1: ODA, CBD, CIQ Short-run Inferences
ΔODA ΔCBD ΔCIQ ECT-1
ΔODA – 6.75** 5.39** − 0.022* ODA ← CBD
(continued on next page)

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Table E.2 (continued )

Dependent Variable Independent variables and ECT-1

ΔCBD 4.71 – 2.32 − 0.022 ODA ← CIQ

ΔCIQ 0.15 1.06 – − 0.010 CBD ∤ CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
ΔODA ΔCSD ΔCIQ ECT-1
ΔODA – 6.17** 7.21* − 0.008* ODA ← CSD
ΔCSD 3.57 – 0.36 − 0.016 ODA ← CIQ
ΔCIQ 0.16 0.56 – − 0.016 CSD ∤ CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 5.29** 5.40** − 0.020* ODA ← CFD
ΔCFD 3.96 – 3.44 − 0.002 ODA ← CIQ
ΔCIQ 0.21 0.73 – − 0.010 CFD ∤ CIQ
Cluster 2.3: For Blend Borrowing Countries
Case 1: ODA, CBD, CIQ Short-run Inferences
ΔODA ΔCBD ΔCIQ ECT-1
ΔODA – 6.05** 8.28* − 0.007* ODA ← CBD
ΔCBD 2.94 – 1.54 − 0.003 ODA ← CIQ
ΔCIQ 1.30 0.63 – − 0.009 CBD ∤ CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
ΔODA ΔCSD ΔCIQ ECT-1
ΔODA – 8.08* 6.16** − 0.001* ODA ← CSD
ΔCSD 0.33 – 1.76 − 0.013 ODA ↔ CIQ
ΔCIQ 9.11* 1.12 – − 0.001 CSD ∤ CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 7.76* 6.33** − 0.004* ODA ← CFD
ΔCFD 1.85 – 1.02 − 0.002 ODA ← CIQ
ΔCIQ 1.25 0.61 – − 0.004 CFD ∤ CIQ
Note 1: ODA is official development assistance, CBD is the index of banking sector development, CSD is the index of stock market development, CFD is the
index of financial development, and CIQ is the composite index of institutional quality.
Note 2: * and ** indicate significance at the 1% and 5% levels, respectively.
Note 3: ←/→ indicates the direction of Granger causality; and ∤ indicates the absence of Granger causality.
Note 4: The results reported in Table 1 are for the composite index of institutional quality (CIQ) with ODA and CBD/CSD/CFD. We also estimated the
model for each indicator of institutional quality with ODA and CBD/CSD/CFD, but do not report those results here (they can be requested from the
authors).

Table E.3
On the Basis of Regional Classification

Dependent Variable Independent variables and ECT-1

Cluster 3.1: For East Asian Countries

Case 1: ODA, CBD, CIQ Short-run Inferences
ΔODA ΔCBD ΔCIQ ECT-1
ΔODA – 8.38* 6.73** − 0.011* ODA ← CBD
ΔCBD 2.65 – 0.77 − 0.003 ODA ↔ CIQ
ΔCIQ 5.52** 10.7* – − 0.088 CBD → CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
ΔODA ΔCSD ΔCIQ ECT-1
ΔODA – 8.39* 5.51** − 0.001* ODA ← CSD
ΔCSD 0.33 – 2.10 − 0.001 ODA ↔ CIQ
ΔCIQ 6.87* 10.9* – − 0.002 CSD → CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 6.40* 5.85* − 0.014* ODA ← CFD
ΔCFD 2.07 – 0.57 − 0.002 ODA ↔ CIQ
ΔCIQ 4.95*** 7.77* – − 0.074 CFD ← CIQ
Cluster 3.2: For Europe and Central Asian Countries
Case 1: ODA, CBD, CIQ Short-run Inferences
ΔODA ΔCBD ΔCIQ ECT-1
ΔODA – 7.76* 5.46** − 0.108* ODA ↔ CBD
ΔCBD 5.86* – 3.32 − 0.032 ODA ← CIQ
ΔCIQ 4.83 0.88 – − 0.085 CBD ∤ CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
ΔODA ΔCSD ΔCIQ ECT-1
ΔODA – 6.15* 5.61** − 0.079* ODA ← CSD
ΔCSD 3.72 – 4.36 − 0.064 ODA ← CIQ
ΔCIQ 4.08 12.2* – − 0.155 CSD → CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 6.47* 6.06* − 0.093* ODA ← CFD
ΔCFD 4.38 – 1.26 − 0.013 ODA ← CIQ
ΔCIQ 4.39 0.11 – − 0.079 CFD ∤ CIQ
Cluster 3.3: For South Asian Countries
(continued on next page)

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Table E.3 (continued )

Dependent Variable Independent variables and ECT-1

Case 1: ODA, CBD, CIQ Short-run Inferences

ΔODA ΔCBD ΔCIQ ECT-1
ΔODA – 5.22* 6.60* − 0.021* ODA ↔ CBD
ΔCBD 5.18** – 2.27 − 0.017 ODA ← CIQ
ΔCIQ 1.29 0.18 – − 0.015 CBD ∤ CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
ΔODA ΔCSD ΔCIQ ECT-1
ΔODA – 8.13** 6.16* − 0.002* ODA ← CSD
ΔCSD 1.96 – 0.20 − 0.027 ODA ← CIQ
ΔCIQ 1.49 0.04 – − 0.002 CSD ∤ CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 6.40* 7.30* − 0.021* ODA ↔ CFD
ΔCFD 8.33* – 2.93 − 0.008 ODA ← CIQ
ΔCIQ 1.28 0.18 – − 0.017 CFD ∤ CIQ
Cluster 3.4: For Middle Eastern Countries
Case 1: ODA, CBD, CIQ Short-run Inferences
ΔODA ΔCBD ΔCIQ ECT-1
ΔODA – 14.6* 8.38* − 0.005* ODA ← CBD
ΔCBD 3.57 – 0.95 − 0.021 ODA ← CIQ
ΔCIQ 1.27 2.99 – − 0.014 CBD ∤ CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
ΔODA ΔCSD ΔCIQ ECT-1
ΔODA – 7.24** 5.54** − 0.013* ODA ← CSD
ΔCSD 3.38 – 3.32 − 0.079 ODA ← CIQ
ΔCIQ 1.75 0.01 – − 0.005 CSD ∤ CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 18.2* 8.07* − 0.010* ODA ← CFD
ΔCFD 4.13 – 0.33 − 0.029 ODA ← CIQ
ΔCIQ 1.45 1.81 – − 0.012 CFD ∤ CIQ
Cluster 3.5: For Latin American Countries
Case 1: ODA, CBD, CIQ Short-run Inferences
ΔODA ΔCBD ΔCIQ ECT-1
ΔODA – 6.35* 6.59* − 0.031* ODA → CBD
ΔCBD 1.89 – 2.09 − 0.010 ODA ↔ CIQ
ΔCIQ 9.10* 1.27 – − 0.014 CBD ∤ CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
ΔODA ΔCSD ΔCIQ ECT-1
ΔODA – 8.14* 6.91* − 0.037* ODA ↔ CSD
ΔCSD 6.10* – 2.44 − 0.013 ODA ↔ CIQ
ΔCIQ 8.47* 4.74 – − 0.013 CSD ∤ CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 8.32* 9.45* − 0.003* ODA ↔ CFD
ΔCFD 7.79* – 0.30 − 0.001 ODA ← CIQ
ΔCIQ 0.29 4.50 – − 0.002 CFD ∤ CIQ
Cluster 3.6: For Sub-Saharan Countries
Case 1: ODA, CBD, CIQ Short-run Inferences
ΔODA ΔCBD ΔCIQ ECT-1
ΔODA – 7.45* 6.56* − 0.016* ODA ←CBD
ΔCBD 0.70 – 1.12 − 0.001 ODA ← CIQ
ΔCIQ 1.26 0.30 – − 0.004 CBD ∤ CIQ
Case 2: ODA, CSD, CIQ Short-run Inferences
ΔODA ΔCSD ΔCIQ ECT-1
ΔODA – 6.60* 5.58* − 0.001* ODA ← CSD
ΔCSD 1.14 – 0.48 − 0.068 ODA ← CIQ
ΔCIQ 1.32 0.20 – − 0.003 CSD ∤ CIQ
Case 3: ODA, CFD, CIQ Short-run Inferences
ΔODA ΔCFD ΔCIQ ECT-1
ΔODA – 6.34* 6.41* − 0.015* ODA ↔ CFD
ΔCFD 10.6** – 1.63 − 0.003 ODA ← CIQ
ΔCIQ 1.24 0.22 – − 0.004 CFD ∤ CIQ
Note 1: ODA is official development assistance, CBD is the index of banking sector development, CSD is the index of stock market development, CFD is the index of
financial development, and CIQ is the composite index of institutional quality.
Note 2: * and ** indicate significance at the 1% and 5% levels, respectively.
Note 3: ←/→ indicates the direction of Granger causality; and ∤ indicates the absence of Granger causality.
Note 4: The results reported in Table 1 are for the composite index of institutional quality (CIQ) with ODA and CBD/CSD/CFD. We also estimated the model for each
indicator of institutional quality with ODA and CBD/CSD/CFD, but do not report those results here (they can be requested from the authors).

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Appendix F. FMOLS, DOLS and GMM Estimates

Table F.1
FMOLS, DOLS and GMM Results

Explained Variable: ODA

IVs: CBD CSD CFD

Estimate 1: with FMOLS

FIN 1.31 (0.25) [P < 0.01] 0.44 (0.42) 0.98 (0.31) [P < 0.01]
CIQ 1.12 (0.08) [P < 0.001] 0.89 (0.37) [P < 0.001] 1.33 (0.08) [P < 0.001]
Estimate 2: with DOLS
FIN 1.26 (0.17) [P < 0.01] 0.15 (0.10) 0.72 (0.20) [P < 0.001]
CIQ 1.10 (0.05) [P < 0.01] 1.00 (0.07) [P < 0.001] 1.31 (0.04) [P < 0.001]
Estimate 3: with GMM
FIN 1.53 (0.05) [P < 0.01] 0.24 (0.04) 1.14 (0.06) [P < 0.01]
CIQ 1.11 (0.03) [P < 0.01] 1.37 (0.03) [P < 0.001] 1.35 (0.03) [P < 0.001]
J-statistic 1423 1423 1423
J-statistic (p-value) 0.0001 0.00001 0.00001
Note 1: FIN is used for CBD, CSD and CFD; all variables are as discussed in the text.
Note 2: Parentheses indicate the standard error value.

Appendix G. Quantile-on-Quantile Regression Estimates

Table G.1
Quantile-on-Quantile Regression Estimates

Dependent Variable: ODA Quantiles

IVs: 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Estimate 1: with CBD

CBD 0.03* 0.33* 0.91* 1.37* 1.64* 2.00* 2.40* 2.73* 3.23*
(0.04) (0.04) (0.14) (0.07) (0.08) (0.08) (0.06) (0.06) (0.07)
CIQ 0.89* 1.08* 1.08* 1.09* 1.13* 1.13* 1.26* 1.39* 1.65*
(0.03) (0.03) (0.03) (0.03) (0.03) (0.03) (0.03) (0.03) (0.05)
Estimate 2: with CSD
CSD 0.02* 0.03* 0.04* 0.05* 0.13* 0.29* 0.37* 0.50* 0.89*
(0.02) (0.03) (0.02) (0.02) (0.04) (0.04) (0.04) (0.06) (0.16)
CIQ 0.89* 1.12* 1.24* 1.31* 1.39* 1.47* 1.57* 1.71* 1.91*
(0.03) (0.02) (0.02) (0.02) (0.02) (0.02) (0.02) (0.03) (0.03)
Estimate 3: with CFD
CFD 0.03* 0.13* 0.35* 0.82* 1.26* 1.55* 1.91* 2.41* 3.12*
(0.03) (0.04) (0.10) (0.13) (0.08) (0.08) (0.10) (0.10) (0.09)
CIQ 0.89* 1.12* 1.24* 1.33* 1.40* 1.49* 1.57* 1.79* 2.14*
(0.03) (0.02) (0.02) (0.02) (0.02) (0.02) (0.02) (0.04) (0.05)
Note 1: All symbols are as described in text.
Note 2: Parentheses exhibit the standard error value; and * indicates significance at the 1% level.

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Rudra P. Pradhan is a SAP Fellow and a Professor at Indian institute of Technology
Kharagpur, India. Pradhan is affiliated with various professional journals and is the
Associate Editors of Heliyon, Asia-Pacific Financial Markets, International Journal of
Innovation and Technology Management, Asia-Pacific Journal of Regional Science, and
Journal of Economic Development. He has published his research work in leading inter­
national journals and presented in high-impact conferences and forums. Pradhan has been
a visiting scholar to University of Pretoria, Republic of South Africa and a visiting professor
to Asian Institute of Technology, Thailand.
Sara E. Bennett is an Associate Professor of Finance in the Collge of Business at the
University of Lynchburg in Lynchburg, VA, USA where she currently serves as the director
of the MBA program. Her areas of interest include macroeconomics, financial develop­
ment, ICT infrastructure, corporate financial management, and financial derivatives. She is
the author of several papers and reviews in refereed journals in the area of finance.
Mahendhiran S. Nair is a Professor and Pro Vice-Chancellor (Research Engagement &
Impact) at Sunway University, Malaysia. He is a Fellow of Academy Sciences Malaysia and
Fellow of CPA (Australia). He is a member of the National Science Council of Malaysia, the
High-Tech Council of Malaysia and United Nation’s Sustainable Development Solutions
Network (Malaysia). He has published his research work in leading international journals
R.P. Pradhan et al.
and presented in high-impact conferences and forums. He has been a subject matter expert
on the knowledge economy and the development of innovation ecosystems for government
agencies, public policy organisations, community organisations and ‘think-tanks’ in the
Asia-Pacfic region.
Mak B. Arvin is Professor Emeritus at Trent University, Peterborough, Ontario, Canada,
where he was a faculty member for over 36 years. Arvin’s research has resulted in over 190
19
Socio-Economic Planning Sciences 88 (2023) 101649
publications in journals, edited volumes, and books. He served on the editorial board of
over a dozen professional journals and was the Editor-in-Chief of the International Journal
of Happiness and Development. Arvin has been a visiting professor to Boston College and a
consultant to the IFO Institute for Economic Research, Germany. His latest book is the
Handbook on the Economics of Foreign Aid published in 2015 (with Byron Lew).