Financial Flows and Economic Growth: A Comparative Analysis Between South Asia and Developing Countries

This study undertakes a comparative analysis of the impact of international financial flows—specifically foreign aid, foreign direct investment (FDI) and remittances—on economic growth in South Asia (SA) and 45 other developing countries, using panel data for the period 1980–2016. The study also analyses the indirect influences of financial flows on growth mediated through key transmission channels, including political stability, trade openness and human capital (HC) for both groups. On controlling endogeneity, the results indicate that foreign aid discourages growth both in developing countries and SA. However, FDI and remittances promote growth in the two groups of countries, while their impact is higher in SA. Investigation of transmission channels reveals multiple significant roles of financial flows in impacting economic growth. Exploring the dynamic roles of international financial flows, the findings of the study offer a deeper understanding and insights to policymakers in the developing world.