Abstract:
Foreign aid has been an essential source of external financing for developing
countries, with the belief that it can foster growth in recipient nations. Specifically, the type
of aid known as Program Aid is particularly important because it provides the funds needed
to implement a reform agenda in the target area or sector. However, the literature shows
that the relationship between foreign aid and economic growth is complex, and empirical
findings are inconclusive, necessitating further research in this area. In this context, the
present study employed an innovative triangular conceptual modeling (TCM) approach to
assess the effectiveness of program aid for Pakistan. The goal is to analyze effectiveness both
directly, through the reform process, and indirectly, through financing development
spending or fiscal deficit. Results show that program aid has a significantly positive impact
on economic growth. However, this positive effect becomes negative once the effect of fiscal
deficit is taken into account, suggesting that program aid is mainly used to finance fiscal
deficits rather than to improve efficiency in the country. Additionally, the findings reveal
that the indirect effect of program aid on economic growth is substantially larger than the
direct effect. The greater indirect effects imply that the primary objective of program aid is
to meet budgetary requirements or to finance the government’s development spending
