The Impact of Official Development Assistance on Welfare of Low and Middle Income Countries

Abstract

This study investigates the Impact of Official Development Assistance (ODA) on the welfare of low- and middle-income countries (LMICs), measured through the Human Development Index (HDI). Using annual panel data from 1999 to 2023, the study incorporates Foreign Direct Investment (FDI), Inflation (INF), and Access to Electricity (ACE) as complementary macroeconomic factors. The Feasible Generalized Least Squares (FGLS) method was performed after detecting for Cross-sectional dependency (CD) and panel (CIPS) unit root tests. Empirical results revealed that ODA has a significant positive effect on HDI. FDI, ACE was also positively influencing HDI. In contrast, INF showed a negative relationship with HDI with a coefficient of –0.046, reducing the real benefits of ODA. These findings suggest that while ODA improves welfare, its effectiveness is maximized when supported by increased FDI, expanded electricity access, and stable price levels. Policy makers should prioritize ODA towards human capital, infrastructure, and institutional reforms, while implementing macroeconomic measures to control inflation and attract productive investment for sustained welfare gains.