This study examines the link between institutional governance, aid and economic growth of South Asian countries, using data from 1996 to 2012. The empirical results show that Quality of Institutional Governance Index as well as individual governance indicators have positive impact on economic growth. It unveils that economic growth is not possible without better institutions. Aid has negative effect on economic growth in all specifications of growth equations. The reason might be overvaluation of exchange rate, skewing of the income distribution and micro-macro paradox. Furthermore, the study is unable to confirm that good institutions interact with development aid in order to boost economic growth in the economy. The results suggest that policy makers should give eminent importance to institutional quality, while making policies to achieve remarkable growth in these countries. Moreover, problems to development aid would be analyzed properly and after appropriate documentation, carefully incorporated into the policy.
Institutional Governance, Aid, Economic Growth, Institutional Quality, Governance Index