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Research and Communication on Foreign Aid

WP/001 Aid and Government Fiscal Behaviour: What Does the Evidence Say?

Donors are concerned about how their aid is used, especially how it affects fiscal behaviour by recipient governments. This study reviews the recent evidence on the effects of aid on government spending and tax effort in recipient countries, concluding with a discussion of when (general) budget support is a fiscally efficient aid modality. Severe data limitations restrict inferences on the relationship between aid and spending, especially as the government is not aware of all the aid available to finance the provision of public goods. Three generalizations are permitted by the evidence: aid finances government spending; the extent to which aid is fungible is over-stated and even where it is fungible this does not appear to make the aid less effective; and there is no systematic effect of aid on tax effort. Beyond these conclusions the fiscal effects of aid are country-specific.
Publisher:
UNU-WIDER
Series:
WIDER Working Paper
Volume:
2012/01
Title:
WP/001 Aid and Government Fiscal Behaviour: What Does the Evidence Say?
Authors:
Oliver Morrissey
Publication date:
January 2012
ISBN 13 Web:
978-92-9230-464-5
Copyright holder:
© UNU-WIDER
Copyright year:
2012
Keywords:
Aid, fiscal effects, fungibility, government spending, taxation
JEL:
E62, F35
Sponsor:
This working paper has been prepared within the UNU-WIDER project ‘Foreign Aid: Research and Communication (ReCom)’, directed by Tony Addison and Finn Tarp. UNU-WIDER gratefully acknowledges specific programme contributions from the governments of Denmark (Ministry of Foreign Affairs, Danida) and Sweden (Swedish International Development Cooperation Agency—Sida) for the Research and Communication (ReCom) programme. UNU-WIDER also acknowledges core financial support to UNU-WIDER’s work programme from the governments of Finland (Ministry for Foreign Affairs), the United Kingdom (Department for International Development), and the governments of Denmark and Sweden.
Format:
online
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