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Foreign Aid and Government's Fiscal Behaviour in Nepal: An Empirical Analysis

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Author Info
Bhattarai, Badri Prasad (School of Economics and Finance, University of Western Sydney, Parramatta Australia)
Abstract

Using the cointegration technique, this paper examines the revenue and expenditure behaviour of the Nepalese government in the presence of foreign aid for the period 1975–2002. The results show that aid positively affects both development and non-development expenditure in the long run. However, the long-run relationship between aid and non-development expenditure is found to be stronger than that between aid and development expenditure. Since aid is generally given for development expenditure, these results indicate the possibility of diversion of aid to non-development expenditure. Thus, the long-run relationship between aid and non-development expenditure may indicate aid fungibility. On the other hand, no evidence is found in favour of the hypothesis that aid availability makes the government lazy in terms of domestic revenue mobilisation.

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Publisher Info
Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal EAP (Economic Analysis and Policy).

Volume (Year): 37 (2007)
Issue (Month): 1 (March)
Pages: 41-60
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Handle: RePEc:eap:articl:v:37:y:2007:i:1:p:41-60

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Related research
Keywords: Aid; Development; Expenditure; Foreign Aid; Government;

Find related papers by JEL classification:
F35 - International Economics - - International Finance - - - Foreign Aid
H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

References listed on IDEAS
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  1. Craig Burnside & David Dollar, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September. [Downloadable!] (restricted)
    Other versions:
  2. Susana Franco-Rodriguez, & Mark McGillivray, & Oliver Morrissey, . "Aid and the Public Sector in Pakistan: Evidence with Endogenous Aid," Discussion Papers 98/2, University of Nottingham, CREDIT. [Downloadable!]
  3. Feyzioglu, Tarhan & Swaroop, Vinaya & Zhu, Min, 1998. "A Panel Data Analysis of the Fungibility of Foreign Aid," World Bank Economic Review, Oxford University Press, vol. 12(1), pages 29-58, January.
  4. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
  5. Pesaran, M. Hashem & Shin, Yongcheol, 1996. "Cointegration and speed of convergence to equilibrium," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 117-143. [Downloadable!] (restricted)
    Other versions:
  6. Pack, Howard & Pack, Janet Rothenberg, 1993. "Foreign Aid and the Question of Fungibility," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 258-65, May. [Downloadable!] (restricted)
  7. Sharma, Kishor, 2006. "The political economy of civil war in Nepal," World Development, Elsevier, vol. 34(7), pages 1237-1253, July. [Downloadable!] (restricted)
  8. Swaroop, Vinaya & Jha, Shikha & Sunil Rajkumar, Andrew, 2000. "Fiscal effects of foreign aid in a federal system of governance: The case of India," Journal of Public Economics, Elsevier, vol. 77(3), pages 307-330, September. [Downloadable!] (restricted)
  9. Franco-Rodriguez, Susana & Morrissey, Oliver & McGillivray, Mark, 1998. "Aid and the Public Sector in Pakistan: Evidence with Endogenous Aid," World Development, Elsevier, vol. 26(7), pages 1241-1250, July. [Downloadable!] (restricted)
  10. White, Howard, 1994. "Foreign aid, taxes and public investment: A further comment," Journal of Development Economics, Elsevier, vol. 45(1), pages 155-163, October. [Downloadable!] (restricted)
  11. Heller, Peter S, 1975. "A Model of Public Fiscal Behavior in Developing Countries: Aid, Investment, and Taxation," American Economic Review, American Economic Association, vol. 65(3), pages 429-45, June. [Downloadable!] (restricted)
  12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
  13. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September. [Downloadable!] (restricted)
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