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Foreign Aid and the Public Sector: A Model of Fiscal Behaviour in Pakistan

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  • Zafar Iqbal

    (Pakistan Institute of Development Economics, Islamabad.)

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    Abstract

    The main aim of this paper is to demonstrate the impact of foreign capital inflows on government’s fiscal behaviour in Pakistan. Government’s fiscal response is measured in terms of social, non-development, and development expenditures as well as revenues. This paper specifies and estimates a fiscal behaviour model for the period 1976–95. The threestage least squares results suggest that foreign capital flows into the public sector have strong positive impact on social and non-development expenditures and, in contrast to what the government and donor agencies believe, have little effect on development spending. In other words, proceeds from foreign loans and aid are largely consumed rather than invested productively. The results also reveal the strong substitutable interdependence between social and non-development expenditures. Furthermore, the finding clearly demonstrates that foreign assistance causes a strong shift of public domestic resources from development projects to non-development activities. In addition to the above, the results show that a large fraction of government revenues is used to finance social and non-development expenditures. The results also demonstrate that foreign assistance enhances taxation efforts of the Government of Pakistan.

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    File URL: http://www.pide.org.pk/pdf/PDR/1997/Volume2/115-129.pdf
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    Bibliographic Info

    Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

    Volume (Year): 36 (1997)
    Issue (Month): 2 ()
    Pages: 115-129

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    Handle: RePEc:pid:journl:v:36:y:1997:i:2:p:115-129

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    References

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    1. Gang, Ira N. & Ali Khan, Haider, 1990. "Foreign aid, taxes, and public investment," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 355-369, November.
    2. Bruton, Henry J, 1969. "The Two Gap Approach to Aid and Development: Comment," American Economic Review, American Economic Association, vol. 59(3), pages 439-46, June.
    3. 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.
    4. Mosley, Paul, 1980. "Aid, Savings and Growth Revisited," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 42(2), pages 79-95, May.
    5. Iqbal, Z., 1996. "Three-Gap Analysis of Structural Adjustment in Pakistan," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73593, Tilburg University.
    6. White, Howard, 1994. "Foreign aid, taxes and public investment: A further comment," Journal of Development Economics, Elsevier, vol. 45(1), pages 155-163, October.
    7. Pack, Howard & Pack, Janet Rothenberg, 1990. "Is Foreign Aid Fungible? The Case of Indonesia," Economic Journal, Royal Economic Society, vol. 100(399), pages 188-94, March.
    8. Bacha, Edmar L., 1990. "A three-gap model of foreign transfers and the GDP growth rate in developing countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 279-296, April.
    9. Weisskopf, Thomas E, 1972. "An Econometric Test of Alternative Constraints on the Growth of Underdeveloped Countries," The Review of Economics and Statistics, MIT Press, vol. 54(1), pages 67-78, February.
    10. Binh, Tran-Nam & McGillivray, Mark, 1993. "Foreign aid, taxes and public investment A comment," Journal of Development Economics, Elsevier, vol. 41(1), pages 173-176, June.
    11. Zafar Iqbal, 1995. "Constraints to the Economic Growth of Pakistan: A Three-gap Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 34(4), pages 1119-1133.
    12. Solimano, Andres, 1990. "Macroeconomic constraints for medium term growth and distribution : a model for Chile," Policy Research Working Paper Series 400, The World Bank.
    13. Weisskopf, Thomas E., 1972. "The impact of foreign capital inflow on domestic savings in underdeveloped countries," Journal of International Economics, Elsevier, vol. 2(1), pages 25-38, February.
    14. Gupta, Kanhaya L. & Lensink, Robert, 1995. "Foreign aid and the public sector : a simulation approach," Research Report 95D21, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    15. Taylor, Lance, 1994. "Gap models," Journal of Development Economics, Elsevier, vol. 45(1), pages 17-34, October.
    16. Khan, Haider Ali & Hoshino, Eiichi, 1992. "Impact of foreign aid on the fiscal behavior of LDC governments," World Development, Elsevier, vol. 20(10), pages 1481-1488, October.
    17. 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.
    18. Gang, Ira N. & Khan, Haider Ali, 1994. "Reply to White, 'foreign aid, taxes and public investment: A further comment'," Journal of Development Economics, Elsevier, vol. 45(1), pages 165-167, October.
    19. Griffin, Keith B & Enos, J L, 1970. "Foreign Assistance: Objectives and Consequences," Economic Development and Cultural Change, University of Chicago Press, vol. 18(3), pages 313-27, April.
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    Cited by:
    1. Mark McGillivray & Simon Feeny, 2010. "Aid, Public Sector Fiscal Behaviour and Developing Country Debt," Working Papers id:3183, eSocialSciences.
    2. Mobeen Ur Rehman, 2013. "The Role of the Pakistani Government in the Efficient Management of Public Funds," Public Finance Quarterly, State Audit Office of Hungary, vol. 58(2), pages 230-237.
    3. Gil S. Epstein & Ira N Gang, 2006. "The Hope for Hysteresis in Foreign Aid," Departmental Working Papers 200628, Rutgers University, Department of Economics.
    4. Matthew McCartney, 2011. "Pakistan, Growth, Dependency, and Crisis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 71-94, September.
    5. Simon Feeny & Mark McGillivray, 2003. "Aid and public sector borrowing in developing countries," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(8), pages 989-998.
    6. Oliver Morrissey & Mark McGillivray, 2010. "Fiscal Effects of Aid," Working Papers id:3194, eSocialSciences.
    7. Mark McGillivray & Oliver Morrissey, 2000. "Aid fungibility in Assessing Aid: red herring or true concern?," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 413-428.

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