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Has aid made the Government of Indonesia lazy?

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Author Info

  • Iman Sugema

    (Faculty of Economics and Management, Institut Pertanian Bogor, Indonesia)

  • Anis Chowdhury

    ()
    (University of Western Sydney, Australia)

Abstract

This paper is aimed at assessing the effects of aid on fiscal behaviour in Indonesia. There are four main findings. First, the inflow of aid is driven primarily by the need to fill the fiscal gap; that is, aid is demand driven. Second, although project aid is by definition intended for development expenditures, it results in an increase in routine expenditure as well. This suggests that project aid is fungible: it creates extra resources available to increase non-discretionary spending. Third, programme aid tends to increase routine expenditure but not development expenditure; thus, it mainly serves as budgetary support. Fourth, aid flows make the Government of Indonesia fiscally “lazy”. The availability of aid is a disincentive to mobilize domestic revenue through a more efficient and effective taxation system.

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File URL: http://www.unescap.org/pdd/publications/apdj_14_1/Sugema-chowdhury.pdf
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Bibliographic Info

Article provided by United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) in its journal Asia-Pacific Development Journal.

Volume (Year): 14 (2007)
Issue (Month): 1 (June)
Pages: 105-124

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Handle: RePEc:unt:jnapdj:v:14:y:2007:i:1:p:105-124

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Related research

Keywords: Foreign aid; economic growthm balance of payments; government fiscal behaviour;

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References

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  1. Hill,Hal, 2000. "The Indonesian Economy," Cambridge Books, Cambridge University Press, number 9780521663670, October.
  2. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September.
  3. Finn Tarp, 2006. "Aid and Development," Discussion Papers 06-12, University of Copenhagen. Department of Economics.
  4. 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.
  5. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
  6. Gillis, Malcolm, 1985. "Micro and macroeconomics of tax reform : Indonesia," Journal of Development Economics, Elsevier, vol. 19(3), pages 221-254, December.
  7. White, Howard, 1994. "Foreign aid, taxes and public investment: A further comment," Journal of Development Economics, Elsevier, vol. 45(1), pages 155-163, October.
  8. 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.
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