The Impact of Foreign Aid on Government Spending, Revenue and Domestic Borrowing in Ethiopia
AbstractThe main aim of this Working Paper is to assess the impact of foreign aid inflows on public expenditure, revenue and domestic borrowing in Ethiopia. The paper provides a literature overview of the fiscal effects of aid, and then applies a fiscal response model to Ethiopian data for the period 1964-2005. Since the empirical literature finds little evidence of common cross-country patterns, this highlights the important role that country-specific circumstances play in determining fiscal outcomes. By studying the particular fiscal dynamics in Ethiopia, the paper finds that foreign aid has had a positive impact on government investment, while its effect on current expenditure has been less pronounced. Moreover, by disaggregating aid inflows into grants and foreign lending, the paper is able to analyse their specific roles and impacts. The results support the conclusion that aid inflows increase public investment, with loans having a stronger impact than grants. Both aid grants and loans have a strong negative effect on domestic borrowing, suggesting that aid and domestic financing are close substitutes. Finally, the results also appear to support the hypothesis that higher aid flows displace domestic revenues. However, this particular finding does not seem to be robust across the sample.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by International Policy Centre for Inclusive Growth in its series Working Papers with number 41.
Date of creation: Nov 2007
Date of revision:
Publication status: Published by UNDP - International Poverty Centre, November 2007, pages 1-30
Foreign Aid; Aid Effectiveness; Fiscal Response Literature; Ethiopia;
Find related papers by JEL classification:
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- F35 - International Economics - - International Finance - - - Foreign Aid
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Andre Lyra).
If references are entirely missing, you can add them using this form.