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Aid, taxation and development: analytical perspectives on aid effectiveness in Sub-Saharan Africa

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  • Christopher Adam
  • Stephen A. O`Connell

Abstract

The design of effective aid programs depends on the diagnosis of the problem. To say that institutional failures are central to Africa's poor economic performance is not to repudiate early interpretations based on policy failures and capital shortages. Institutional failures produce policy failures that in turn produce capital shortages or the equivalent. The authors focus on the core of the evolving (mainly external) diagnosis of the African development problem, making these main points, among others: a) Tax and taxlike distortions tend to be high and volatile in Africa. These influence the allocation of national wealth and can reduce both the level and productivity of domestic investment. The composition of domestic investment seems to be more important in explaining poor African growth than the level of domestic investment. b) Policy-generated uncertainty (underemphasized in the literature) can activate socially inefficient self-insurance mechanisms that reduce growth. When leaders have substantial discretion about policy, as they do in most African countries, executive transitions become a major source of uncertainty. c) Patronage is heavily used in African systems of personal rule. Governments use distortionary taxes to finance transfers to politically powerful groups. d) A government that is captive to a favored group will trade off growth for transfers, if the group is small enough relative to the government's disposable resources. In such a case, conditional aid can be ineffective in spurring growth and investment, even when the potential gains from aid are great. e) Conditionality is required to secure the gains from aid when nonrepresentative political structures generate a conflict of interest between donors and recipient governments. When donors are in a strong bargaining position, conditionality agreements that mandate a reduction in distortionary taxes will also require that some part of lost revenues be made up by cuts in politically motivated transfe

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/1997-05.

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Date of creation: 01 Jan 1997
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Handle: RePEc:oxf:wpaper:wps/1997-05

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Cited by:
  1. Nissanke, Machiko & Aryeetey, Ernest, 2006. "Institutional Analysis of Financial Market Fragmentation in Sub-Saharan Africa: A Risk-Cost Configuration Approach," Working Paper Series RP2006/87, World Institute for Development Economic Research (UNU-WIDER).
  2. Margaret S. McMillan, 1999. "Foreign Direct Investment: Leader or Follower?," Discussion Papers Series, Department of Economics, Tufts University 9901, Department of Economics, Tufts University.
  3. James M. Boughton & Alex Mourmouras, 2002. "Is Policy Ownership An Operational Concept?," IMF Working Papers 02/72, International Monetary Fund.
  4. Bigsten, Arne, 1998. "Can Aid Generate Growth in Africa?," Working Papers in Economics 3, University of Gothenburg, Department of Economics.

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