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Foreign aid and revenue response: An examination of joint General Budget Support

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  • Knoll, Martin
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    Abstract

    The present paper explores the extent to which new joint General Budget Support (GBS) systems have been able to overcome the problems of aid dependency and negative fiscal incentives that can potentially result from high levels of on-budget aid. As approximately 90 percent of new joint GBS goes to sub-Saharan Africa, this analysis, which covers the period from 2000 to 2008, evaluates data from 37 sub-Saharan developing countries. According to fixed effect and system GMM estimations, joint GBS assistance - although highly discretionary - does not undermine recipients' revenue mobilization efforts. Indeed, on the contrary, while aid in general has no measurable impact on recipients' revenue performance, joint GBS programs are associated with higher revenue mobilization. This suggests that on-budget aid delivered under well-targeted conditionality successfully mitigates adverse fiscal incentives while substantially enhancing recipients' fiscal space. --

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    Bibliographic Info

    Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2011/23.

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    Date of creation: 2011
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    Handle: RePEc:zbw:fubsbe:201123

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    Keywords: budget support; fiscal response; revenue mobilization; sub-Saharan Africa;

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    1. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    2. 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.
    3. James M. Buchanan, 1963. "The Economics of Earmarked Taxes," Journal of Political Economy, University of Chicago Press, vol. 71, pages 457.
    4. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
    5. Richard Blundell & Steve Bond & Frank Windmeijer, 2000. "Estimation in dynamic panel data models: improving on the performance of the standard GMM estimator," IFS Working Papers W00/12, Institute for Fiscal Studies.
    6. Paul Clist & Oliver Morrissey, 2011. "Aid and tax revenue: Signs of a positive effect since the 1980s," Journal of International Development, John Wiley & Sons, Ltd., vol. 23(2), pages 165-180, March.
    7. Martin Knoll, 2008. "Budget Support: A Reformed Approach Or Old Wine In New Skins?," UNCTAD Discussion Papers 190, United Nations Conference on Trade and Development.
    8. Alexander Pivovarsky & Benedict J. Clements & Sanjeev Gupta & Erwin Tiongson, 2003. "Foreign Aid and Revenue Response," IMF Working Papers 03/176, International Monetary Fund.
    9. Leuthold, Jane H., 1991. "Tax shares in developing economies A panel study," Journal of Development Economics, Elsevier, vol. 35(1), pages 173-185, January.
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