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Aid, Economic Reform, and Public Sector Fiscal Behavior in Developing Countries

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  • Mark McGillivray

Abstract

This paper looks at interactions between foreign development aid, economic reform, and public sector fiscal behavior. It proposes a model of the public sector fiscal response to aid inflows, which allows for changes in structural relationships due to an exogenously imposed program of economic reform. This model is applied to 1960-99 time series data for the Philippines, which embarked on an IMF- and World Bank-funded structural adjustment program in 1980. Estimates of structural and reduced-form equations paint a dismal picture of the effectiveness of foreign aid to, and the structural adjustment program in, the Philippines so far as fiscal impacts are concerned. Both bilateral and multilateral aid inflows, and the presence of an economic reform program, are associated with decreases in public fixed capital expenditure, decreases in taxation and other recurrent revenue, and decreases in public sector saving. Multilateral aid also appears to be highly fungible. Copyright 2009 UNU-WIDER. Journal compilation 2009 Blackwell Publishing Ltd.

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  • Mark McGillivray, 2009. "Aid, Economic Reform, and Public Sector Fiscal Behavior in Developing Countries," Review of Development Economics, Wiley Blackwell, vol. 13(s1), pages 526-542, August.
  • Handle: RePEc:bla:rdevec:v:13:y:2009:i:s1:p:526-542
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    References listed on IDEAS

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    Cited by:

    1. Aaron Batten, 2010. "Foreign aid, government behaviour, and fiscal policy in Papua New Guinea," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 24(2), pages 142-160, November.
    2. Hisali, Eria & Ddumba-Ssentamu, John, 2013. "Foreign aid and tax revenue in Uganda," Economic Modelling, Elsevier, vol. 30(C), pages 356-365.
    3. Howard Stein, 2009. "A Brief History of Aid in East Africa: The Political Economy of Convergence," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 10(4), pages 13-22, January.
    4. Carter Patrick, 2013. "Does Foreign Aid Displace Domestic Taxation?," Journal of Globalization and Development, De Gruyter, vol. 4(1), pages 1-47, August.

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