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Heterogeneous Aid Effects on Tax Revenues: Accounting for Government Stability in WAEMU Countries

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  • Hermann D. Yohou
  • Michaël Goujon
  • Wautabouna Ouattara

Abstract

Using a panel threshold model, we examine the heterogeneous effects of foreign aid on tax revenue due to government stability in the West African Economic and Monetary Union countries over the period 1986–2010. Panel Smooth Threshold Regressions indicate the existence of strong threshold effects in the aid–tax relationship depending on the level of government stability. They also indicate that the effect of aid on tax revenue is gradual and varies across countries according to the level of government stability. We find that aid directly reduces tax revenues but for higher levels of government stability it enhances tax performance. We provide estimates of country time-varying coefficients of aid effect. We find on average a positive impact of aid. However, the size of this impact is very small, suggesting that there is still much to do at the institutional level to improve the effectiveness of aid for tax performance in WAEMU countries.

Suggested Citation

  • Hermann D. Yohou & Michaël Goujon & Wautabouna Ouattara, 2016. "Heterogeneous Aid Effects on Tax Revenues: Accounting for Government Stability in WAEMU Countries," Journal of African Economies, Centre for the Study of African Economies, vol. 25(3), pages 468-498.
    • Handle: RePEc:oup:jafrec:v:25:y:2016:i:3:p:468-498.
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    More about this item

    JEL classification:

    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • F35 - International Economics - - International Finance - - - Foreign Aid

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