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Has aid made the Government of Indonesia lazy?

  • Iman Sugema

    (Faculty of Economics and Management, Institut Pertanian Bogor, Indonesia)

  • Anis Chowdhury

    ()

    (University of Western Sydney, Australia)

This paper is aimed at assessing the effects of aid on fiscal behaviour in Indonesia. There are four main findings. First, the inflow of aid is driven primarily by the need to fill the fiscal gap; that is, aid is demand driven. Second, although project aid is by definition intended for development expenditures, it results in an increase in routine expenditure as well. This suggests that project aid is fungible: it creates extra resources available to increase non-discretionary spending. Third, programme aid tends to increase routine expenditure but not development expenditure; thus, it mainly serves as budgetary support. Fourth, aid flows make the Government of Indonesia fiscally “lazy”. The availability of aid is a disincentive to mobilize domestic revenue through a more efficient and effective taxation system.

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Article provided by United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) in its journal Asia-Pacific Development Journal.

Volume (Year): 14 (2007)
Issue (Month): 1 (June)
Pages: 105-124

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Handle: RePEc:unt:jnapdj:v:14:y:2007:i:1:p:105-124
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  1. Finn Tarp, 2006. "Aid and Development," Discussion Papers 06-12, University of Copenhagen. Department of Economics.
  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. Hill,Hal, 2000. "The Indonesian Economy," Cambridge Books, Cambridge University Press, number 9780521663670.
  4. Gillis, Malcolm, 1985. "Micro and macroeconomics of tax reform : Indonesia," Journal of Development Economics, Elsevier, vol. 19(3), pages 221-254, December.
  5. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
  6. Gang, Ira N. & Ali Khan, Haider, 1990. "Foreign aid, taxes, and public investment," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 355-369, November.
  7. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September.
  8. White, Howard, 1994. "Foreign aid, taxes and public investment: A further comment," Journal of Development Economics, Elsevier, vol. 45(1), pages 155-163, October.
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