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Does Foreign Aid Promote the Expansion of Government?

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  • Karen L. Remmer

Abstract

Building on the literature on public finance, I seek to advance our understanding of variations in government size by exploring the impact of official development assistance on fiscal policy. I hypothesize that foreign aid operates in accordance with the “flypaper effect,” systematically generating incentives and opportunities for the expansion of government spending. Results from a time‐series cross‐sectional regression analysis of growth in government spending over the 1970–99 time period are consistent with the hypothesis. For middle‐ and lower‐income nations, aid represents an important determinant of government expansion. Looking at the tax and revenue side of the equation, however, reveals a more perverse pattern of response: aid promotes not only increased spending but also reduced revenue generation. The results have important implications from both a theoretical and policy perspective. Inter alia they point to the potentially self‐defeating nature of efforts to promote market‐oriented programs of state retrenchment via development assistance as well as to the importance of incorporating international transfers into future research on government spending.

Suggested Citation

  • Karen L. Remmer, 2004. "Does Foreign Aid Promote the Expansion of Government?," American Journal of Political Science, John Wiley & Sons, vol. 48(1), pages 77-92, January.
  • Handle: RePEc:wly:amposc:v:48:y:2004:i:1:p:77-92
    DOI: 10.1111/j.0092-5853.2004.00057.x
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    1. Government of Nicaragua, 2001. "Nicaragua: A Strengthened Growth and Poverty Reduction Strategy," IDB Publications (Working Papers) 8917, Inter-American Development Bank.
    2. Shantayanan Devarajan & David R. Dollar & Torgny Holmgren, 2001. "Aid and Reform in Africa : Lessons from Ten Case Studies," World Bank Publications - Books, The World Bank Group, number 13894, December.
    3. John Williamson, 1994. "The Political Economy of Policy Reform," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 68, October.
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