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Foreign Aid and Fiscal Policy

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  • Faini, Riccardo

Abstract

Foreign aid has been on a downward trend since at least the early eighties. Despite the commitments of donor governments, the GDP share of foreign aid for DAC countries has fallen to slightly more than 0,2% in the early part of this decade. The purpose of this paper is to explore the macro determinants of the amount of foreign aid. Surprisingly enough, not much attention has been devoted in the literature to this issue. Most of the research has focussed either on the effectiveness of aid (“does aid promote growth and help alleviating poverty”?) or to the cross country allocation of a given amount of foreign aid (“is foreign aid motivated by donor’s political and commercial interests or by recipients’ needs?”). In both cases, the total aid budget is taken as given and its determinants remain therefore unexplored. Our main finding is that the size of the budget aid is a function of the donor country’s fiscal situation, even after controlling for the government’s political orientation, the cyclical position of the donor economy, and its income per capita level. In light of these results, we argue that advocates of foreign aid should strongly lobby in favour of fiscal discipline. The alternative strategy of pushing for a more lenient budgetary treatment of foreign aid may be loaded with risks, and even turn to be counterproductive, particularly if the list of “virtuous” exceptions becomes exceedingly long. This is exactly what seems to have happened with the revision of the Stability and Growth pact.

Suggested Citation

  • Faini, Riccardo, 2006. "Foreign Aid and Fiscal Policy," CEPR Discussion Papers 5721, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5721
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    References listed on IDEAS

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    1. David Roodman, 2004. "An Index of Donor Performance," Development and Comp Systems 0412004, University Library of Munich, Germany.
    2. Arvind Subramanian & Raghuram Rajan, 2005. "What Undermines Aid’s Impact on Growth?," IMF Working Papers 05/126, International Monetary Fund.
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    4. Alesina, Alberto & Dollar, David, 2000. "Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March.
    5. Lisa CHAUVET & Patrick GUILLAUMONT, 2003. "Aid and Growth Revisited: Policy, Economic Vulnerability and Political Instability," Working Papers 200327, CERDI.
    6. Papanek, Gustav F, 1972. "The Effect of Aid and other Resource Transfers on Savings and Growth in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 82(327), pages 934-950, September.
    7. Raghuram G. Rajan & Arvind Subramanian, 2008. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 643-665, November.
    8. Collier, Paul & Dollar, David, 2002. "Aid allocation and poverty reduction," European Economic Review, Elsevier, vol. 46(8), pages 1475-1500, September.
    9. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
    10. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages 191-216, June.
    11. Burnside, Craig & Dollar, David, 2004. "Aid, policies, and growth : revisiting the evidence," Policy Research Working Paper Series 3251, The World Bank.
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    Citations

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    Cited by:

    1. Franklin Allen and Giorgia Giovannetti, 2010. "Fragile Countries And The 2008-2009 Crisis," EUI-RSCAS Working Papers 13, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    2. Sèna Kimm Gnangnon, 2013. "How do OECD donor countries distribute foreign aid among developing countries during their fiscal episodes?," Working Papers halshs-00786009, HAL.
    3. repec:eee:wdevel:v:106:y:2018:i:c:p:136-148 is not listed on IDEAS
    4. Dang, Hai-Anh & Knack, Stephen & Rogers, F. Halsey, 2013. "International aid and financial crises in donor countries," European Journal of Political Economy, Elsevier, vol. 32(C), pages 232-250.
    5. Sena Kimm GNANGNON, 2011. "The consequences of Fiscal Episodes in OECD Countries for Aid Supply," Working Papers 201122, CERDI.
    6. Era Dabla-Norris & Camelia Minoiu & Luis-Felipe Zanna, 2010. "Business Cycle Fluctuations, Large Shocks, and Development Aid; New Evidence," IMF Working Papers 10/240, International Monetary Fund.
    7. Andrew Mold & Sebastian Paulo & Annalisa Prizon, 2009. "Taking Stock of the Credit Crunch: Implications for Development Finance and Global Governance," OECD Development Centre Working Papers 277, OECD Publishing.
    8. Fuchs, Andreas & Dreher, Axel & Nunnenkamp, Peter, 2014. "Determinants of Donor Generosity: A Survey of the Aid Budget Literature," World Development, Elsevier, vol. 56(C), pages 172-199.
    9. Gnangnon, Sena Kimm, 2013. "The consequences of fiscal episodes in OECD DAC countries for aid supply," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(3), pages 302-313.
    10. Dabla-Norris, Era & Minoiu, Camelia & Zanna, Luis-Felipe, 2015. "Business Cycle Fluctuations, Large Macroeconomic Shocks, and Development Aid," World Development, Elsevier, vol. 69(C), pages 44-61.
    11. Kronick, Jeremy, 2014. "Monetary Policy Shocks from the EU and US: Implications for Sub-Saharan Africa," MPRA Paper 59416, University Library of Munich, Germany.
    12. Gnangnon, Sèna Kimm, 2017. "Structural economic vulnerability, openness and bilateral development aid flows," Economic Analysis and Policy, Elsevier, vol. 53(C), pages 77-95.
    13. repec:unu:wpaper:wp2012-25 is not listed on IDEAS
    14. Simone Bertoli & Giovanni Andrea Cornia & Francesco Manaresi, 2007. "Aid performance and its determinants. A comparison of Italy with the OECD norm," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 60(242), pages 271-321.
    15. Sèna Kimm Gnangnon, 2011. "The consequences of Fiscal Episodes in OECD Countries for Aid Supply," Working Papers halshs-00613161, HAL.
    16. Simone Bertoli & Giovanni Andrea Cornia & Francesco Manaresi, 2007. "Aid performance and its determinants. A comparison of Italy with the OECD norm," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 60(242), pages 271-321.
    17. Sena Kimm GNANGNON, 2013. "How do OECD donor countries distribute foreign aid among developing countries during their fiscal episodes?," Working Papers 201301, CERDI.

    More about this item

    Keywords

    fiscal policy; foreign aid;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F35 - International Economics - - International Finance - - - Foreign Aid

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