IDEAS home Printed from https://ideas.repec.org/p/ipc/wpaper/41.html
   My bibliography  Save this paper

The Impact of Foreign Aid on Government Spending, Revenue and Domestic Borrowing in Ethiopia

Author

Listed:
  • Pedro M. G. Martins

    () (Visiting IPC Researcher, Institute for Development Studies, Sussex)

Abstract

The main aim of this Working Paper is to assess the impact of foreign aid inflows on public expenditure, revenue and domestic borrowing in Ethiopia. The paper provides a literature overview of the fiscal effects of aid, and then applies a fiscal response model to Ethiopian data for the period 1964-2005. Since the empirical literature finds little evidence of common cross-country patterns, this highlights the important role that country-specific circumstances play in determining fiscal outcomes. By studying the particular fiscal dynamics in Ethiopia, the paper finds that foreign aid has had a positive impact on government investment, while its effect on current expenditure has been less pronounced. Moreover, by disaggregating aid inflows into grants and foreign lending, the paper is able to analyse their specific roles and impacts. The results support the conclusion that aid inflows increase public investment, with loans having a stronger impact than grants. Both aid grants and loans have a strong negative effect on domestic borrowing, suggesting that aid and domestic financing are close substitutes. Finally, the results also appear to support the hypothesis that higher aid flows displace domestic revenues. However, this particular finding does not seem to be robust across the sample.

Suggested Citation

  • Pedro M. G. Martins, 2007. "The Impact of Foreign Aid on Government Spending, Revenue and Domestic Borrowing in Ethiopia," Working Papers 41, International Policy Centre for Inclusive Growth.
  • Handle: RePEc:ipc:wpaper:41
    as

    Download full text from publisher

    File URL: http://www.ipc-undp.org/pub/IPCWorkingPaper41.pdf
    File Function: First version, 2007
    Download Restriction: no

    More about this item

    Keywords

    Foreign Aid; Aid Effectiveness; Fiscal Response Literature; Ethiopia;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ipc:wpaper:41. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Andre Lyra). General contact details of provider: http://edirc.repec.org/data/ipcunbr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.