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Aid and Taxation: Evidence from Ethiopia

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  • Giulia Mascagni

    (Institute of Development Studies, Falmer, United Kingdom
    Department of Economics, University of Sussex, Falmer, United Kingdom)

Abstract

The relation between aid and tax has been largely debated in the literature, given its far-reaching consequences: the presence of a crowding-out effect of aid on domestic revenue would seriously impair the sustainability of the development process. This paper explores this relation by adopting a case-study approach, which overcomes some of the common limits of the cross-country literature. I use time series data for Ethiopia for 1960-2009, a longer time series than most country studies of this kind. The estimation is based on an error correction model that allows separating long-run equilibrium relations and short-run dynamics. The analysis shows that both foreign grants and loans have a positive relation with tax revenue in Ethiopia. This effect seems to be robust to endogeneity and to structural breaks, although clearly establishing causality remains a challenge. The results show that aid has a beneficial effect on tax revenue, which may be due to its role in supporting fiscal reforms and improvements in tax administration.

Suggested Citation

  • Giulia Mascagni, 2014. "Aid and Taxation: Evidence from Ethiopia," Working Paper Series 7314, Department of Economics, University of Sussex Business School.
    • Handle: RePEc:sus:susewp:7314
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    File URL: http://www.sussex.ac.uk/economics/documents/wps-73-2014.pdf
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    More about this item

    Keywords

    Foreign Aid; Taxation; Grants; Loans; Ethiopia;
    All these keywords.

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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