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How Effective Is Japanese Foreign Aid? Econometric Results from a Bounded Rationality Model for Indonesia

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  • Haider Ali Khan

    (GSIS, University of Denver and CIRJE, Faculty of Economics, University of Tokyo)

Abstract

How does Japanese aid influence the allocation of government expenditures and the raising of government revenues? Using a non-linear model with an asymmetric loss function the case of Japanese aid to Indonesia is examined at the macroeconomic level. It turns out that Japanese aid led to proportionately more development expenditures than other aid. It also might have been positively related to an increased effort by the Indonesian government to raise taxes. Economic explanations based on a bounded rationality models are advanced. Econometric and institutional explanations are also offered. The three sets of explanations can be seen as overlapping and complementary.

Suggested Citation

  • Haider Ali Khan, 2002. "How Effective Is Japanese Foreign Aid? Econometric Results from a Bounded Rationality Model for Indonesia," CIRJE F-Series CIRJE-F-164, CIRJE, Faculty of Economics, University of Tokyo.
  • Handle: RePEc:tky:fseres:2002cf164
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2002/2002cf164.pdf
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    References listed on IDEAS

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    1. Pack, Howard & Pack, Janet Rothenberg, 1990. "Is Foreign Aid Fungible? The Case of Indonesia," Economic Journal, Royal Economic Society, vol. 100(399), pages 188-194, March.
    2. Pack, Howard & Pack, Janet Rothenberg, 1993. "Foreign Aid and the Question of Fungibility," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 258-265, May.
    3. J. K. Sengupta, 1970. "Optimal Stabilization Policy with a Quadratic Criterion Function," Review of Economic Studies, Oxford University Press, vol. 37(1), pages 127-145.
    4. Maizels, Alfred & Nissanke, Machiko K., 1984. "Motivations for aid to developing countries," World Development, Elsevier, vol. 12(9), pages 879-900, September.
    5. 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 429-445, June.
    6. Khan, Haider Ali & Hoshino, Eiichi, 1992. "Impact of foreign aid on the fiscal behavior of LDC governments," World Development, Elsevier, vol. 20(10), pages 1481-1488, October.
    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 616-641, September.
    8. Frey, Bruno S. & Schneider, Friedrich, 1986. "Competing models of international lending activity," Journal of Development Economics, Elsevier, vol. 20(2), pages 225-245, March.
    9. Gang, Ira N. & Khan, Haider Ali, 1990. "Some determinants of foreign aid to India, 1960-1985," World Development, Elsevier, vol. 18(3), pages 431-442, March.
    10. Binh, Tran-Nam & McGillivray, Mark, 1993. "Foreign aid, taxes and public investment A comment," Journal of Development Economics, Elsevier, vol. 41(1), pages 173-176, June.
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    Cited by:

    1. Séverine Blaise, 2009. "Japanese Aid as a Prerequisite for FDI : The Case of Southeast Asian Countries," Finance Working Papers 22767, East Asian Bureau of Economic Research.

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