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Aid, Public Sector Fiscal Behaviour and Developing Country Debt

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  • Feeny, Simon
  • McGillivray, Mark

Abstract

This paper looks at public sector debt in developing countries, being concerned specifically with the relationship between aid inflows and the public sector borrowing requirement net of aid loans. After examining the public sector budget constraint and various conditions under which aid might lead to an increase in this borrowing, the paper surveys the empirical results of literature on aid and public sector fiscal behaviour. It finds that the results of a number of studies are consistent with aid leading to increases in this borrowing. Further investigation, in the form of econometric analysis of panel data, also points to this outcome. The paper then looks at a number of theoretical scenarios in which aid leads to increases in borrowing net of aid loans. [Discussion Pape rNo. 2002/40]
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  • Feeny, Simon & McGillivray, Mark, 2002. "Aid, Public Sector Fiscal Behaviour and Developing Country Debt," WIDER Working Paper Series 040, World Institute for Development Economic Research (UNU-WIDER).
  • Handle: RePEc:unu:wpaper:dp2002-40
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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. Salim Chishti & Aynul Hasan, 1992. "Foreign Aid, Defence Expenditure and Public Investment in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 31(4), pages 895-908.
    3. Stasavage, David & Moyo, Dambisa, 2000. "Are Cash Budgets a Cure for Excess Fiscal Deficits (and at What Cost)?," World Development, Elsevier, vol. 28(12), pages 2105-2122, December.
    4. 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.
    5. M. McGillvray & O. Morrissey, 2001. "Aid Illusion and Public Sector Behaviour," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 118-136.
    6. Cashel-Cordo, Peter & Craig, Steven G., 1990. "The public sector impact of international resource transfers," Journal of Development Economics, Elsevier, vol. 32(1), pages 17-42, January.
    7. Swaroop, Vinaya & Jha, Shikha & Sunil Rajkumar, Andrew, 2000. "Fiscal effects of foreign aid in a federal system of governance: The case of India," Journal of Public Economics, Elsevier, vol. 77(3), pages 307-330, September.
    8. 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.
    9. Gang, Ira N. & Ali Khan, Haider, 1990. "Foreign aid, taxes, and public investment," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 355-369, November.
    10. Franco-Rodriguez, Susana & Morrissey, Oliver & McGillivray, Mark, 1998. "Aid and the Public Sector in Pakistan: Evidence with Endogenous Aid," World Development, Elsevier, vol. 26(7), pages 1241-1250, July.
    11. World Bank, 2000. "World Development Indicators 2000," World Bank Publications, The World Bank, number 13828, April.
    12. 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.
    13. Zafar Iqbal, 1997. "Foreign Aid and the Public Sector: A Model of Fiscal Behaviour in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 36(2), pages 115-129.
    14. Feyzioglu, Tarhan & Swaroop, Vinaya & Zhu, Min, 1998. "A Panel Data Analysis of the Fungibility of Foreign Aid," World Bank Economic Review, World Bank Group, vol. 12(1), pages 29-58, January.
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    Cited by:

    1. Aparajita Goyal & John Nash, 2017. "Reaping Richer Returns," World Bank Publications, The World Bank, number 25996, April.
    2. Thi Kim Cuong PHAM & Ngoc-Sang PHAM, 2017. "Economic growth and escaping the poverty trap: how does development aid work?," Working Papers P197, FERDI.
    3. McGillivray, Mark & Ouattara, Bazoumana, 2003. "Aid, Debt Burden and Government Fiscal Behaviour: A New Model Applied to C.te d'Ivoire," WIDER Working Paper Series 033, World Institute for Development Economic Research (UNU-WIDER).
    4. Joseph David Barroso Vasconcelos de Deus & Helder Ferreira de Mendonça, 2015. "Empirical evidence on fiscal forecasting in Eurozone countries," Journal of Economic Studies, Emerald Group Publishing, vol. 42(5), pages 838-860, October.

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    Keywords

    aid; borrowing; debt; fiscal behaviour;

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