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Aid, Economic Reform, and Public Sector Fiscal Behavior in Developing Countries

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  • Mark McGillivray

Abstract

This paper looks at interactions between foreign development aid, economic reform, and public sector fiscal behavior. It proposes a model of the public sector fiscal response to aid inflows, which allows for changes in structural relationships due to an exogenously imposed program of economic reform. This model is applied to 1960–99 time series data for the Philippines, which embarked on an IMF‐ and World Bank‐funded structural adjustment program in 1980. Estimates of structural and reduced‐form equations paint a dismal picture of the effectiveness of foreign aid to, and the structural adjustment program in, the Philippines so far as fiscal impacts are concerned. Both bilateral and multilateral aid inflows, and the presence of an economic reform program, are associated with decreases in public fixed capital expenditure, decreases in taxation and other recurrent revenue, and decreases in public sector saving. Multilateral aid also appears to be highly fungible.

Suggested Citation

  • Mark McGillivray, 2009. "Aid, Economic Reform, and Public Sector Fiscal Behavior in Developing Countries," Review of Development Economics, Wiley Blackwell, vol. 13(3), pages 526-542, August.
    • Handle: RePEc:bla:rdevec:v:13:y:2009:i:3:p:526-542
    DOI: 10.1111/j.1467-9361.2009.00505.x
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    Cited by:

    1. Loujaina Abdelwahed, 2023. "Fiscal Responses to Foreign Aid: Does the Permanence of Aid Matter?," Journal of African Economies, Centre for the Study of African Economies, vol. 32(1), pages 26-51.
    2. Hisali, Eria & Ddumba-Ssentamu, John, 2013. "Foreign aid and tax revenue in Uganda," Economic Modelling, Elsevier, vol. 30(C), pages 356-365.
    3. Samuel Brazys & Krishna Chaitanya Vadlamannati, 2021. "Aid curse with Chinese characteristics? Chinese development flows and economic reforms," Public Choice, Springer, vol. 188(3), pages 407-430, September.
    4. repec:oup:jafrec:v:32:y:2022:i:1:p:26-51. is not listed on IDEAS
    5. Bhavan, T. & Xu, Changsheng & Zhong, Chunping, 2010. "Growth effect of aid and its volatility: An individual country study in South Asian economies," Business and Economic Horizons (BEH), Prague Development Center (PRADEC), vol. 3(3), pages 1-9, October.
    6. Carter Patrick, 2013. "Does Foreign Aid Displace Domestic Taxation?," Journal of Globalization and Development, De Gruyter, vol. 4(1), pages 1-47, August.
    7. Assad Ullah & Muhammad Anees & Zahid Ali & Muhammad Ayub Khan, 2018. "Economic Freedom and Private Capital Inflows in Selected South Asian Economies: A Dynamic Panel Data Evidence," South Asian Journal of Business and Management Cases, , vol. 7(1), pages 41-52, June.

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