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Foreign Aid and the Public Sector: A Model of Fiscal Behaviour in Pakistan

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  • Zafar Iqbal

    (Pakistan Institute of Development Economics, Islamabad.)

Abstract

The main aim of this paper is to demonstrate the impact of foreign capital inflows on government’s fiscal behaviour in Pakistan. Government’s fiscal response is measured in terms of social, non-development, and development expenditures as well as revenues. This paper specifies and estimates a fiscal behaviour model for the period 1976–95. The threestage least squares results suggest that foreign capital flows into the public sector have strong positive impact on social and non-development expenditures and, in contrast to what the government and donor agencies believe, have little effect on development spending. In other words, proceeds from foreign loans and aid are largely consumed rather than invested productively. The results also reveal the strong substitutable interdependence between social and non-development expenditures. Furthermore, the finding clearly demonstrates that foreign assistance causes a strong shift of public domestic resources from development projects to non-development activities. In addition to the above, the results show that a large fraction of government revenues is used to finance social and non-development expenditures. The results also demonstrate that foreign assistance enhances taxation efforts of the Government of Pakistan.

Suggested Citation

  • 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.
    • Handle: RePEc:pid:journl:v:36:y:1997:i:2:p:115-129
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    References listed on IDEAS

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    Cited by:

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    2. Ahmed, Vaqar & Wahab Siddiqui, Abdul, 2010. "Nexus between aid and security: the case of Pakistan," MPRA Paper 29310, University Library of Munich, Germany.
    3. Matthew McCartney, 2011. "Pakistan, Growth, Dependency, and Crisis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 71-94, September.
    4. Ijirshar, Victor Ushahemba & Andohol, Jerome, 2022. "Investment-growth nexus in West Africa: An assessment of whether fragility matter," International Review of Economics & Finance, Elsevier, vol. 81(C), pages 1-17.
    5. Simon Feeny & Mark McGillivray, 2003. "Aid and public sector borrowing in developing countries," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(8), pages 989-998.
    6. Ahmed, Vaqar & Wahab, Mohammad Abdul, 2011. "Foreign assistance and economic growth: evidence from Pakistan 1972 - 2010," MPRA Paper 30344, University Library of Munich, Germany.
    7. Mark McGillivray & Oliver Morrissey, 2001. "Fiscal Effects of Aid," WIDER Working Paper Series DP2001-61, World Institute for Development Economic Research (UNU-WIDER).
    8. Rana, Zunera & Koch, Dirk-Jan, 2020. "Why fungibility of development aid can be good news: Pakistan case study," World Development Perspectives, Elsevier, vol. 20(C).
    9. Rabia Butt & Attiya Yasmin Javid, 2013. "Foreign Aid and the Fiscal Behaviour of Government of Pakistan," PIDE-Working Papers 2013:96, Pakistan Institute of Development Economics.
    10. Gil S. Epstein & Ira N Gang, 2006. "The Hope for Hysteresis in Foreign Aid," Departmental Working Papers 200628, Rutgers University, Department of Economics.
    11. Rehman, Mobeen Ur, 2013. "The Role of the Pakistani Government in the Efficient Management of Public Funds," Public Finance Quarterly, Corvinus University of Budapest, vol. 58(2), pages 230-237.
    12. Thilak Ranaweera, 2004. "Ghost of the financing gap: an overlooked aspect of the aid debate," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(4), pages 637-652.
    13. Muhammad Javid & Abdul Qayyum, 2011. "Foreign Aid and Growth Nexus in Pakistan: The Role of Macroeconomic Policies," PIDE-Working Papers 2011:72, Pakistan Institute of Development Economics.
    14. Mark McGillivray & Oliver Morrissey, 2000. "Aid fungibility in Assessing Aid: red herring or true concern?," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 413-428, April.

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