Aid and domestic resource mobilization with a focus on Sub-Saharan Africa

Abstract

Morrissey, Oliver (2015) Aid and domestic resource mobilisation with a focus on sub-Saharan Africa. Oxford

Fiscal Reforms and the Fiscal Effects of Aid in Uganda

“…Essentially this is a test that aid substitutes for tax revenue. Addressing the tax effect associated with aid tends to be difficult as there can be many effects in opposing directions (Morrissey, 2015b).…”

“…In principal, because most of the aid that is spent in a country goes to or through the government, or finances the provision of public goods and services that would otherwise place demands on the budget, aid is a fundamental component of public sector fiscal behaviour (Morrissey, 2015a). Aid inflows are expected to be associated with a direct and significant effect on public spending, but may also affect taxation either because of influences on tax effort or because reforms linked to aid conditionality affect tax rates or the tax base (Morrissey, 2015b). Aid may be associated with lower domestic borrowing where this is an element of donor conditionality.…”

The Macroeconomics of Aid: Overview

“…There is very little theoretical guidance, other than by assumption or construction, on fiscal response to aid; various factors will influence how a government views aid and domestic tax revenues as potential substitutes (Morrissey, 2015), so it is reasonable to consider this a country-specific empirical question. The CVAR methodology is appropriate in this context as no structural model or behavioural priors are required and there is an established protocol for testing which variables are endogenous to (determined by) the system, which are exogenous (drivers) and which can be excluded from a particular relationship.…”

“…While it may be the case that denying access to aid will be a strong motivation for mobilising domestic tax revenue (Eubank, 2012), this is an extreme case and the associated low levels of resource may not be conducive to economic development and growth. As most developing countries do receive aid the effect on tax effort is likely to depend on how the government views the trade-off between aid dependence and donor conditionality as against domestic revenue and autonomy (Morrissey, 2015). In some countries aid may substitute for tax effort, in others it may not.…”

The economics and politics of foreign aid and domestic revenue

“…Increasing tax revenue is a challenge for most lowincome countries because: (a) tax bases are small and narrow; (b) large informal and agricultural (subsistence) sectors; (c) natural resource dependence, and volatility of resource tax revenues; (d) weak tax administrations; (e) the political environment and the influence of interest groups (for example, Besley and Persson, 2014;Mascagni, Moore and McCluskey, 2014;Junquera-Varela, Verhoeven, Shukla, Haven, Awasthi, and Moreno-Dodson, 2017). These challenges allow foreign aid to have direct effects on DRM, not least because aid and taxes are alternative sources of revenue, with the choice between them dependent on domestic political economy factors (Morrissey, 2015). This has bred a huge strand of literature, rather tenuous, exploring the impact of aid on tax effort (measured as the tax/GDP or the revenue/GDP ratio) in developing countries.…”