Foreign Aid Fiscal Policy: Theory and Evidence

Abstract

The paper provides theoretical and empirical justifications for the instrumentality of foreign aid in stimulating private investment and fixed capital formation through fiscal policy mechanisms. We propose an endogenous growth theory based on an extension of Barro (1990) by postulating that the positive effect of aid mitigates the burden of the taxation system on the private sector of recipient countries. The empirical validity is based on data from 53 African countries for the period 1996-2010. While the findings on the tax effort channel are overwhelmingly consistent with theory across specifications and fundamental characteristics, those of the 'government expenditure' channel are a little heterogeneous but broadly in line with the theoretical postulations. Justification for the slight heterogeneity and policy implications are discussed.JEL Classification: B20; F35; F50; O10; O55

Foreign Aid and Inclusive Development: Updated Evidence from Africa, 2005-2012

“…The author has suggested that a 'soft economics' approach focusing on human capability development should be given more emphasis in relation to the 'strong economics' paradigm based on structural adjustment policies. This suggestion for a paradigm shift is consistent with a recent theory by Asongu and Jellal (2016) on foreign aid policy which postulates that domestic and private investments (for economic growth and inclusive development) can be better achieved if foreign aid is channelled through mechanisms that reduce the burden of the taxation system on the private sector of recipient nations. The narrative of Kuada (2015) for understanding trends in high unemployment, poverty and exclusive growth in Africa is broadly consistent with a recent stream of African development literature which has responded to the MDG-related poverty trends by suggesting mechanisms by which foreign aid could be tailored to achieve more employment, inclusive growth and poverty alleviation Simpasa et al, 2015;Asongu & Tchamyou, 2015;Page & Söderbom, 2015).…”

Foreign Aid, Instability and Governance in Africa

“…Hence, because this research is framed as an applied economics study, an established theoretical underpinning is not indispensable to support the empirical analysis. This is essentially because of the wealth of theoretical literature on the relationship between aid and development outcomes in developing countries (Easterly, 1999;Asongu and Jellal, 2016). Hence, this research is consistent with a contemporary strand of literature arguing that applied econometrics is not necessarily limited to the acceptance and rejection of established theoretical underpinnings (Costantini and Lupi, 2005;Narayan et al, 2011;.…”

Increasing Foreign Aid for Inclusive Human Development in Africa

“…The author has proposed a shift towards 'soft economics' (or human capability development) as a means of understanding poverty in Africa. The proposed shift in paradigm from strong economics (or structural adjustment policies) is broadly consistent with the 'foreign aid'-oriented theoretical propositions from Asongu and Jellal (2016) which suggest that inclusive development and economic growth can be enhanced in the continent if foreign aid is channelled via mechanisms that reduce the taxation burden borne by the private sector. Moreover, the paradigm from Kuada (2015) for eliciting the absence of inclusive development and high unemployment in Africa is in line with a recent stream of African development literature on the need to reinvent foreign aid in order to address challenges in the post-2015 sustainable development agenda (see Simpasa et al, 2015;Page & Söderbom, 2015;.…”