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Foreign Aid and Revenue: Still a Crowding Out Effect? [1]

['Ernesto Crivelli Sanjeev Gupta Priscilla S Muthoora Dora Benedek', 'Ernesto Crivelli', 'Sanjeev Gupta', 'Priscilla S Muthoora', 'Dora Benedek']

Date: 2016-12-31  

Foreign Aid and Revenue: Still a Crowding Out Effect?

Author/Editor:

Ernesto Crivelli ; Sanjeev Gupta ; Priscilla S Muthoora ; Dora Benedek

Publication Date:

July 1, 2012

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper reexamines the relationship between aid and domestic tax revenues using a more recent and comprehensive dataset covering 118 countries for the period 1980 - 2009. Overall, our results support earlier findings of a negative association between net Official Development Assistance (ODA) and domestic tax revenues, but this relationship appears to have weakened in reflection of greater efforts at mobilizing domestic revenues in many countries. The composition of net ODA matters: ODA grants are associated with lower revenues, while ODA loans are not. The paper further finds that net ODA and grants are negatively associated with VAT, excise and income tax revenues, but have a positive relationship with trade taxes. Aid has a particularly strong negative effect on domestic tax revenues in low-income countries and in countries with relatively weak institutions.

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[1] Url: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Foreign-Aid-and-Revenue-Still-a-Crowding-Out-Effect-26085

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