Abstract
This paper reviews evidence published in the last 10 years that has added to our understanding of the effects of aid on government spending and tax effort in recipient countries, with a discussion of when (general) budget support is a fiscally efficient aid modality. Three generalizations are permitted by the evidence: aid finances government spending; the extent to which aid is fungible is over-stated and even where it is fungible this does not appear to make the aid less effective; and there is no systematic effect of aid on tax effort. Beyond these conclusions effects are country-specific.
Highlights
Aid flows to developing countries represent significant inflows of money, especially in poorer recipients
The core conclusion from the recent evidence on aid and government spending can be stated: it should not be assumed or expected that a given amount of aid will result in an equivalent increase in the amount of recipient government spending
There is no particular reason why $1 m in aid should increase spending by $1 m
Summary
Aid flows to developing countries represent significant inflows of money, especially in poorer recipients. Aid should be expected to impact on fiscal behavior, in particular the level and composition of government spending, especially in the low-income countries that receive significant amounts of aid relative to Gross Domestic Product (GDP). This paper is an update that addresses recent research to identify significant developments that have added to our understanding of three issues: fungibility, aid and the allocation of government spending; aid and taxation; and the specific issue of budget support (especially insofar as this relates to spending allocation). Notes: The table provides simple average of available observations for the regions in each decade (number of countries in parentheses); Revenue, tax, and spending relate to central government only and all figures are as a percentage of GDP except final column which is aid (A) as a percentage of public spending (G).
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
