Fiscal Capacity and Aid Allocation: Domestic Resource Mobilization and Foreign Aid in Developing Countries

Abstract

Bhushan and Samy examine the interaction between fiscal performance and donor aid allocation in developing countries. This is important, they argue, because domestic resource mobilization is increasingly recognized as a key component of financing for development, and some donors are beginning to pay more attention to aid recipients’ taxation and fiscal capacity. While several studies have examined whether aid affects fiscal performance, there has been no systematic study of whether fiscal capacity and performance in aid-receiving countries has an impact on donors’ aid allocation decisions. Using both large-N analysis and case studies, the authors show that donors are not necessarily delivering on their commitments to align with recipient country priorities and to provide aid through country public financial management systems.