Abstract
Summary In the long run tax effort, we argue, determines the effectiveness of aid, and this relationship operates simultaneously with the negative link in the opposite direction observed by Brautigam and Knack (2004) and others. Tax effort and the ability of the state to diversify its taxation structure, we find, are significantly linked to growth and poverty indicators. The key message for policy is that a broadening of the tax structure in low-income countries is crucial in order to enable those countries to escape from the “weak-state–low-tax trap,” and to make aid effective.
Highlights
For all the idealism, and increased aid levels, aroused by the Millennium Development Goals and Make Poverty History campaigns, the literature on the effectiveness of aid flows has entered a gloomy phase
We have examined aid effectiveness through the lens of the link from tax structure, to tax effort, to expenditure possibilities, to growth
Our interpretation has not really advanced from that put forward thirty years ago as Mosley (1980)––namely that for poorer developing countries, tax effort, as an important indicator of institutional structure, is an important element in determining the ability of a country to transform itself into a developmental state, and thence in determining that country’s capacity for growth; and that it is vital, if one is to understand the relative effectiveness of aid in relation to growth, to examine the linkage going from tax structures to growth to aid, as well as the linkage going in the reverse direction from aid to tax-structures, as examined, for example, by Bräutigam and Knack (2004)
Summary
Increased aid levels, aroused by the Millennium Development Goals and Make Poverty History campaigns, the literature on the effectiveness of aid flows has entered a gloomy phase. The most up-to-date and comprehensive recent study of aid effectiveness, the paper by Rajan and Subramaniam (2008) finds no significant association between aid and growth in any region, whatever the lag-structure that is used. This finding casts a shadow over the more optimistic results achieved by, for example, Hudson and Mosley (2001), Hansen and Tarp (2001) and Clemens, Radelet and Roodman (2005), all of which suggest that long-term aid flows, at least since the 1990s, had a positive impact on the performance of developing economies. Throughout, our concern is to improve aid effectiveness if that is possible––with a focus on fiscal approaches to that objective––and only secondarily to measure the size and significance of the aid effectiveness coefficient
Sign-in/Register to view highlights & summary 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 callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
