Foreign Aid and Recipient State Capacity

Abstract

Rich economies are characterized by high state capacity. During the Millennium Development Goal (MDG) era, the development community has emphasized both increases in foreign aid and the building of state capacity in recipient countries. Therefore, knowing whether the former promotes or impedes the latter is important. There are only a small number of studies exploring the empirical aid–state capacity relationship. We present evidence on the relationships between aid flows and recipient tax shares of GDP, direct tax shares of total tax revenues, and legal system and property rights quality. The relationships are often not statistically significant. The correlation between aid and the direct tax share is sometimes significant and positive, but it is not robust and the size of the effect is small.