Aid and the Public Sector in East Africa: Endogenous and Disaggregated Aid

Abstract

This paper addresses the question of the relationship between foreign aid and the fiscal behavior of the public sector in developing countries. We treat aid as an endogenous variable in the public sector's utility maximization problem. We also disaggregate the aid variable into three components of official development assistance. Data on the East African countries Ethiopia, Sudan, Kenya, Tanzania, and Uganda for the period 1990-2009 is used to estimate the parameters of the model. The results indicate that aid increases both public investment and recurrent government expenditure. The results also show that aid reduces taxation and domestic borrowing. An incremental aid results in much higher reduction in domestic borrowing than the reduction in Taxation.

Aid Categories that Foster Pro‐Poor Growth: The Case of Sierra Leone

“…There has been increasing research interest in this area. Studies by Mavrotas (2005), Ouattara (2006, 2007), Cassimon and Campenhout (2007), and Salih (2012) have all provided some evidence in this respect. These studies emphasize the need for disaggregating aid to more precisely determine the effect of each category on government budget or fiscal behaviour.…”