The economics and politics of foreign aid and domestic revenue
Abrams M.E. Tagem
No 180, WIDER Working Paper Series from World Institute for Development Economic Research (UNU-WIDER)
The main argument of this paper is that there is considerable heterogeneity in the way aid can shape tax performance in developing countries: through behavioural effects, donor conditionality, recipient policy reform and technical assistance; and these effects are countryspecific. We investigate these effects by applying the dynamic Common Correlated Effects Mean Group estimator to a dataset comprising 84 developing countries from 1980 to 2013. The following results ensued: aid and taxes comprise an equilibrium relation, with a positive long-run association between aid and taxes; causality runs from aid to taxes, suggesting that on average, changes in aid induce permanent changes in taxes.
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