Foreign Aid, Investment and Fiscal Policy Behavior: Theory and Empirical Evidence

2014 African Governance and Development Institute WP/14/030

37 Pages Posted: 12 Jan 2015

See all articles by Simplice Asongu

Simplice Asongu

African Governance and Development Institute

Mohamed Jellal

Al Makrizi Institute of Economy

Date Written: June 10, 2014

Abstract

The paper provides theoretical and empirical justifications for the instrumentality of foreign aid in stimulating private investment and fixed capital formation through fiscal policy mechanisms. We propose an endogenous growth theory based on an extension of Barro (1990) by postulating that the positive effect of aid mitigates the burden of the taxation system on the private sector of recipient countries. The empirical validity is based on 53 African countries for the period 1996-2010. While the findings on the tax effort channel are overwhelmingly consistent with theory across specifications and fundamental characteristics, those of the government expenditure channel are a little heterogeneous but broadly in line with the theoretical postulations. Justification for the slight heterogeneity and policy implications are discussed.

Keywords: Foreign Aid; Political Economy; Development; Africa

JEL Classification: B20; F35; F50; O10; O55

Suggested Citation

Asongu, Simplice and Jellal, Mohamed, Foreign Aid, Investment and Fiscal Policy Behavior: Theory and Empirical Evidence (June 10, 2014). 2014 African Governance and Development Institute WP/14/030. Available at SSRN: https://ssrn.com/abstract=2548084 or http://dx.doi.org/10.2139/ssrn.2548084

Simplice Asongu (Contact Author)

African Governance and Development Institute ( email )

P.O. Box 8413
Yaoundé, 8413
Cameroon

Mohamed Jellal

Al Makrizi Institute of Economy ( email )

Rabat
Morocco

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