The Effectiveness of Aid and their Fiscal Response in Sub-Saharan Africa: Theoretical and Empirical Evidence

Abstract

This study primary target is to examine the effects of aid on fiscal responses in Sub-Saharan Africa. The significant of capital accumulation for economic development and growth was broadly recognized long time ago. However, most developing nations- particularly Sub-Saharan African nations, are still trapped in ‘vicious circle of poverty’ and have failed to fund most of the desired level of investment from their own domestic savings. Previous studies of development debated that these nations would come out of stagnation only if they received support from developed countries (Rodan 1961, and Chenery and Strout 1966). Based on this observation donors from developed countries are concerned about how their aid is been used in various recipient countries, especially how it affects the fiscal responses by the receiving countries government. Aid may be given to governments; but the effectiveness will hinge on their fiscal behavior from diverse recipient government. The preponderance evidence from theoretical and empirical literature on the effectiveness of aid proposes that external finance has not had a remarkable influence on development in most Sub-Saharan Africa nations. However, there are certain evidences that aid has had certain major impacts on growth in most favorable policy environments.

This survey reviews the current proof on the effects of external finance on government tax and expenditure effort in diverse receiving nations-especially in Sub-Saharan Africa, ending with a discussion of when budget support is a fiscally effective aid modality. Severe data shortcomings restrict inferences on the association between expenditure and aid, particular as most regimes are not aware of all the available aid to fund the provision of public goods. Three generalities are allowed by the proof: aid fund government expenditure; the degree to which external finance is fungible is over-stated and even where it is fungible this does not seem to make the external finance less effective; and there is no systematic effect of aid on tax effort. Beyond these conclusions the fiscal effect of external finance are nation-specific.

Keywords: Aid, Fiscal response, fungibility, Government expenditure, taxation