## What Does Aid Do to Fiscal Policy? New Evidence

_IMF Working Papers, June 9, 2016_

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## Bibliographic details
- Authors: Jean-Louis Combes, Rasmané Ouedraogo, Sampawende J Tapsoba
- Published: June 9, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484382691.001

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### Overview
- Study revisits fiscal effects of shifts in aid dependency in 59 developing countries from 1960 to 2010.
- Identifies structural shifts in aid dependency: upward shifts (structural increases in aid inflows) and downward shifts (structural decreases in aid inflows).
- Treats these structural shifts as shocks in aid dependency and uses treatment effect methods to assess fiscal effects of aid.

### Methodology
- Sample: 59 developing countries.
- Time period: 1960 to 2010.
- Analytical approach: identification of structural upward and downward shifts in aid dependency; treatment effect methods to estimate fiscal impacts.

### Key Findings
- Shifts in aid dependency are frequent and have significant fiscal effects.
- Evidence of traditional phenomena:
  - Tax displacement.
  - “Aid illusion.”
- Asymmetric effects:
  - Upward shifts (large aid inflows) undermine tax capacity and public investment.
  - Downward shifts (large reductions in aid inflows) tend to leave recipients’ tax and expenditure ratios unchanged.
- Persistence and temporality:
  - Tax displacement effects tend to be temporary.
  - Impacts on expenditure items are persistent.
- Conditional effects:
  - Undesirable fiscal effects of aid are more pronounced in countries with low governance scores.
  - Effects are more pronounced in countries with low absorptive capacity.
  - Effects are more pronounced in countries with IMF-supported programs.

### Subject Areas and Keywords (as reported)
- Subject: Absorptive capacity, Balance of payments, Capital spending, Current spending, Expenditure, Foreign aid, Revenue administration
- Keywords: Absorptive capacity, Africa, Aid illusion, Capital spending, crowding out, crowding-out effect, Current spending, displacement effect, Exchange Rate, Fiscal policy, Foreign aid, Fungibility, Global, IMF program, recipient country, South Asia, Sub-Saharan Africa, tax displacement effect, tax revenue, treatment effect approach, treatment effect literature, WP

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/what-does-aid-do-to-fiscal-policy-new-evidence-43949_