Pakistan Economic and Social Review - Lahore

PAKISTAN ECONOMIC and SOCIAL REVIEW

School of Economics, University of the Punjab, Lahore
ISSN (print): 1011-002X
ISSN (online): 2224-4174

AID DISAGGREGATION AND THE PUBLIC SECTOR IN AID-RECIPIENT ECONOMIES: EVIDENCE FROM PAKISTAN

  • KHOLLA SYED/
  • TAHIR MUKHTAR/
  • June 30, 2021
Keywords
Foreign aid, fiscal response, GMM, Pakistan
Abstract

As foreign aid is mainly directed to the public sector of Pakistan, one can only recognize the broader macroeconomic impact of aid if one first understands its impact on fiscal behaviour of the government. To this end, the present study has estimated a fiscal response model using the annual time series data for the period 1972 to 2016.Foreign aid is disaggregated into two components, namely, foreign loans and foreign grants. Whereas public expenditures are classified as current expenditure, socio-economic expenditure and development expenditure while on revenue side tax revenue and domestic borrowing are used. The estimation task has been accomplished by using the generalized method of moments (GMM) technique. Results reveal that foreign aid (loans and grants) is a significant contributor in inducing the fiscal activities of the government of Pakistan. Aid has been found to increase development and non-development expenditures but at the same time it adversely impacts tax effort and domestic borrowing. The study suggests that government of Pakistan should devise ways for developmentoriented use of foreign aid to enhance the productive capacity of the economy. A suitable mechanism ought to be chalked out by donors for monitoring tax revenue generating behaviour of the government of Pakistan in response to their financial assistance. More and unceasing aid is ensured only if the government of Pakistan maintains a certain threshold level of tax to GDP ratio. 

References

Adelman, I. F., & Chenery, H. B.  (1966). Foreign aid and economic development: The case of Greece. The Review of Economics and Statistics, 48(1), 1–19.

Ahmed, S. (2002). Impact of aid on fiscal behaviour: A case study of Pakistan (1980-2000). The Lahore Journal of Economics, 7(1), 117-124.

Ahmed, Vaqar & Wahab, M. Abdul (2011).Foreign assistance and economic growth: Evidence from Pakistan 1972-2010, MPRA Paper No. 30344. 

Ali, M. & Nishat, M. (2009). Do foreign inflows benefit Pakistani poor?The Pakistan Development Review, 48(4), 715-738.

Bacha, E. L.  (1990). A three-gap model of foreign transfers and the GDP growth rate in developing countries. Journal of Development Economics, 32, 279–296.

Bakhtiari, S., Izadkhasti, H. & Tayebi, S.K. (2013). Crowding out effect of foreign aid in selected developing countries: Panel data evidence.Iranian Economic Review, 17(2), 35-50. 

Binh, T.N. & McGillivray, M. (1993).Foreign aid, taxes and public investment: A comment. Journal of Development Economics, 41, 173-176. 

Butt, R. & Javed, A.Y. (2013).Foreign aid and the fiscal behaviour of government of Pakistan. PIDE Working Paper No. 96, Islamabad.

Bwire, T., Lloyd, T., & Morrissey, O. (2017). Fiscal reforms and the fiscal effects of aid in Uganda.The Journal of Development Studies, 53, 1019-1036.

Brecher, I. & Abbas, S. A. (1972).Foreign aid and industrial development in Pakistan.Cambridge: University Press.

Chenery, H. B., & Strout, A. M.  (1966). Foreign assistance and economic development.The American Economic Review, 56, 680-733.

Chishti S., & Hasan M.A. (1992). Foreign aid, defence expenditure and public investment in Pakistan.The Pakistan Development Review, 31(4),895-908.

Clist, P., & Morrissey, O. (2011). Aid and tax revenue: Signs of a positive effect since the 1980s.  Journal of International Development, 23, 165-180.

Dayanath, D.& Ichihashi, M. (2013). Fiscal policy and economic growth in presence of foreign aid [The Sri Lankan Experience]. IDEC Discussion Paper No. 11, Hiroshima University, Japan.

Erden, L. & Guven, A. (2009). The impact of aid on the fiscal behaviour of governments in transition economies. Ekonomický časopis Journal of Economics, 57(5), 445-457.

Feeny, S. (2007). Foreign aid and fiscal governance in Melanesia. World Development, 35, 439-453.

Feeny, S. & McGillivray, M. (2010). Aid and public sector fiscal behaviour in failing states.Economic Modelling, 27, 1006-1016.

Franco-Rodriguez, S., McGillivray, M. & Morrissey, O.  (1998). Aid and the public sector in Pakistan: Evidence with endogenous aid.World Development, 26, 1241–1250.

Gang, I. N.& Khan, H.  (1991). Foreign aid, taxes, and public investment.Journal of Development Economics, 34, 355-369.

Gupta S., Clements B., Pivovarsky, A. & Tiongson E.R. (2003).Foreign Aid and Revenue Response: Does the Composition of Aid Matter? IMF Working Paper No.176.

Heller, S.P. (1975). A model of public fiscal behaviour in developing countries: Aid, investment and taxation.American Economic Review, 65, 429-445.

Hansen, L. P. (1982). Large sample properties of generalized method of moments estimators.  Econometrica: Journal of the Econometric Society, 50, 1029-1054.

Iqbal, Z. (1997).Foreign aid and the public sector: a model of fiscal behaviour in Pakistan.The Pakistan Development Review, 36 (2), 115-129.

Ishfaq, M. & Ahmad, E.  (2005). Aid effectiveness: The case of Pakistan.The Middle East Business and Economic Review, 17 (2), 17-39.

Javed, M. & Qayyum, A. (2011).Foreign aid and growth nexus in Pakistan: the role of macroeconomic policies. PIDE Working Paper No.72.

Khan, H. A. & Hoshino, E. (1992). Impact of foreign aid on the fiscal behavior of LDC governments.World Development, 20, 1481-1488.

Khan, S. R. (1997). Has aid helped in Pakistan? The Pakistan Development Review, 36 (4), 947-957.

Khan, M. A. & Ahmed, A.  (2007). Foreign aid-blessing or curse: evidence from Pakistan. 

The Pakistan Development Review, 46 (3), 215-240.

Khan, N. Z. & Rahim, E. (1993). Foreign aid, domestic savings and economic growth in Pakistan: 1960 -1988.The Pakistan Development Review, 32 (4), 1157–1167.

Khilji,  N.  M.  &  E.  M.  Zampelli  (1991).  The effect of us assistance on public and private expenditures in Pakistan: 1960-1988.The Pakistan Development Review, 30 (4), 1169–1184.

Martins, P.M. (2007). The impact of foreign aid on government spending, revenue and domestic borrowing in Ethiopia. Working Paper No. 41, International Poverty Centre, Brazil.

Mavrotas, G. (2002). Foreign aid and fiscal response: does aid disaggregation matter? Review of World Economics, 138, 534-559.

Mavrotas, G.  (2005). Aid heterogeneity: looking at aid effectiveness from a different angle. Journal of International Development, 17, 1019-1036.

Mavrotas, G. & Ouattara, B. (2003). Aid disaggregation, endogenous aid and the public sector in aid-recipient economies: evidence from Côte d'ivoire. WIDER Discussion Paper No 15, United Nations University, Tokyo, Japan.

McGillivray, M. (2000). Aid and public sector behaviour in developing countries.Review of Development Economics, 4, 156-163.

McGillivray, M. .(2009). Aid, economic reform, and public sector fiscal behavior in developing countries. Review of Development Economics, 13, 526-542.

McGillivray, M. & Ahmed, A. (1999). Aid, adjustment and public sector fiscal behaviour in developing countries. Journal of Asia-Pacific Economy, 4, 381– 391.

McGillivray M. & Morrissey, O. (2000). Aid fungibility in assessing aid: red herring or true concern?Journal of International Development, 12, 413–428.

McGillivray M. & Morrissey, O. (2000). (2001). Fiscal effects of aid, WIDER Discussion Paper No. 61, United Nations University, Tokyo, Japan.

McGillivray, M. & Ouattara, B. (2003). Aid, debt burden and government fiscal behaviour: a new model applied to Côte d'Ivoire. WIDER Discussion Papers No. 33, United Nations University, Tokyo, Japan.

Mohey-ud-Din, D. (2006). Impact of foreign capital inflows on economic growth in Pakistan (1975-2004). Journal of Independent Studies and Research, 1(5), 2429.

Morrissey, O. (2015a). Aid and government fiscal behaviour: What does the evidence say? World Development, 69, 98–105. 

Morrissey, O. (2015b). Aid and domestic resource mobilisation with a focus on subSaharan Africa. Oxford Review of Economic Policy, 31(3–4), 447–461.

Otim, S. (1996). Foreign aid and government fiscal behaviour in low-income South Asian countries. Applied Economics, 28, 927-933.

Ouattara, B. (2006a). Foreign aid and government fiscal behaviour in developing countries: Panel data evidence. Economic Modelling 23, 506–514.

Ouattara, B.  (2006b). Aid, debt and fiscal policy in Senegal. Journal of International Development, 18, 1105-1122. 

 Senbet, D. & Senbeta, A. (2009). Fiscal response to external finance: The case of Sub-Saharan Africa,European Journal of Social Sciences, 8(1), 107-123.

Swaroop, V., Jha, S. & Rajkumar, A. S. (2000). Fiscal effects of foreign aid in a federal system of governance: The case of India. Journal of Public Economics, 77 (3), 307-330.

Taylor, L.  (1994). Gap models. Journal of Development Economics, 45, 17-34.

Thamae, R. I., & Kolobe, L. G. (2016). The fiscal effects of foreign aid in Lesotho.  Mediterranean Journal of Social Sciences, 7(1), 116-122.

White, H. (1994). Foreign aid, taxes and public investment: a further comment. Journal of Development Economics, 45, 155-163.

Zaidi, S. A. (2015). Issues in Pakistan’s economy: A political economy perspective. Karachi: Oxford University Press.

Statistics

Author(s):

KHOLLA SYED

Ph.D. Scholar

Department of Economics, Fatima Jinnah Women University, Rawalpindi

Pakistan

TAHIR MUKHTAR

Associate Professor/Chairman

Department of Economics, Fatima Jinnah Women University, Rawalpindi

Pakistan

  • tahir.mukhtar@fjwu.edu.pk

Details:

Type: Articles
Volume: 59
Issue: 1
Language: English
Id: 613c9352587e5
Pages 1 - 26
Published June 30, 2021

Statistics

  • 21
  • 2
  • 2

Copyrights

The research published by Pakistan Economic and Social Review (PESR) is licensed under Creative Commons Attribution 4.0 International License. It allows readers to Share_ copy and redistribute, Adapt_ remix and transform. PESR offers free full text downloading to its online contents to all readers. No subscription fee is required to read and download online articles.
Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.