International aid corruption and fiscal behavior policy

Asongu, Simplice and Jellal, Mohamed (2014): International aid corruption and fiscal behavior policy.

Abstract

The Okada & Samreth (2012, EL) and Asongu (2012, EB; 2013, EEL) debate on ‘the effect of foreign aid on corruption’ has had an important influence in policy and academic circles. This paper provides a unifying framework by using investment and fiscal behavior transmission channels in 53 African countries for the period 1996-2010. The richness of the dataset enables us to disaggregate countries into 16 panels depicting fundamental characteristics of corruption based on wealth-effects, legal origins, openness to sea, petroleum-exporting, regional proximity and religious domination. Findings unite the two streams of the debate and broadly suggest that while the ‘government’s final consumption expenditure’ channel is consistent with the latter author, the investment and tax effort channels are in line with the former authors. Justifications for the nexuses are provided. Policy implications on how to use foreign aid constraints in managing fiscal behavior as means of reducing (increasing) corruption (corruption-control) are discussed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign Aid; Political Economy; Development; Africa
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B20 - General; F - International Economics > F3 - International Finance > F35 - Foreign Aid; F - International Economics > F5 - International Relations, National Security, and International Political Economy > F50 - General; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O10 - General; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa

References

Addison, T., Mavrotas, G., & McGillivray, M., (2005), “Development Assistance and Development Finance: Evidence and Global Policy Agendas”, Journal of International Development, 17, pp. 819-836.

Ahmed, I., Marcoux, C., Russell, B., & Tierney, M. J., (2011), “Foreign Aid in Hard Times: The Political Economy of Aid Effort”, Institute of Theory and International Relations.

Alam, S., (2004), “Colonialism and Industrialization: A Critique of Lewis”, Journal of Radical Political Economics, 36(2), pp. 217-240.

Alesina, A., & Dollar, D., (2000), “Who gives Foreign Aid to Whom and Why?”, Journal of Economic Growth, 5, pp. 33-64.

Alesina, A., & Weder, B., (2002), “Do Corrupt Governments Receive Less Foreign Aid?”, American Economic Review, 92, pp. 1126-1137.

Asongu, S. A., (2012a), “On the effect of foreign aid on corruption”, Economics Bulletin. 32(3), pp. 2174-2180.

Asongu, S. A., (2012b), “The political economy of development assistance: peril to government quality dynamics in Africa”, MPRA Paper No. 36543.

Asongu, S. A., (2012c), “Fighting software piracy in Africa: how do legal origins and IPRs protection channels matter?” Journal of the Knowledge Economy. http://link.springer.com/article/10.1007/s13132-012-0137-0 (accessed: 15/05/2013).

Asongu, S. A., (2012d), “Government quality determinants of stock market performance in African countries”, Journal of African Business, 13(2), pp. 183-199.

Asongu, S. A., (2013a), “On the effectiveness of foreign aid in institutional quality”, European Economics Letters, 2(1), pp. 12-19.

Asongu, S. A., (2013b), “Fighting African Capital Flight: Trajectories, Dynamics and Tendencies”, African Governance and Development Institute Working Paper.

Asongu, S. A., (2013c), “Law, finance, economic growth and welfare: why does legal origin matter?”, Institutions and Economies: Forthcoming.

Asongu, S. A., (2013d), “Fighting corruption with existing corruption-control levels count: what do wealth-effects tell us in Africa?”, Institutions and Economies: Forthcoming.

Asongu, S. A., (2013e), “Fighting corruption in Africa: do existing corruption-control levels matter?”, International Journal of Development Issues, 12(1) pp. 36-52.

Arvis, J-F., Marteau, J-F., & Raballand, G., (2007), “The cost of being landlocked: logistics costs and supply chain reliability”, Word Bank Working Paper Series No. 4258.

Baliamoune-Lutz, M., & Ndikumana, L., (2008), “Corruption and Growth: Exploring the Investment Channel”, University of Massachusetts, Amherst.

Bartels, F. L., Alladina, S. N., & Lederer, S., (2009), “Foreign Direct Investment in Sub-Saharan Africa: Motivating Factors and Policy Issues”, Journal of African Business, 10(2), pp. 141-162.

Benedek, D., Crivelli, E., Gupta, S., & Muthoora, P., (2012), “Foreign Aid and Revenue: Still a Crowding Out Effect?”, IMF Working Paper 12/186.

Bird, R. M., (2007), “Tax Effort: The Impact of Corruption, Voice and Accountability”, ITP Paper 0702.

Bird, R. M., (2004). “Administrative Dimensions of Tax Reform”, Asia-Pacific Tax Bulletin, 10(3), pp. 3-21.

Boone, P., (1996), “Politics and Effectiveness of Foreign Aid,” European Economic Review, 40, pp. 289-329.

Boyce, J. K., & Ndikumana, L., (2008), “New Estimate of Capital Flight from Sub-Saharan African Countries: Linkages with External Borrowing and Policy Option”, PERI Working Paper No. 166, University of Massachusetts Amherst, USA.

Burnside, C., & Dollar, D., (2000), “Aid, Policies and Growth”, American Economic Review, 90(4), pp. 847-868.

Chenery, H. B., & Strout, A. M., (1966), “Foreign Assistance and Economic Development”, American Economic Review, 56, pp. 679-733.

Clemens, M. A., Radelet, S., & Bhavnani, R., (2004), “Counting Chickens When They Hatch: the Short-Term Effect of Aid on Growth”, Center for Global Development Working Paper No. 44.

CIA (2011). Central Intelligence Agency, The World Factbook 2011.

Collier, P., & Dehn, J., (2001), “Aid, shocks and growth”, World Bank Policy Research Working Paper No. 2001/11/06.

Collier, P., & Dollar, D., (2001), “Can the World Cut Poverty in Half? How Policy Reform and Effective Aid can Meet International Development Goals,” World Development, 29(111), pp. 1787-1802.

Crotty, J., & Lee, K., (2002), “Is financial liberalization good for developing countries? The case of South Korea in the 1990s”, Review of Radical Political Economics, 34(3), pp. 327-334.

Crotty, J., & Lee, K., (2006), “The Effects of Neoliberal Reforms on the Postcrisis Korean Economy”, Review of Radical Political Economics, 38(3), pp. 381-387.

Crotty, J., & Lee, K., (2009), “Was IMF-Imposed Economic Regime Change in Korea Justified? The Political Economy of IMF Intervention”, Review of Radical Political Economics, 41(2), pp. 2149-2169.

Degnbol-Martinussen, J., & Engberg-Pedersen, P., (2003), Aid: Understanding International Development Cooperation. London: Zed Books.

De la Croix, D., & Delavallade, C., (2007), “Corruption et allocation optimale de l’investissement public”, Revue Economique, 58(3), pp. 637-647.

Dixit, A., (2004), Lawlessness and Economics: Alternative Modes of Governance. Princeton: University Press.

Djankov, S., Jose, G. M., & Marta, R., (2005), The Curse of Aid. World Bank, Mimeo, April, 2005.

Easterly, W., (1999), “The Ghost of Financing Gap: Testing the Growth Model Used in the International Financial Institutions”, Journal of Development Economics, 60, pp. 423-438.

Easterly, W., (2005a), “Can foreign aid save Africa”, Saint John’s University.

Ghura, D., Hadjimichael, M.T., Mahleisen, M., Nord, R., & Ucer, E.M., (1995), “Sub-Saharan Africa: Growth, Savings and Investment, 1986-93”, IMF Occasional Paper No. 118.

Gupta, S., Clements, B., Pivovarsky, A., & Tiongson, E. R., (2003), “Foreign Aid and Revenue Response: Does the Composition of Aid Matter?”, IMF Working Paper 03/176.

Gupta, S., de Mello, L., & Sharan, R., (2000), “Corruption and Military Spending”, IMF Working Paper No. 00/23.

Feeny, S., (2003), “The impact of foreign aid on poverty and human well-being in Papua New Guinea”, Asia-Pacific Development Journal, 10, (2).

Fielding, D., McGillivray, M., & Torres, S., (2006), “A Wider Approach to Aid Effectiveness: Correlated Impacts on Health, Wealth, Fertility and Education”, The World Institute for Development Economics Research (UNU-WIDER).

Filmer, D., Hammer, J., & Pritchett, L., (2000), “Weak Links in the Chain: A Diagnosis of Health Policy in Poor Countries,” The World Bank Research Observer, 15, (2), pp. 199–224.

Filmer, D., & Pritchett, L., (1997), “What Educational Production Functions Really Show : A Positive Theory of Education Spending”, World Bank Policy Research Paper No. 1795.

Gomane, K., Morrissey, O., Mosley, P., & Verschoor, A., (2003), “Aid, pro-poor Government Spending and Welfare”, CREDIT Working Paper 03/01.

Guillaumont, P., & Chauvet, L., (2001), “Aid and Performance: A Reassessment,” Journal of Development Studies, 37, pp. 66-92.

Herrick, C., (2008), “The Southern African Famine and Genetically Modified Food Aid: The Ramifications for the United States and European Union’s Trade War’, Review of Radical Political Economics, 40(1), pp. 50-66.

Hines, J., (1995), “Forbidden payments: foreign bribery and American business”, NBER Working paper 5266.

Ishfaq, M., (2004), “Aid effectiveness, debt capacity and debt management in the economy of Pakistan”, a PhD dissertation at Quad-e-Azam University, Islamabad.

Knack, S., (2001). “Aid Dependence and the Quality of Governance: Cross-Country Empirical Tests”. Southern Economic Journal, 68(2), 310-329.

Knack, S., & Keefer, P., (1995), “Institutions and Economic Performance: cross-country tests using alternative institutional measures”, Economics and Politics, 7(3), pp. 207-227.

Kodila-Tedika, O., (2012). “Empirical Survey on the Causes of Corruption”. MPRA Paper No. 41484.

Kodila-Tedika, O., (2013). “Corruption and Failed African States”. MPRA Paper No. 44686.

Koechlin, T., (2007), “Fighting Global Poverty, Three Ways”, Review of Radical Political Economics, 39(3), pp. 377-384.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W., (1998), “Law and finance”, Journal of Political Economy, 106, pp. 1113-1155.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W., (1999), “The quality of government”, Journal of Law, Economics and Organization, 15, pp. 222-279.

La Porta, R., Lopez-de-Silanes, F., & Shleifer, A., (2008), “The Economic Consequences of Legal Origin,” Journal of Economic Literature, 46(2), pp. 285-332.

Larrain, F., & Tavares, J., (2004), “Does Foreign Direct Investment Decrease Corruption”, Cuadernos de Economia-Latin American Journal of Economics, 41(123), pp. 217-230.

Levy, D., & Duménil, G., (2006), “Imperialism in the Neoliberal Era: Argentina’s Reprieve and Crisis”, Review of Radical Political Economics, 38(3), pp. 388-396.

Martinez-Vazquez, J., Arze, F. J., & Boex, J., (2006), “Corruption, Fiscal Policy and Fiscal Management: Fiscal Reform in Support of Trade Liberalization”? United States Agency for International Development.

Masud, N., & Yontcheva, B., (2005), “Does Foreign Aid Reduce Poverty? Empirical Evidence from Nongovernmental and Bilateral Aid”, IMF Working Paper, 05/100.

Mauro, P., (1998), “Corruption and the composition of government expenditure”, Journal of Public Economics, 69(2), pp. 263-279.

Mkandawire, T., (2011), “On Tax Efforts and Colonial Heritage in Africa”, Journal of Development Studies, 46(10), pp. 1647-1669

Minou, C., & Reddy, S. G. (2010), “Development aid and economic growth: A positive long-run relation”, The Quarterly Review of Economics and Finance, 50, pp. 27-39.

Morrissey, O., (2012), “Aid and Government Fiscal Behavior. What Does the Evidence Say?”, UNU-WIDER Working Paper No. 2012/01.

Mosley, P., Hudson, J., & Horrell, S., (1992), “Aid, The Public Sector and The Market in Less Developed Countries: A Return to The Scene of Crime”, Journal of International Development, 4, pp. 139-150.

Mosley, P., Hudson, J., & Verschoor, A., (2004), “Aid, Poverty Reduction and the ‘new’ Conditionality”, Economic Journal, 114, F217–F243.

Okada, K., & Samreth, S., (2012), “The effect of foreign aid on corruption: A quantile regression approach”. Economic Letters, 11, pp. 240-243.

Oya, C., (2006), “The Political Economy of Development Aid as Main Source of Foreign Finance for Poor African Countries: Loss of Policy Space and Possible Alternatives from East Asia”, School of Oriental and African Studies, University of London.

Pedersen, K. P., (1996), “Aid, Investment and Incentives,” Scandinavian Journal of Economics, 98(3), pp. 423-438.

Pritchett, L., & Woolcock, M., (2004), “Solutions When the Solution Is the Problem: Arraying the Disarray in Development”, World Development, 32 (2), pp. 191-212.

Reichel, R., (1995), “Development, Aid, Savings and Growth in the 1980s: A Cross-Sectional Analysis,” Savings and Development, 19(3), pp. 279-296.

Resnick, D., (2012), “Foreign Aid in Africa, Tracing Channels of Influence on Democratic Transitions and Consolidation”, UNU-WIDER Working Paper No. 2012/15.

Rostow, W. W., (1960), The Stages of Economic Growth: A Non-Communist Manifesto.

Shleifer, A., & Vishny, R., (1993), “Corruption”, Quarterly Journal of Economics, 108, pp. 599-617.

Svensson, J., (2000). “Foreign Aid and Rent-Seeking”, Journal of International Economics, 51(2), pp. 437-461.

Taliercio, R., (2003). “Designing Performance: The Semi-Autonomous Revenue Authority Model in Africa and Latin America.” World Bank Policy Research Working Paper No. 3423.

Weeks, J., (2012), “Macroeconomic Impact of Capital Flows in Sub-Saharan African Countries, 1980-2008”, Association of Concerned Africa Scholar Bulletin, No. 87, pp. 1-7.