The Fiscal Impact of Foreign Aid in Rwanda : A Theoretical and Empirical Analysis
The inflow of large quantities of foreign aid into Rwanda since 1994 can have potential adverse effects such as aid dependency via a significant negative effect on tax efforts and on public investments. This paper carries out a theoretical and empi...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2008/02/9046104/fiscal-impact-foreign-aid-rwanda-theoretical-empirical-analysis http://hdl.handle.net/10986/6591 |
| Summary: | The inflow of large quantities of
foreign aid into Rwanda since 1994 can have potential
adverse effects such as aid dependency via a significant
negative effect on tax efforts and on public investments.
This paper carries out a theoretical and empirical study to
examine these issues. The theoretical part develops a model
in which the recipient government decides on the optimal
level of tax and optimally allocates total government
revenue between current expenditure and public investment.
The theoretical model makes it possible to empirically test
whether an increase in aid is likely to reduce the optimal
tax rate and the proportion of public expenditure allocated
to public investment. The econometric analysis uses time
series data on Rwanda to show, in line with other studies in
the literature, a negative relationship between increased
aid and the tax rate; but the magnitude of the effects are
extremely small. In the case of Rwanda, reforms to the tax
administration and expansion of the tax base have had
mitigating effects. As far as the effect on public
investment, the overall effect was negative in the past;
however, since 1995 the direction of this effect has changed. |
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