Aid and Public Finance: A Missing Link? |
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Authors: | Markus Gstoettner Anders Jensen |
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Institution: | (1) London School of Economics and Political Science, London, UK |
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Abstract: | The present consensus in the literature is that foreign aid does not have the desired positive effects on economic development.
This is due in great part to poorly performing public institutions in recipient countries. In order to understand better the
causes of this undesirable phenomenon, we examine the relationship between multilateral foreign aid flows and recipient countries’
public finance systems. We construct a new indicator to assess the quality of public finance, the Public Finance Institutions
Quality (PFIQ) Index. For our panel of 86 countries, we find that multilateral aid flows have a negative impact on recipient
country PFIQ score, whereas exogenous improvements in public finance seem to attract more aid. These results provide insight
into the “black box” of governance: failure to turn aid receipts into desired results seems partly attributable to multilateral
aid, in its present form, not being suited to improving a country’s public finance institutions. However, international donor
organisations do seem to reward exogenous improvements in quality and reliability of public finance systems. |
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