The Fiscal Impact of Foreign Aid in Rwanda : A Theoretical and Empirical Analysis
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World Bank, Washington, DC
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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.
Palabras clave
ADVERSE EFFECTS, AGRICULTURE, AMORTIZATION, BALANCE OF PAYMENTS, BUDGET CONSTRAINT, CALCULATION, CAPITAL FLOWS, CAPITAL GRANTS, COMMERCIAL BANKS, COMMODITY, COMPETITIVENESS, CONSTANT RETURNS TO SCALE, CONSUMER, CONSUMERS, CONSUMPTION EXPENDITURE, CONTRIBUTION, CURRENCY, CURRENT EXPENDITURE, DEBT, DEBT FORGIVENESS, DEBT OUTSTANDING, DERIVATIVE, DEVELOPING COUNTRIES, DEVELOPMENT ASSISTANCE, DEVELOPMENT ECONOMICS, DEVELOPMENT PROJECTS, DISBURSEMENTS, DISCOUNTED VALUE, DOMESTIC BORROWING, DOMESTIC DEBT, DUMMY VARIABLE, ECONOMETRIC ANALYSIS, ECONOMIC DIFFICULTIES, ECONOMIC MANAGEMENT, ECONOMIC RECOVERY, ENDOGENOUS VARIABLES, ENDOWMENTS, EQUATIONS, EXCESS LIQUIDITY, EXCHANGE RATE, EXCLUSION, EXOGENOUS VARIABLES, EXPENDITURE, EXPORTS, FISCAL BEHAVIOR, FISCAL PERFORMANCE, FISCAL POLICY, FOREIGN DIRECT INVESTMENT, FOREIGN EXCHANGE, FOREIGN LOAN, FOREIGN LOANS, GDP, GOVERNMENT BUDGET, GOVERNMENT EXPENDITURE, GOVERNMENT REVENUE, GOVERNMENT SPENDING, GROSS DOMESTIC PRODUCT, GROWTH RATE, HOUSEHOLDS, INCOME, INCOME EFFECT, INFLATION, INSTRUMENT, INTERNATIONAL BANK, INTERNATIONAL TRADE, LABOR FORCE, LIQUIDITY, LOCAL GOVERNMENT, M2, MACROECONOMIC STABILITY, MARGINAL COST, MARGINAL UTILITY, MONETARY MANAGEMENT, MONEY SUPPLY, OPEN ECONOMY, OPTIMIZATION, POLICY ENVIRONMENT, POSITIVE EFFECTS, PRESENT VALUE, PRICE ELASTICITY, PRICE ELASTICITY OF DEMAND, PRINCIPAL REPAYMENTS, PRIVATE CAPITAL, PRIVATE GOODS, PRIVATE INVESTMENT, PRIVATE INVESTMENTS, PRIVATE SECTOR, PRODUCTION EFFICIENCY, PUBLIC, PUBLIC ECONOMICS, PUBLIC EXPENDITURE, PUBLIC GOOD, PUBLIC GOODS, PUBLIC INVESTMENT, PUBLIC INVESTMENTS, PUBLIC SECTOR, RATE OF GROWTH, RATE OF INTEREST, RATE OF RETURN, REAL INCOME, RECEIPTS, REGRESSION ANALYSIS, RESOURCE ALLOCATION, RETURNS, SALES, SAVINGS, SOCIAL EXPENDITURE, T-BILL, T-BILLS, TAX, TAX CODE, TAX COLLECTION, TAX RATE, TAX REVENUE, TAX RULES, TAXATION, TOTAL COST, TREASURY, TREASURY BILLS, TYPES OF INVESTMENTS, UTILITY FUNCTION