The composition of aid and the fiscal sector in an aid-recipient economy: a model

The ‘fiscal response’ literature models how the impact of aid is mediated by public sector behaviour, an issue which the paper argues has not been adequately addressed by the World Banks 1998 publication ‘Assessing Aid’. Furthermore, the paper argues, both the fiscal response literature and the World Bank publication have neglected the heterogenous nature of aid. Rather than looking at aid effectiveness based upon a single figure for aid, its impact should be assessed for at least four disaggregated categories of aid, as they operate in different ways and be responded to by recipients in different ways, specifically:

• project aid with a lengthy gestation period
• programme aid which disburses rapidly as free foreign exchange
• technical assistance
• food aid and other commodity aid which adds directly to consumption

The paper develops a new fiscal response model, which combines these ideas of both endogenous and disaggregated aid. The paper calls for further modelling and empirical work so that significant policy implications can be derived.

[adapted from the author]