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Foreign Aid and Recipient State Capacity

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Abstract

Rich economies are characterized by high state capacity. During the Millennium Development Goal (MDG) era, the development community has emphasized both increases in foreign aid and the building of state capacity in recipient countries. Therefore, knowing whether the former promotes or impedes the latter is important. There are only a small number of studies exploring the empirical aid–state capacity relationship. We present evidence on the relationships between aid flows and recipient tax shares of GDP, direct tax shares of total tax revenues, and legal system and property rights quality. The relationships are often not statistically significant. The correlation between aid and the direct tax share is sometimes significant and positive, but it is not robust and the size of the effect is small.

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Notes

  1. 1.

    United Nations (2002), https://www.ataftax.org/en/ (last accessed August 3, 2018), European Commission (2010), and United Nations (2015). For example, the European Commission communication states: “Supporting developing countries in mobilising domestic revenues and in fighting tax evasion is key in efforts to eradicate poverty as measured by the millennium development goals.”

  2. 2.

    For example, Crivelli and Gupta (2016); also see the discussion in the World Bank’s 2017World Development Report: Governance and the Law (pp. 26–28).

  3. 3.

    Bräutigam (2002, p. 11) notes: “If economic elites are largely outside of the fiscal net, as they are in many developing countries, taxation may not stimulate effective demands for power sharing from authoritarian rules.” She notes that a link between taxation of elites and the development of representative government is fundamental to the well-known theory of North and Thomas (1973) and North and Weingast (1989) of the 1688 Glorious Revolution in England and how it set the stage for the Industrial Revolution.

  4. 4.

    See Williamson (2010) for a discussion of the incentive and information problems that may lead to foreign aid failing to achieve its goals.

  5. 5.

    Young and Sheehan also address the aid-income growth relationship, finding that after institutional quality is controlled for, aid flows are not significantly related to economic growth. There work implies that aid only has a direct (significant and negative) effect on institutional quality, which in turn leads it to indirectly harm recipient development. Though not focusing on the legal system and property rights area specifically, Dutta and Williamson (2016) temper Young and Sheehan’s finding somewhat by reporting evidence that aid can increase economic freedom in recipients that have high-quality political institutions. (As Dutta and Williamson note, however, most developing countries are not characterized by high-quality political institutions).

  6. 6.

    The underlying data are from the PRS Group’s International Country Risk Guide, the World Economic Forum’s Global Competitiveness Report, and the World Bank’s Doing Business Survey. Se Gwartney et al. (2017, pp. 265–267) for details.

  7. 7.

    Numerous studies have documented a positive relationship between the EFW index and economic outcomes that include income levels, income growth rates, life expectancy, and reports of subjective well-being (Hall and Lawson 2014). Polity scores the level of democracy in a country, emphasizing the level of political competition and executive constraint. The scale is from 0 to 10, with 10 representing a fully institutionalized democracy. The PWT human capital index is constructed as a function of average years of schooling (Barro and Lee 2013) and the rate of return to that schooling (Psacharopoulos 1994).

  8. 8.

    Recent work by Bologna Pavlik and Young (2017, 2018) highlights how medieval and early-modern European experiences with representative assemblies left cultural legacies that facilitate high levels of state capacity and institutional quality generally today.

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Authors and Affiliations

  1. Texas Tech University, Lubbock, TX, USA

    Andrew T. Young & Estefania Lujan Padilla

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  1. Andrew T. Young
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  2. Estefania Lujan Padilla
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Correspondence to Andrew T. Young .

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Editors and Affiliations

  1. University of Wisconsin-La Crosse, La Crosse, WI, USA

    Nabamita Dutta

  2. Mississippi State University, Mississippi, MS, USA

    Claudia R. Williamson

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Young, A.T., Padilla, E.L. (2019). Foreign Aid and Recipient State Capacity. In: Dutta, N., Williamson, C.R. (eds) Lessons on Foreign Aid and Economic Development. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-22121-8_8

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  • DOI: https://doi.org/10.1007/978-3-030-22121-8_8

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