Foreign Aid, Public Savings Displacement and Aid Dependency in Côte d'Ivoire: An Aid Disaggregation Approach

Abstract

This paper uses the fiscal response framework to investigate the extent to which different categories of foreign aid flows, namely project aid, programme aid, technical assistance and food aid, displace public savings and affect the recipient country's dependence on aid, using time series data for Côte d'Ivoire for the period 1975–99.The results indicate that, in general, project aid flows tend to reduce public savings and worsen Côte d'Ivoire's dependence on aid more than the other categories of aid flows. This finding therefore suggests that accounting for aid heterogeneity in aid studies as well as aid policies design and implementation could be crucial in improving aid effectiveness to achieve the Millennium Development Goals.

Notes

¹ Fungibility studies (see Pack & Pack, 1990, 1993; Khilji & Zampelli, 1994; Feyzioglu et al., 1998) have also addressed the fiscal effects of aid; but they are limited to the effect of aid flows on expenditure types. Fiscal response studies, however, go beyond the effects of aid on expenditure to examine how aid affects other sources of revenue (tax and borrowing).

² see McGillivray & Morrissey (2001) for a thorough review of the fiscal response literature.

³ see Ouattara, B. (2003) Aggregation bias in aid effectiveness studies: a case study of Cote d'Ivoire using the fiscal response framework, PhD Thesis, University of Manchester, submitted.

⁴ Mavrotas (2002a, b) used disaggregated aid in the form of project aid, programme aid and technical assistance.

⁵ In this paper, the fiscal effects of aid have not been separated from the fiscal effects of the conditionality attached to aid.

⁶ Donors often exert a greater control over the use and management of project aid.

⁷ This assumption has been used extensively in fiscal response studies (see Heller, 1975; Mosley et al., 1987; McGillivray, 2000).

⁸ This refers to revenue excluding grants.

⁹ The estimation of equation (9) should give equation (8).

¹⁰ We derive borrowing data this way following previous fiscal response studies. The main focus here is disaggregation, therefore much of the assumptions used in previous studies are retained. However, in practice borrowing derived this way might not be consistent with borrowing recorded in government accounts data, which are not easily accessible for Côte d’ Ivoire.

¹¹ These coefficients are not reported here but can be obtained from the author.

¹² Given that these coefficients are calculated (not estimated), it is not possible to provide standard diagnostic tests such as standard errors and t-statistics. However, in calculating these coefficients, any ρs or βs found to be statistically insignificant in the previous stage were set to zero.

¹³ Details about these parameters can be obtained from the author.

Additional information

Notes on contributors

Bazoumana Ouattara

The author would like to thank Jane Harrigan, George Mavrotas and Mark McGillivray for useful comments, and Jean-Louis Grolleau at the OECD/CRS for helpful advise on the construction of project and programme aid disbursements for Côte d'Ivoire. He is also indebted to the editors of this journal and to two anonymous referees for very constructive comments. The usual disclaimer applies.