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Aid and Taxation: Evidence from Ethiopia

Published on 1 January 2015

The relation between aid and tax has been largely debated in the literature, given its far reaching consequences: the presence of a crowding out effect of aid on domestic revenue would seriously impair the sustainability of the development process. This paper explores this relation by adopting a case study approach, which overcomes some of the common limits of the cross country literature.

The research uses time series data for Ethiopia for 1960 – 2009, a longer time series than most country studies of this kind. The estimation is based on an error correction model that allows separating long-run equilibrium relations and short-run dynamics. 

The analysis shows that both foreign grants and loans have a positive relation with tax revenue in Ethiopia. This effect seems to be robust to endogeneity and to structural breaks, although clearly establishing causality remains a challenge. The results show that aid has a beneficial effect on tax revenue, which may be due to its role in supporting fiscal reforms and improvements in tax administration.

Authors

Image of Giulia Mascagni
Giulia Mascagni

IDS Research Fellow and ICTD Research Director

Publication details

authors
Mascagni, G.
journal
Working Paper Series, issue 73-2014

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