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The Fiscal Impact of Foreign Aid in Rwanda : A Theoretical and Empirical Analysis

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
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World Bank, Washington, DC
Africa | Rwanda
2012-05-29T18:58:09Z | 2012-05-29T18:58:09Z | 2008-02

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.

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