Is the impact of development aid on government revenue sustainable? An empirical assessment

This paper contributes to the public finance literature that examines the impact of foreign aid on government revenue by assessing whether the impact of development aid (if any at all) on government revenue, including non-resource tax revenue is sustainable. The study is carried out over a panel dataset comprising 148 countries of which 40 Least developed countries (LDCs) and over the period 1980–2013 as well as the sub-period 1990–2013. The empirical results show that the sustainability of development aid on non-resource tax revenue depends on countries’ level of economic development proxied by their real per capita income. In particular, for LDCs, we obtain that on average, half of the impact of development aid inflows is felt within a very short time-period, that is, two or three years depending on the period considered. This indicates that for these countries, the impact of aid on non-resource tax revenue is yet positive, but not really sustainable, i.e., persistent over time.