Foreign aid : donors and recipients

This work examines the relationship between donor allocation of foreign development aid and the budgetary behavior of recipient governments. Models of aid allocation and of recipient budgetary behavior are developed and empirically tested. Different specifications of donor aid allocation are used to determine the role of recipient budgetary behavior as a target in the allocation of aid. Furthermore, the recipient model examines the effect of different types of aid on the fiscal behavior of the recipient. Donors are separated into three major categories, the multilateral development banks (MDB), the International Monetary Fund (IMF) and bilateral agencies (BILAT). The empirical results show that the aid/fiscal relationship between donor and recipient varies considerably by donor. Highly concessional MDB aid is highly stimulative, increasing recipient fiscal expenditures. However, recipient fiscal behavior does not greatly influence its allocation among recipients. Near market rate MDB aid acts in somewhat the opposite manner, leading to reductions in recipient expenditures and revenues, while its allocation is in part explained by the fiscal behavior of the recipient. The IMF allocation patterns are the most highly influenced by recipient fiscal behavior, and its aid has a depressive impact on the size of government and budget deficits. The third donor group, BILAT, appears not to respond in its allocation patterns to recipient fiscal behavior. BILAT aid has a corresponding lack of effect on recipient fiscal behavior as its primary use appears to be debt relief.