The Impact of Foreign Aid on Public Spending the Case of Ethiopia
No Thumbnail Available
Date
2002-10
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Addis Ababa University
Abstract
This paper seeks to address the effect of foreign aid on public spending with
particular reference to the case of aid fungibility in Ethiopia. In this paper, 4
developmental sector and 3 non-developmental sector were considered.
Agriculture, construction, education and transport& communication were
classified as developmental expenditure while, defense, general service and debt
servicing were classified as non-developmental expenditure. For each
developmental sector, GDP, sector specific aid and aid other than the sector
specific aid variables are considered for explanatory variables and sector
specific spending is considered as dependent variables.
The analysis was done using OLS estimation. In estimating the long run model,
first, the time series characteristic of the data is tested using ADF test and found
that all the variables in developmental and non-developmental models are
integrated order of one. Then, the cointegration test was conducted and
concluded that there is one cointegrating vector between developmental
spending, sector-specific aid, other aid and GDP. It is also found that there is
one cointegrating vector b/n non-developmental spending, foreign aid and GDP.
The test of weak exogenity indicate that all explanatory variables in
developmental model are weakly exogenous. Before going to estimation, the
following step is to test zero restriction on the coefficients of explanatory
variables in which case, at least one of the explanatory variable coefficient is
found to be significantly different from zero. In estimating the short run impact,
ECM method was employed after knowing not only that there is one
cointegrating vector between dependent and explanatory variables, but also the
variables are integrated of order one I(1). Hence, the estimated result in
education and agriculture sectors were marked by non-fungiblity in which case
the sectoral aid impact on sectoral spending have crowding in effect. However,
for transport & communication and construction sector, aid fungiblity seems to
exist which means that there is crowding out effect. In this case, the sectoral aid
impact on the sectors spending is negative. For non developmental expenditure,
aid is found to be significantly affecting debt servicing expenditure but
insignificant for general service and defense expenditures.
Description
Keywords
Foreign Aid on Public Spending