This study has examined the impact of foreign aid on government expenditure in Ethiopia over the period 1981 to 2012 using Multivariate Vector Auto Regression analysis. All the necessary time series tests such as stationary test, co-integration, weak exiguity, and other tests are conducted. The empirical result from the long run fungibility equation result indicates that sectoral aid has negative effect on its sector spending in developmental sectors except for agricultural sector government spending. The estimate of agricultural aid also support that a 1percent increase in agricultural aid leads to a 0.83percent increase in agricultural spending. Aid other than health aid also has positive impact on health spending. The positive coefficient of aid other than the health implies that there is an aid diversion towards health sector from the others. The negative coefficients of sectoral aid on the sector spending and the negative coefficients of aid other than sector-specific aid, indicate diversion of aid away from the specific sector. Negative coefficients of explanatory variables may arise when there is a diversion of categorical aid from developmental investment towards non developmental expenditure such as general service government expenditures. The result also shows education aid is fungible both in short and long run. Health aid is fungible in the long run but not in the short run. Agriculture aid is non fungible in both long and short run in Ethiopia. The coefficient of aid other than education aid has positive sign that implies the diversion of foreign aid to the education sector. Foreign aid have also negative impact on all of non developmental government spending In order to get the desired benefit from foreign aid, Ministry of Finance and Economic Development has to set sound financial management system which stimulates economic growth and mitigate any diversion of developmental sector aid to other non developmental expenditure particularly in education and health sectors. Therefore, effective and efficient monitoring system which was purpose oriented utilization of foreign aid is central to make sectoral spending non fungible in Ethiopia.
Table of Contents
1. INTRODUCTION
1.1. Background
1.2. Statement of the Problem
1.3. Objective of the Study
1.3.1. General Objectives
1.3.2. Specific Objectives
1.4. Research Questions
1.5. Significance of the Study
1.6. Scope of the Study
1.7. Limitation of the Study
1.8. Organization of the Paper
2. METHODOLOGY OF THE STUDY
2.1. Data Type and Sources
2.2. Description of Variables
2.3. Model Specification
2.4. Econometric Estimation Techniques
2.4.1. Testing for Unit Root
2.4.2. Test for Cointegration
2.4.3 Vector Error Correction Model (VECM)
3. ANALYSIS OF ECONOMIC PERFORMANCE IN ETHIOPIA
3.1. Aggregate Economic Growth in Ethiopia
3.2. Sectorial Economic Growth in Ethiopia
3.3. External Economic Sector and Its Financing
3.4. Government Expenditure and Means of Financing
3.5. Functional Classification of Capital Expenditure in Ethiopia
3.6. Classification of Current Expenditure in Ethiopia
3.7. Budget Deficit and Means of Financing in Ethiopia
3.8. Rate of ODA Flows to Ethiopia Relative to Economic Sectors
3.9. Composition of ODA Flows to Ethiopia
4. EMPIRICAL RESULTS AND INTERPRETATION
4.1. Results for Unit-Root Test
4.2. Result of Cointegration Analysis
4.2.1. Tests for Co-integration and Long-Run Relationships
4.2.2. Test Result for Short Run Expenditure Equation
5. SUMMARY, CONCLUSION AND POLICY IMPLICATION
5.1. Summary
5.2. Conclusion
6.3. Policy Implication
Objectives and Research Themes
This study examines the impact of foreign aid on public expenditure in Ethiopia for the period 1981–2012, utilizing a Multivariate Vector Auto Regression analysis to determine whether aid is fungible within various economic sectors.
- Analysis of the relationship between foreign aid and government spending components.
- Investigation into sectoral fungibility of foreign aid in developmental and non-developmental sectors.
- Assessment of the macroeconomic performance and fiscal policy shifts in Ethiopia.
- Evaluation of short-run and long-run impacts of aid on specific government expenditures.
- Formulation of policy recommendations to enhance the monitoring and efficiency of aid utilization.
Excerpt from the Book
1.1. Background
Foreign aid is a postwar World War II phenomenon (McGillivray, Feeny, Hermes, & Lensink, 2005). The origins of modern aid can be traced to the colonial period. Specifically, the British Colonial Development Act of 1929 provided for grants and loans to colonial governments to meet their infrastructural needs as well as enabling them to pay for imports. However, such aid was firmly subordinate to the economic and political interests of the “metropole”. The emphasis only began to change with the shift in international political and financial leadership from the old colonial powers, both at the global level and at the local level allowing aid to acquire a more purposeful development rationale (UNCTAD, 2006).
Foreign aid is the international transfer of public funds in the form of loans or grants either directly from one government to another (bilateral assistance) or indirectly through the vehicle of a multilateral assistance agency such as the World Bank (WB) (Abuzeid, 2009).
Foreign aid should not include all transfers of capital to developing countries, particularly the capital flows of private foreign investors that represent normal commercial transactions, prompted by commercial considerations of profits and rates of return, and therefore should not be viewed as foreign aid (Bakare, 2011; Todaro & Smith, 2012; Bwire, Morrissey, & Lloyda, 2013).
Summary of Chapters
1. INTRODUCTION: Provides the historical background of foreign aid, defines the problem of aid fungibility, and outlines the objectives, research questions, and scope of the study.
2. METHODOLOGY OF THE STUDY: Details the econometric models and estimation techniques, including unit root tests and Vector Error Correction Models (VECM), used to analyze the time-series data.
3. ANALYSIS OF ECONOMIC PERFORMANCE IN ETHIOPIA: Examines macroeconomic trends, sectoral growth, and the structural composition of government expenditure and official development assistance (ODA) in Ethiopia.
4. EMPIRICAL RESULTS AND INTERPRETATION: Presents the results of unit-root tests, cointegration analysis, and the short-run and long-run regression estimations regarding the impact of aid on spending.
5. SUMMARY, CONCLUSION AND POLICY IMPLICATION: Summarizes the key empirical findings, draws conclusions on aid fungibility, and offers policy recommendations for improving the effectiveness of aid.
Keywords
foreign aid, economic growth, fungibility, public expenditure, sector, Ethiopia, ODA, macroeconomic performance, government spending, cointegration, VECM, time series analysis, fiscal policy, development economics, structural adjustment.
Frequently Asked Questions
What is the core focus of this research?
The research investigates how foreign aid influences government expenditure in Ethiopia and whether this aid is "fungible," meaning it is diverted from its intended development targets toward other government spending areas.
What are the primary themes covered?
The paper covers the macroeconomic development of Ethiopia, the historical trends of government expenditure, the sectoral distribution of foreign aid, and the econometric modeling of aid impacts.
What is the main objective of this study?
The main objective is to empirically analyze the short-run and long-run impacts of foreign aid on sectoral government spending in Ethiopia to detect the existence of aid fungibility.
Which scientific methods are applied in this work?
The study employs Multivariate Vector Auto Regression (VAR) analysis, unit root tests, cointegration tests, and Vector Error Correction Models (VECM) to analyze time-series data from 1981 to 2012.
What is addressed in the main part of the work?
The main part analyzes the economic performance of Ethiopia, classifies government expenditure, details the econometric methodology, and presents the empirical results and interpretations of the data models.
Which keywords characterize the work?
Key terms include foreign aid, economic growth, fungibility, public expenditure, sector, Ethiopia, and macroeconomic performance.
Does the study find that foreign aid is fungible in Ethiopia?
The study concludes that foreign aid is indeed fungible in several sectors, with results indicating that sectoral aid often has a negative effect on its intended sector spending, except in the case of agricultural aid.
How does the author recommend improving aid utilization?
The author recommends that the Ministry of Finance and Economic Development establish a sound financial management and monitoring system to ensure aid is purpose-oriented and effectively utilized for development.
- Arbeit zitieren
- Fikadu Goshu (Autor:in), 2014, The Impact of Foreign Aid on Government Expenditure in Ethiopia, München, GRIN Verlag, https://www.grin.com/document/286054
