Aid and Tax Revenue: Signs of a Positive Effect Since the 1980s

This paper addresses the effect of aid loans and grants on tax effort using data for 82 developing countries over 1970-2005. We find no robust evidence for a negative effect of aid (grants or loans) on the tax/GDP ratio, other than a contemporaneous correlation, but find some evidence that the effect of grants on tax revenue is positive (if significant) since the mid 1980s and that grants tend to increase tax revenue over the medium term. For poor aid recipients, grants are to be preferred to loans because they create no debt and have no adverse fiscal effects.