THE UNIVERSITY OF NAIROBI

SCHOOL SCHOOL OF ECONOMICS

DEPARTMENT

ECONOMICS

COURSE NAME:

ADVANCED MACROECONOMIC THEORY I

COURSE CODE

XET503

ANALYTICAL PAPER ON IMPACT OF FOREIGN AID ON GOVERNMENT PUBLIC SPENDING IN KENYA

PRESENTED BY: MARWANGA JACKON OBARE

X50/6 0!/"0##

TO

: DR$ SETH GOR

#5TH NOVEMBER% "0##

ABSTRACT

Foreign aid represents an important source of finance in most countries in Africa countries, where it supplements low savings, narrow export earnings and thin tax bases. In recent years the donor community has become more stringent about fiscal discipline and good policies, which has led to freezing of donor funds to governments that do not conform with aid conditionalities. The Kenyan government has experienced such aid cuts in the past and this paper uses a welfare utility maximization function to explore how government expenditure responds to fluctuations in aid flows. The empirical results indicate that the flow of foreign aid does influence government spending patterns. There is a positive and statistically significant relationship between the share of government expenditure in gross domestic product !"#$ and the share of net disbursement of overseas development assistance %"A$. The study found out that foreign aid has a positve impact on the growth of the economies when there ae sound macroeconomic policies, its absence also creates economic stagnation of most African economies.

Table of Contents
1.0 Background .................................................................................................................... 5 1.4 Research issue................................................................................................................. 7 2.0 Literature review.............................................................................................................. 8 2.2 Analytical model.............................................................................................................. 11 2.3 Empirical data................................................................................................................. 12 2.4 Conclusion and policy implication.. .15 References .16 Appendices .18

ABBREVIATIONS DAC GDP IMF ODA OECD OLS "evelopment Assistance &ommittee !ross "omestic #roduct International 'onetary Fund %verseas "evelopment Assistance %rganization for (conomic &ooperation and "evelopment %rdinary )east *+uare

#$0 B&'()*+,-. Foreign aid is the international transfer of capital, goods, or services from a country or international organization for the benefit of the recipient country or its population. Aid can be economic, military, or emergency humanitarian e.g., aid given following natural disasters$. Foreign aid is an important source of finance to a ma,ority of developing countries since it supports the budgetary process and therefore enhances the development of these countries, Atemn-eng .. T. /001$. The role of foreign aid in the growth process of developing countries has been a topic of intense debate. Foreign aid is an important theme given its implications on poverty reduction in developing countries. #revious empirical studies on foreign aid and economic growth generate mixed results. For example, #apane- 2345$, "owling and 6iemenz 237/$, !upta and Islam 2375$, 6ansen and Tarp /000$, 8urnside and "ollar /000$, !omanee, et al. /005$, "algaard et al. /009$, and Karras /001$, find evidence for positive impact of foreign aid on growth: 8urnside and "ollar /000$ and 8rautigam and Knac- /009$ find evidence for negative impact of foreign aid and growth, while 'osley 2370$, 'osley, et al. 2374$, 8oone 2331$, and .ensen and #aldam /005$ find evidence to suggest that aid has no impact on growth. It should be noted that, although 8urnside and "ollar /000$ concluded that foreign aid has positive effects, this conclusion applies only to economies in which it is combined with good fiscal, monetary, and trade policies, (-anaya-e. (. '. /007$ The main role of foreign aid in stimulating economic growth is to supplement domestic sources of finance such as savings, thus increasing the amount of investment and capital stoc-. As 'orrissey /002$ points out, there are a number of mechanisms through which aid can contribute to economic growth, including a$ aid increases investment, in physical and human capital: b$ aid increases the capacity to import capital goods or technology: c$ aid does not have indirect effects that reduce investment or savings rates: and aid is associated with technology transfer that increases the productivity of capital and promotes endogenous technical change. According to 'c!illivray, et al. /001$, four main alternative views on the effectiveness of aid have been suggested, namely, a$ aid has decreasing returns, b$ aid effectiveness is influenced by external and climatic conditions, c$ aid effectiveness is influenced by political conditions, and d$ aid effectiveness depends on institutional +uality. It is interesting to note that in recent years there has been a significant increase in aid flows to developing countries although other types of flows such as foreign direct investment and other private flows are declining. For example, according to the %rganization for (conomic &orporation and "evelopment %(&", /003b$, foreign direct investment and other private flows are on the decline, and remittances are expected to drop significantly in /003. 8udgets of many developing countries were hit hard by the rises in food and oil prices in the last two years. 'any
5

countries are not in a strong fiscal position to address the current financial crisis. According to the %(&" /003b$, in /007, total net official development assistance %"A$ from members of the %(&";s "evelopment Assistance &ommittee "A&$ rose by 20./< in real terms to =*>223.7 billion and is expected to rise to =*>250 billion by /020. Africa is the largest recipient of foreign aid see Table 2$. For example, net bilateral %"A from "A& donors to Africa in /007 totaled =*>/1 billion, of which =*>//.? billion went to sub@*aharan Africa. (xcluding volatile debt relief grants, bilateral aid to Africa and sub@*aharan Africa rose by 20.1< and 20< respectively in real terms (-anaya-e. (. '. /007$ #$#$ KENYA/S RECORD ON ECONOMIC GROWTH Kenya gained independence in 2315 and rapidly became the most economically successful and politically stable country in (ast Africa Aorld 8an-, /005$. 6owever, during the last two decades, Kenya;s economic growth performance has been disappointing and as a result poverty has increased. There are several reasons for the underperformanceBpoor governance, slow and incomplete economic reforms, low investment, poor public services delivery, underinvestment in infrastructure, corruption, and a wea- ,udiciary I'F, /005$. In the past few years, the rising incidence of 6ICDAI"*, the deteriorating security situation, and political uncertainty have also detracted from growth. #$" E'+-+01' G*+234 #5 06"000 8etween 2340 and /000, Kenyan real gross domestic product !"#$ growth was 9.1 percent per year and real per capita income grew by an average of 2.5 percent annually. 6owever, these numbers mas- the uneven pace of economic expansion in Kenya over this period. #$3 #5 07: R&81. E'+-+01' G*+234 1- A99 S:'3+*7 The Kenyan economy grew rapidly in the period immediately following independence, and this growth persisted into the 2340s, when growth averaged 4.7 percent per year. The agricultural sector grew at roughly 1 percent per year, while the industrial and service sectors expanded by an average of 22 and 7 percent, respectively, each year. As a result, per capita incomes also grew rapidly at an annual rate of 9.5 percent Aorld 8an-, /009b$. This growth was in large part driven by rapid expansion in the agricultural sector, activist fiscal policies, and the import substitution industrialization I*I$ strategy pursued by the !overnment of Kenya !overnment$. "uring this period, the !overnment pursued a monetary policy that -ept inflation low and attempted to reduce its reliance on foreign aid. Fiscal policy was cautious and serious efforts were made to -eep budget deficits at sustainable levels I-iara et al., /009$. The import substitution strategy led to industrial diversification and growth by protecting domestic firms against international competition E#(", /009$. The
6

main instruments used to pursue the import substitution strategy were an overvalued exchange rate, import tariffs and +uantitative restrictions, foreign exchange controls, and import licensing I-iara et al., /009$. Toward the end of the 2340s, Kenya;s economic performance began to deteriorate as a result of several factors. These included the collapse of the (ast African &ommunity in 2344: the erosion of fiscal prudence, partly due to the windfall from the boom in coffee prices: the second oil shoc- in 2344: and the anti@export bias of the import substitution strategy I-iara et al., /009$. 'ore generally, the inefficiencies resulting from the distortions introduced by import substitution policies increasingly outweighed the gains in growth from the stimulation of domestic production. According to (-anaya-e. (. '. /007$, the impact of foreign aid has been the sub,ect of very extensive investigation. The -ey +uestion that both the donor and the recipient countries +uestion is whether aid has any effect on developing countries; growth and their level of poverty. This issue has been approached from various perspectives: nevertheless, a single and definite answer still does not exist. Therefore, it is important to note that not only factors such as the amount and type of financial aid impact the effectiveness of available funds but also the appropriate use of these funds by the receiving country plays a vital role.

#$; RESEARCH ISSUE According to F,eru,. /005$,Kenya, li-e other developing countries, faces huge external debts and is crying out for debt relief. 'ost countries argue that given their current poverty levels, the repayment and servicing costs of external debts are too high and unmanageable. These claims have led to the reconsideration of issues related to the effectiveness of aid in developing countries. (arlier the aid@ savings debate focused on the two@gap model developed by &henery and *trout 2311$ that set foreign aid as an engine of growth. &ritics of this model have argued that foreign aid substitutes domestic resources through declined savings, reduced government tax revenue and increased government consumption. Aith the renewal of the debate, the +uestion remains as to whether external assistance complements or substitutes available domestic resources. In Kenya, the answer to this +uestion is complicated by the fact that aid flow has not been consistent. !iven Kenya;s high dependence on foreign aid, coupled with ma,or aid freeze episodes, there is need to analyse the impact of aid flows on the budget process by establishing the lin- between aid and public expenditure. A stronger association of aid with higher government consumption rather than with public investment would suggest both a Gflypaper effectH and fungibility. This may imply that aid recipient governments view foreign aid li-e any other source of revenue and conse+uently use it for increased consumption, tax reductions or reduced
7

fiscal deficits future tax obligations. A -ey discussion would be what proportion of increased spending resulting from increased donor funds goes to either recurrent or development expenditures. The answer can shed some light on the implications of an aid freeze to recipient countries, and highlight how the Kenyan government responds to resultant budgetary deficits .This study will focus on the impact of foreign aid on government public spending in Kenya.

"$0 LITERATURE REVIEW

"$# THEORETICAL FRAMEWORK There has been concern over the role of and effectiveness of forein aid flow in promoting growth and development in developing countries. !iven that, most of the foreign aid to Kenya is channeled through public sector, its not possible therefore to analyse the effectiveness of these flows in Kenya without studying the impact of such flows on public spending )agat, 2339$ The development theory upon which the issue of forein aid drwas its existence dates bac- to the 2350s 'arshall plan and the emergency of growth models in the late 2390s. Adam *mith and "avid Eicardo advocated for specialization of labor, foreign trade, capital accummulation and increased productivity as being the fundamental determinants of growth *chumpeter, 2393$. This analytical paper borrows heavily from 6arod "omar model which extended the Keynesian emphasis on investment to include capacity increasing effects, the sencond was the emphasis by economists on physical capital and the view that shortages of capital largely account for the poverty of the developing countries. The role of and impact of foreign aid followed logically from this analysis )agat 2339$ 6eller 234?$ developed across@sectional times series mode to analyse the behavior of the public sector in all African countries to foreign flow. *pecifically hewas concerned whether foreign capital inflow has resulted in increased public or private consumption or increased investment re+uired to boost the economy. The model focuses on the interractions among several categories of public expenditure and the relationship between domestic and foreign revenues. It further distinguishes alternative types of aid and their sources. 6eller assumed that decision ma-ers maximise their utility sub,ect to some constraints li-e alternative use of public resources, distribution of output between private and public alternative modes of domestic financing and alternative types of external assistance such as grants and loans.

The relationship between foreign aid and economic growth has drawn great attention for years, but the empirical results are mixed. There is now a large literature on the relationship between aid and growth. For a recent comprehensive survey of the theoretical and empirical literature on foreign aid and growth see 6udson /009$ and 'c!illivray, et al. /001$.

A study conducted by 'c!illivray /00?$ demonstrates how aid to African countries not only increases growth but also reduces poverty. Furthermore, the author points out the important fact that continuously growing poverty, mainly in sub@*aharan African countries, compromises the '"!s 'illennium "evelopment !oals$ main target of dropping the percentage of people living in extreme poverty to half the 2330 level by /02?. 6is research econometrically analyzes empirical, time series data for 2317@ 2333. The paper concludes that the policy regimes of each country, such as inflation and trade openness, influence the amounts of aid received. %uattara /001$ analyzes the effects of aid flows on -ey fiscal aggregates in *enegal. This paper utilizes data over the period of 2340 I /000 and primarily focuses on the interaction between aid and debt. The author determined three main outcomes of his study. First, that a large portion of aid flows, approximately 92<, are used to finance *enegal;s debt and /0< of the government;s resources are devoted to debt servicing. *econd, that the impact of aid flows on domestic expenditures is statistically insignificant, and third that debt servicing has a significant negative effect on domestic expenditure. As a result, his paper suggests that debt reduction could become a more successful policy tool than obtaining additional loans. Addison, 'avrotas and 'c!illivray /00?$ examine trends in official aid to Africa over the period 2310 to /00/. The authors largely emphasize the tremendous decrease in aid over the last decade which will have an impact on Africans living in poverty and the African economy as a whole. As a result of the shortfall in aid, the '"!s will be much harder if not impossible to be achieved. This paper concludes that aid in fact does promote growth and reduces poverty. Furthermore, it also positively impacts public sector aggregates, contributing to higher public spending and to lower domestic borrowing. Fevertheless, it is apparent that the '!"s cannot be achieved with development aid alone, but other innovative sources of development finance need to be explored as well. A study conducted by Atemn-eng T. .. /001$ in &ameroon, found out that % foreign aid and domestic resources have contributed in financing government expenditures particularly in the domain of education, agriculture, communication, and development activities. *econdly, aid flow has not affected the tax or revenue efforts of the government nor retarded government revenue growth. Thus, foreign aid appears to be complementary with the budget process in &ameroon (-anaya-e. (. '. /007$ in his study of J;The effect of foreign aid on economic growth in developing countries;; found out that, foreign aid has a mixed impact on economic growth of developing countries. Foreign aid appears to have an adverse effect on economic growth in developing countries, and also noted that, foreign aid appears to have a positive effect on economic growth in developing countries especially African countries where you find the highest levels of foreign aid compared to other continents
!

A study by Karras /001$ investigates the correlation between foreign aid and growth in per capita !"# using annual data from the 2310 to 2334 for a sample of 42 aid@receiving developing countries. This paper concludes that the effect of foreign aid on economic growth is positive, permanent, and statistically significant. 'ore specifically, a permanent increase in foreign aid by >/0 per person results in a permanent increase in the growth rate of real !"# per capita by 0.21 percent. These results are obtained without considering the effects of policies. !omanee, !irma, and 'orrissay /00?$ address directly the mechanisms via which aid impacts growth. =sing a sample of /? *ub@*aharan African countries over the period 2340 to .ournal of International 8usiness and &ultural *tudies 2334, the authors determined that foreign aid has a significant positive effect on economic growth. Furthermore, they identified investment as the most significant transmission mechanism. In his research, Eam /009$ loo-s at the issue of poverty and economic growth from the view of recipient country;s policies as being the -ey role in the effectiveness of foreign aid. Fevertheless, in his paper the author disagrees with the widely@ac-nowledged view that redirecting aid toward countries with better policies leads to higher economic growth and poverty reduction rates. As a result, based on his research the author concludes that evidence is lac-ing to support the leading belief that directing foreign assistance to countries with good Jpolicy; will increase the impact on growth or poverty reduction in developing countries F,eru, /005$ did a study on the fiscal response by the government to changes in aid flow. 6e recommended further research on the brea-down of the sources of revenue and expenditure use by the public sector at sectoral levelBe.g., transport and communications networ-s, education, health, agriculture, defence, etc.Bwould shed more light on the understanding of how policy ma-ers in the aid recipient country ma-e their public sector decisions. 'wau 2379$ attempted to analyse the impact of foreign aid inflows on the Kenya economy. 6e examined the effects of foreign capital inflow on investment, foreign trade and hence the balance of payment, money supply and economic growth in Kenya. 6e used %)* method of estimation. 6e found out that, foreign capital inflow have some stimulatory effects on domestic investment, with small effects on economic growth. )agat 2339$ did a study on foreign aid impact on public expenditure and its fungability in Kenya for a period between 2349@233/. 6e sought to analyse whether foreign aid assistance provides for development expenditure is fungible, whether it reduces tax efforts tothe government and the impact of total foreign aid and the macroeconomic reforms of public expenditure.
1"

"$" ANALYTICAL FRAMEWORK/MODEL This section discusses the methodology used for analysing the government;s response to aid flow fluctuations resulting from aid freezes. The approach used to determine the effects of foreign aid on government expenditure follows 6eller;s 234?$ utility model, which assumes that the recipient country intends to maximize the social welfare of its own citizens in the face of budgetary constraints and uses aid flows from overseas as an instrument in pursuit of the ob,ective. Cariants of this model include 'c!uire 2347$: #ac- and #ac- 2330, 2335$: and Feyzioglu et al. 2337$. Assume that the government;s ob,ective is to maximize the welfare utility function sub,ect to the prevailing budget constraint. To achieve the ob,ective, policy ma-ers formulate targeted levels of expenditure based on pro,ected economic growth and social development ob,ectives. For simplicity, assume that the government purchases some minimum +uantities of two types of public goodsBnon@ development recurrent$ !E$ and development !d$Bfor its citizens. *upposing the welfare utility function is multiplicative and is specified asK 'aximize U (GR ,Gd) = GR L Gd 1- ............................................. i$ where the </7 are the respective elasticities. 'aximizing the function i$ gives rise to the standard optimal solutions. The government can finance the provision of goods and services through domestic andDor external resources. (xternal resources comprise both programme aid balance of payments and budgetary supports$ and pro,ect aid identified aid$. Ahereas programme aid is fully fungible, other forms of identified aid could be rendered fungible if recipient countries switch spending priorities once aid has been disbursed "evara,an et al., 2337$. *etting the portion of identified aid that is rendered fungible as =% then the budget constraint faced by the government isK Gt=G0+DR+PA+M(PJA) =G0+ P1GR+P2Gd................................................... ii$ where G3 is the total government spending on development activities: G0, autonomous government spending, G.. is the actual government expenditure on development: and GR is the actual government spending on recurrent expenditures. DR is total domestic resources from both taxation and domestic borrowing. PA is the programme aid: PJA is the pro,ect aid other %"A disbursements$ and = is the portion of aid that is fungible. 'aximizing (+uation i$ with respect to the resource constraint (+uation ii$, if the solutions exist and are interior maximums, generates a system of linear expenditure e+uations that enables us to specify our estimable e+uations, lin-ing foreign aid and government expenditures as followsK
11
L

Gt = !0 + N1DRt + N2 PAt +[N2 M +1- M] PJAt + Ot iii$ Ot this represents the error term All the variables will be expressed as a ratio of real !"#. V&*1&>9: D:7'*1831+- &-. D&3& S+,*':7 In order to test the implications of these models, a panel of aggregate data on foreign aidDgrants on Kenya for a period of 20 years /000@/020$ was obtained from &entral ban- of Kenya. The sample contains aggregate data for government expenditure and revenues for the study period. Ae can only understand about the impact of aid flow once we factor in aid freeze as to be able tu understand to government spending once aid is frozen. The data used in the empirical analysis is given in Appendix Table 2. "$3 EMPIRICAL DATA Foreign aid and public government spending

E .945a

E *+uare .//9

Ad,usted E *+uare .254 C+:??1'1:-37&

*td. (rror of the (stimate 5.257

*tandardized =nstandardized &oefficients 'odel 2 &onstant$ #ro,ect grants and program grants for the period /000@/020 8 9.57/ .97/ *td. (rror /.050 ./33 .945 &oefficients 8eta

3?.0< &onfidence Interval for 8 'odel 2 &onstant$ #ro,ect grants and program grants for the period /000@/020 a. "ependent CariableK Total government expenditure Eecurrent and development$ !overnment taxes and non taxes revenue and public government spending t /.2?3 2.120 *ig. .0?3 .29/ )ower 8ound @./03 @.23? =pper 8ound 7.345 2.2?3

12

M+.:9 S,00&*@> &hange *tatistics 'odel 2 E *+uare &hange .150 F &hange 2?.52/ df2 2 df/ 3 *ig. F &hange .009 "urbin@Aatson /./13

b. "ependent CariableK Total government expenditure Eecurrent and development$ AF%CAb 'odel 2 Eegression Eesidual Total *um of *+uares 42.325 9/./13 229.27/ df 2 3 20 'ean *+uare 42.325 9.134 F 2?.52/ *ig. .009a

a. #redictorsK &onstant$, !overnment revenue collection from /000@/020

M+.:9 S,00&*@> &hange *tatistics 'odel 2 E *+uare &hange .150 F &hange 2?.52/ df2 2 df/ 3 *ig. F &hange .009 "urbin@Aatson /./13

b. "ependent CariableK Total government expenditure Eecurrent and development$ AF%CAb 'odel 2 Eegression Eesidual *um of *+uares 42.325 9/./13 df 2 3 'ean *+uare 42.325 9.134 F 2?.52/ *ig. .009a

b. "ependent CariableK Total government expenditure Eecurrent and development$ C+:??1'1:-37& *tandardized =nstandardized &oefficients 'odel 2 &onstant$ !overnment revenue collection from /000@/020 a. "ependent CariableK Total government expenditure Eecurrent and development$ C+:??1'1:-37& 3?.0< &onfidence Interval for 8 'odel 2 &onstant$ !overnment revenue collection from /000@/020 a. "ependent CariableK Total government expenditure Eecurrent and development$ t 2./57 5.325 *ig. ./94 .009 )ower 8ound @2.?10 .557 =pper 8ound ?.555 2./19 8 2.774 .702 *td. (rror 2.?/9 ./0? .439 &oefficients 8eta

14

)et;s first discuss the estimated results that are presented in Table /. The conventional variables behave very much the same way as the model predicts, and the estimated coefficients are statistically significant. The R2 values range from a low of 0.//9 to a high of 0.439. These values, though relatively low, are acceptable for a panel series data for study and are comparable to those obtained in other studies. The coefficients of the first two variables in model iii$ are expected to be positive and the results are consistent. Foreign aid variable has a positive sign in all the cases, indicating that foreign aid appears to have an a positive effect on government spending in Kenya. This coefficient is statistically significant for all cases at 3?< confidence level. The s+uare term is also found to be statistically significant.

"$; CONCLUSIONS AND POLICY IMPLICATIONS This paper analyzes the effects of foreign aid on the government public spending in Kenya. These effects are analyzed using panel data series for foreign aid grants$, government revenue and expenditure. %ne of the contributions of this paper is its input to the existing empirical literature on the effects of foreign aid on economic growth of developing countries sampling out Kenya as a case study. The ma,or point emerging from this wor- is that foreign aid has a positive impact on economic growth of developing countries Kenya included. The variables are positive indicating that foreign aid has a positive effect on public spending. Aid supplements government revenue and thus included in the budgetary process. This is not surprising given that Africa is the largest recipient of foreign aid than any other region. Thus, the findings of this study are, for the most part, consistent with findings of previous studies on the impact of foreign aid on public government spending.

15

REFERENCES Atemn-eng .. T. /001$. Foreign Aid and the #ublic *ector 8udget #rocess in a "eveloping &ountryK the case of &ameroon. #aper presented at the First International &onference on the *tate of Affairs of Africa I&*AA$, to be held from %ctober /1 @ /7 th, /001 at the 8oston Puincy 'arriot 6otel in Puincy, 'A, to address the crippling development crisis in Africa, &onference organized by the International Institute for .ustice and "evelopment*' II."$, Inc. (-anaya-e. (. '. /007$.The effect of foreign aid on economic growth in developing countries. .ournal of International 8usiness and &ultural *tudies. #age /@22 httpKDDu-.oneworld.netDguidesDaid &henery. 6. and A.'. *trout. 2311. GForeign assistance and economic growthH. American Ec n mic Re!ie", )CI *eptember$, Col ?1K143Q455. &assen, E. et al.2339. D e# Aid $ r%& &laredon #ress, %xford =niversity #ress. 6eller, *.#. 234?. GA model of public fiscal behvior in developing countriesK Aid, investment and taxationH. American Ec n mic Re!ie", vol. 1?, no. 5 .une$K 9/3I9?. Feyzioglu, T., C. *waroop and 'in Rhu.2337. GA panel data analysis of the fungibility of foreign aidH. $ rld 'an% Ec n mic Re!ie", vol. 1?K 9/3I9?. #ac-, 6. and ..E. #ac-. 2330. GIs foreign aid fungibleS The case of IndonesiaH. Ec n mic J (rnal, vol. 200 no. 5K 277I39. #ac-, 6. and ..E. #ac-. 2335. GForeign aid and the Puestion of fungibilityH. Re!ie" ) Ec n mic# and *tati#tic#, vol. 4?, /K /?7I1?. #apane-, !. 234/. GThe effect of aid and other resource )agat 2339$, Foreign aid impact on public expenditure and its fungability in Kenya 'wau 2379$, The impact of foreign aid inflows on the Kenya economy I-iara, 'oses '., and )ydia K. Fdirangu. /005. G#rospects of Kenya;s &lothing (xports =nder A!%A after /009.H KI##EA "iscussion #aper /9. FairobiK Kenya Institute for #ublic #olicy Eesearch and Analysis. !omanee, K. and %. 'orrissey, /00/. G(valuating aid effectiveness against a poverty reduction criterionH, "(*! &onference #aper, Fottingham, April /00/. Kahn *unday A. and Amia !. /009. GColatility of resource inflows and "omestic Investment in &ameroonH, Final Eeport presented at the African (conomic Eesearch &onsortium, A(E&, Fairobi .une$ F,eru, .ames. /009. GThe impact of foreign aid on public expenditureK The case of KenyaH. African (conomic Eesearch &onsortium, Eesearch paper no. 25? 'arch$, Tabi A. .. /005. G(valuating the incidence of indirect tax reforms in &ameroonH. African .ournal of (conomic #olicy, Col. 20, Fo. / "ecember$. 8urnside, &., and ". "ollar /000$, GAid, policies and growth,H American (conomic Eeview 30, 794@17.
16

!upta, K. 234?$, GForeign capital inflows, dependency burden and savings rates in developing countriesK A simultaneous e+uation model,H Ky-los /7, 5?7@549. )evy, C. 2377$, GAid and growth in the *ub@*aharan AfricaK The recent experience,H (uropean (conomic Eeview 5/, 2444@243?. 8arro, E. .. and T. *ala@i@'artin /009$, (conomic !rowth /nd ed$. 'IT #ressK &ambridge, 'A. Karras, !. /001$, UForeign aid and long@run economic growthK empirical evidence for a panel of developing countries,U J (rnal ) +nternati nal De!el ,ment , vol.27, no.4, p.2?I/7. %uattara, 8. /001$, UForeign aid and government fiscal behavior in developing countriesK #anel data evidence,U Ec n mic - delin., vol./5, p.?01@?29. Eam, E. /009$, UEecipient country;s Jpolicies; and the effect of foreign aid on economic growth in developing countriesK additional evidence,U J (rnal ) +nternati nal De!el ,ment , vol.21, no./, p./02I /22.

A88:-.1':7
17

T&>9: # F17'&9 @:&*7 P*+)*&00: )*&-37AK74% M1991+-7B P*+C:'3 )*&-37 AK74% M1991+-7B
/000 /002 /00/ /005 /009 /00? /001 /004 /007 /003 /020 T+3&9 #"6%!!5 /0?7 /5534 4934 24111 /1/37 ??19 /27?? 0 //??9 0 0 /9,727 41,2/5 54,71/ 49,/10 49,534 70,770 73,?73 72,071 22?,322 20/,729 2/0,4/0 ! !%;60

T+3&9 ?+*:1)&1.AK74% M1991+-7B

/1,741 33?/0 9?,5?3 32,3/1 200,13? 71,999 220,240 43,7/0 257,91? 20/,729 2/0,4/0 #%00"%!05

T+3&9 *:',**:-3 AK74% M1991+-7B

?30,744 2,/99,990 2,/32,97? 2,90/,525 2,930,424 2,142,330 2,339,45/ /,224,927 /,933,494 /,71?,4?4 5,557,725 "0%50!%"!5

T+3&9 .:E:9+80:-3 K74% M1991+-7B

43,?9? 217,?/? 297,392 /24,305 /0/,597 /11,332 519,4?5 931,047 134,9/7 792,712 2,/04,215 ;%65#%536

T+3&9 :D8:-.13,*:AK 74% M1991+-7B

:D8:-.13,*: :D8:-.13,*:A

140,9// 2,92/,31? 2,990,9/1 2,1/0,/21 2,135,019 2,357,372 /,510,347 /,123,241 5,234,24? 5,17?,?/5 9,?90,55/ "5%# 5%"5!

S+,*': C:-3*&9 >&-( +? K:-@&% J,9@ "0## T&>9: " Fiscal year
/000 /002 /00/ /005 /009 /00? /001 /004 /007 /003

Total revenue Tax and Fon tax$Ksh, 'illions

12?,940 2,/04,127 2,/23,9// 2,559,151 2,?1/,??5 2,433,131 /,001,5/7 /,5?1,3?4 /,491,074 5,205,1/1

18

/020 Total

5,?24,924

21#46!#81"

S+,*': C:-3*&9 >&-( +? K:-@&% J,9@ "0## Results of analysed data

Correlations Total government expenditure(Rec urrent and development) Pearson Correlation Total government expenditure(Recurrent and development) Governemt revenue collection from 2000-2010 #ig. (1-tailed) Total government expenditure(Recurrent and development) Governemt revenue collection from 2000-2010 $ Total government expenditure(Recurrent and development) Governemt revenue collection from 2000-2010 11 11 11 11 .002 . . .002 . !" 1.000 1.000 Governemt revenue collection from 2000-2010 . !"

1!

Model Summaryb

'd(usted R %odel 1 R . !"a R #&uare .+,0 #&uare .-.!

#td. )rror of t*e )stimate 2.1+

a. Predictors/ (Constant)0 Governemt revenue collection from 20002010 1. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

Model Summaryb C*ange #tatistics R #&uare %odel 1 C*ange .+,0 4 C*ange 1-.,12 df1 1 df2 ! #ig. 4 C*ange .00" 2ur1in-5atson 2.2+!

1. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

2"

ANOVAb %odel 1 Regression Residual Total #um of #&uares 1.!1, "2.2+! 11".1.2 df 1 ! 10 %ean #&uare 1.!1, ".+! 4 1-.,12 #ig. .00"a

a. Predictors/ (Constant)0 Governemt revenue collection from 2000-2010 1. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

Coefficientsa #tandardi7ed 6nstandardi7ed Coefficients %odel 1 (Constant) Governemt revenue collection from 2000-2010 a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) 8 1... ..01 #td. )rror 1.-2" .20. !" Coefficients 8eta

21

Coefficientsa !-.09 Confidence :nterval for 8 %odel 1 (Constant) Governemt revenue collection from 2000-2010 a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) t 1.2,. ,.!1, #ig. .2" .00" ;o<er 8ound -1.-+0 .,,. 6pper 8ound -.,,, 1.2+"

Residuals Statisticsa %inimum Predicted 3alue Residual #td. Predicted 3alue #td. Residual 2.+! -1.+. -1. 10 -. ! %aximum 10.+! -.!11 1.2 + 2. 2 %ean .2 .000 .000 .000 #td. 2eviation 2.+.2 2.0-+ 1.000 .!"! $ 11 11 11 11

a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

22

Correlations Total government expenditure(Rec urrent and development) Pearson Correlation Total government expenditure(Recurrent and development) Total government revenue(Taxes collections and 'id) #ig. (1-tailed) Total government expenditure(Recurrent and development) Total government revenue(Taxes collections and 'id) $ Total government expenditure(Recurrent and development) Total government revenue(Taxes collections and 'id) 11 11 11 11 .002 . . .002 . !" 1.000 1.000 Total government revenue(Taxes collections and 'id) . !"

Model Summaryb

'd(usted R %odel 1 R . !"a R #&uare .+,0 #&uare .-.!

#td. )rror of t*e )stimate 2.1+

a. Predictors/ (Constant)0 Total government revenue(Taxes collections and 'id) 1. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

Model Summaryb C*ange #tatistics R #&uare %odel 1 C*ange .+,0 4 C*ange 1-.,12 df1 1 df2 ! #ig. 4 C*ange .00" 2ur1in-5atson 2.2+!

1. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

24

ANOVAb %odel 1 Regression Residual Total #um of #&uares 1.!1, "2.2+! 11".1.2 df 1 ! 10 %ean #&uare 1.!1, ".+! 4 1-.,12 #ig. .00"a

a. Predictors/ (Constant)0 Total government revenue(Taxes collections and 'id) 1. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

Coefficientsa #tandardi7ed 6nstandardi7ed Coefficients %odel 1 (Constant) Total government revenue(Taxes collections and 'id) a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) 8 1... ..01 #td. )rror 1.-2" .20. !" Coefficients 8eta

25

Coefficientsa !-.09 Confidence :nterval for 8 %odel 1 (Constant) Total government revenue(Taxes collections and 'id) a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) t 1.2,. ,.!1, #ig. .2" .00" ;o<er 8ound -1.-+0 .,,. 6pper 8ound -.,,, 1.2+"

Coefficientsa Correlations %odel 1 Total government revenue(Taxes collections and 'id) a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) >ero-order . !" Partial . !" Part . !" Collinearit= #tatistics Tolerance 1.000 3:4 1.000

26

Coefficient Correlationsa Total government revenue(Taxes collections and %odel 1 Correlations Total government revenue(Taxes collections and 'id) Covariances Total government revenue(Taxes collections and 'id) a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) .0"2 'id) 1.000

Residuals Statisticsa %inimum Predicted 3alue Residual #td. Predicted 3alue #td. Residual 2.+! -1.+. -1. 10 -. ! %aximum 10.+! -.!11 1.2 + 2. 2 %ean .2 .000 .000 .000 #td. 2eviation 2.+.2 2.0-+ 1.000 .!"! $ 11 11 11 11

a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

27

Correlations Total government expenditure(Rec urrent and development) Pearson Correlation Total government expenditure(Recurrent and development) Governemt revenue collection from 2000-2010 #ig. (1-tailed) Total government expenditure(Recurrent and development) Governemt revenue collection from 2000-2010 $ Total government expenditure(Recurrent and development) Governemt revenue collection from 2000-2010 11 11 11 11 .002 . . .002 . !" 1.000 1.000 Governemt revenue collection from 2000-2010 . !"

28

Model Summaryb

'd(usted R %odel 1 R . !"a R #&uare .+,0 #&uare .-.!

#td. )rror of t*e )stimate 2.1+

a. Predictors/ (Constant)0 Governemt revenue collection from 20002010 1. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

Model Summaryb C*ange #tatistics R #&uare %odel 1 C*ange .+,0 4 C*ange 1-.,12 df1 1 df2 ! #ig. 4 C*ange .00" 2ur1in-5atson 2.2+!

1. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

2!

ANOVAb %odel 1 Regression Residual Total #um of #&uares 1.!1, "2.2+! 11".1.2 df 1 ! 10 %ean #&uare 1.!1, ".+! 4 1-.,12 #ig. .00"a

a. Predictors/ (Constant)0 Governemt revenue collection from 2000-2010 1. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

Coefficientsa #tandardi7ed 6nstandardi7ed Coefficients %odel 1 (Constant) Governemt revenue collection from 2000-2010 a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) 8 1... ..01 #td. )rror 1.-2" .20. !" Coefficients 8eta

"

Coefficientsa !-.09 Confidence :nterval for 8 %odel 1 (Constant) Governemt revenue collection from 2000-2010 a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) t 1.2,. ,.!1, #ig. .2" .00" ;o<er 8ound -1.-+0 .,,. 6pper 8ound -.,,, 1.2+"

Coefficientsa Correlations %odel 1 Governemt revenue collection from 2000-2010 a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) >ero-order . !" Partial . !" Part . !" Collinearit= #tatistics Tolerance 1.000 3:4 1.000

Coefficient Correlationsa Governemt revenue collection from %odel 1 Correlations Governemt revenue collection from 2000-2010 Covariances Governemt revenue collection from 2000-2010 a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) .0"2 2000-2010 1.000

Residuals Statisticsa %inimum Predicted 3alue Residual #td. Predicted 3alue #td. Residual 2.+! -1.+. -1. 10 -. ! %aximum 10.+! -.!11 1.2 + 2. 2 %ean .2 .000 .000 .000 #td. 2eviation 2.+.2 2.0-+ 1.000 .!"! $ 11 11 11 11

a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) Model Summaryb

'd(usted R %odel 1 R ." ,a R #&uare .22" #&uare .1,

#td. )rror of t*e )stimate ,.1,.

a. Predictors/ (Constant)0 Pro(ect grants and program grants for t*e period 2000-2010 1. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

Model Summaryb C*ange #tatistics R #&uare %odel 1 C*ange .22" 4 C*ange 2.-!, df1 1 df2 ! #ig. 4 C*ange .1"2 2ur1in-5atson 1.,,.

1. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

ANOVAb %odel 1 Regression Residual Total #um of #&uares 2-.-,+ ...+"11".1.2 df 1 ! 10 %ean #&uare 2-.-,+ !.."! 4 2.-!, #ig. .1"2a

a. Predictors/ (Constant)0 Pro(ect grants and program grants for t*e period 2000-2010 1. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

Coefficientsa #tandardi7ed 6nstandardi7ed Coefficients %odel 1 (Constant) Pro(ect grants and program grants for t*e period 20002010 a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) 8 ".,.2 .".2 #td. )rror 2.0,0 .2!! ." , Coefficients 8eta

Coefficientsa !-.09 Confidence :nterval for 8 %odel 1 (Constant) Pro(ect grants and program grants for t*e period 20002010 a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) t 2.1-! 1.+10 #ig. .0-! .1"2 ;o<er 8ound -.20! -.1!6pper 8ound ..! , 1.1-!

Coefficientsa Correlations %odel 1 Pro(ect grants and program grants for t*e period 20002010 a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development) Residuals Statisticsa %inimum Predicted 3alue Residual #td. Predicted 3alue #td. Residual "..+ -+.2 , -1.-0. -1.!!! %aximum !.+. ".+!1 1.-0. 1."!%ean .2 .000 .000 .000 #td. 2eviation 1.-!. 2.! 1.000 .!"! $ 11 11 11 11 >ero-order ." , Partial ." , Part ." ,

a. 2ependent 3aria1le/ Total government expenditure(Recurrent and development)

Source: Own data analysis (2011)

5