Heterogeneous Aid Effects on Tax Revenues: Accounting for Government Stability in WAEMU Countries
Résumé
Using a panel threshold model, we examine the heterogeneous effects of foreign aid
on tax revenue due to government stability in the West African Economic and
Monetary Union countries over the period 1986–2010. Panel Smooth Threshold
Regressions indicate the existence of strong threshold effects in the aid–tax relationship
depending on the level of government stability. They also indicate that the effect
of aid on tax revenue is gradual and varies across countries according to the level of
government stability. We find that aid directly reduces tax revenues but for higher
levels of government stability it enhances tax performance. We provide estimates
of country time-varying coefficients of aid effect. We find on average a positive
impact of aid. However, the size of this impact is very small, suggesting that there
is still much to do at the institutional level to improve the effectiveness of aid for
tax performance in WAEMU countries.