Foreign policies have negative effect on the growth.

Foreign
aid, debt, tax revenue and government spending are the most important factors
in economic theory. They are very much related with each other as foreign aid
and debt are the vital source of government financing for many countries
especially for the developing ones and tax revenue as a source of financing for
any country around the world is unquestioned
(Taha and Loganathan, 2008). Basically the developing
countries have lack of sufficient resources to meet up the development needs as
well as for the successful conducting of fiscal policy thus they need money as
a form of aid and loans. For this reasons developing countries always try to
follow those policies which can attract foreign capital as aid and loans to
enhance investment The inflow of these resources is works as an additional
investment for accelerating economic growth (Chaudhury and Anwar, 2000;
Ouattara, 2006; Herzer and Morrissey, 2013; Combes et al., 2016.).

 

3.1.1
Foreign Aid

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Foreign
aid acts as an income transfer (Hatemi-J and Irandoust, 2005) and generally it
is assumed that it produces economic growth. But the truth is it may or may not
produce growth. Because economic growth will certainly enhance when there will
be proper amount of money, proper sectoral use and obviously good fiscal, monetary, and trade policies.
Good policies enhance economic growth whereas poor policies have negative
effect on the growth.  So the
effectiveness of aid and debt increases with proper policy (Burnside and
Dollar, 2000).         

 

3.1.2
Debt

In
this recent decade the problem of indebtedness become very common to the
developing countries. Basically after 1980s, the rate of debt accumulation and
increased debt servicing appeared as major factors affecting the growth
rate.  Though contributing in economic
growth of South Asia it made the economic situation of the countries
vulnerable. It is also evident in Sub Saharan African countries where the debt
inflows with a view to growth but make them weak under the indebt condition.
Debt increase the resource availability at that time but influence government
spending negatively in the time of repayment with high interest rate as well as
donor countries conditionality (Siddqui and
Malik, 2001; McGillivray and Ouattara,
2005).

 

3.1.3
Tax Revenue

Tax
revenue is the fundamental source for government financing which ensures that
the government could make the country more productive and competitive globally (Taha and Loganathan,
2008). It is not a new source of financing as taxation is an age long process
(Ojong et. al., 2016). Basically, tax revenue is one kind of income that is
earned through government’s tax collection. According to Omotoso (2001), tax is
a compulsory imposition on the income and other things like taxable properties
of the people defined by the government. Public authorities have particular
rules and regulations to impose tax on any object and they make the benchmark
on specific amount and category. This fund of government used with a view to
fulfilling many of states economic and social goals (Okpe, 2000). Rapid growth
of gross national product, decreasing unemployment level, stabilization of
prices, promotion of export orientation and import substitution,
infrastructural development, enhancing public services, increasing equity in
society, favorable balance of payments position, promotion of a free market
economy etc. goals are the aim of government for decreasing the dependency of
the country (Onoh, 2013) as well as fulfilling the dream of economically strong
country. Good governance system helps to increase the amount of tax revenue as
well as for sustainable economic growth.

3.1.4
Government Spending

Around
the world considering all income levels of the countries government spending
emerged as an important policy tool (Shonchoy, 2010; Shen et al., 2015).
Compare to other countries, the developing countries have specific
characteristics and requirements to outline the macroeconomic effects of fiscal
policy. External financing like foreign aid and debt have impact on government
spending. Basically these kind of financing increases the resources
availability and reduces the crowding-out effects of government spending in the
economy. It is observed that compare to the long lasting domestic financing
external financing have less negative effect like it appreciate the real
exchange rate. It is also found out that, between foreign aid and debt though
it is slightly, aid creates higher output multiplier effect than debt in the
long run (Shen et al., 2015).

 

3.2
Impact of Foreign Aid on Government Spending

Being
the vital sources of financing in many developing countries to finance their
development needs foreign aid also stimulates economic growth by
supplementing  to foreign exchange
constraints, technical cooperation, managerial skill (Martins, 2012; Herzer and
Morrissey, 2013; Tagem, 2017). The allocation of aid matters depending on the
size of the aid to conduct fiscal behavior of the recipient country. Foreign
aid in developing countries basically channeled directly through the government
spending thus they clearly influence the government fiscal behavior (Tagem,
2017). Generally, aid is directly given to the government and it is very
essential to assess how government use it. Whether it is used in recurrent
expenditure or development expenditure that is an important aspect for fiscal
behavior (Martins, 2009).

 

On-budget
aid as well as by giving off-budget aid that means technical cooperation donors
helps the recipient countries. It is founded that, a big share of technical
cooperation takes up education and health aid to developing countries and the
most vital part of this aspect is it does not even leave the donor country. So,
the positive impact of aid is not bounded with a certain time frame but exists
for a long time in the recipient countries (Sijpe, 2012; Tagem, 2017).

 

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