Aid, rents and the politics of the budget process

Abstract

This paper analyses the impact of political institutions and budgetary procedures on budget governance in aid- and resource-dependent countries. The notion of budget governance refers to the quality of budget outcomes, such as the governments’ ability to produce sustainable public finances over time, make efficient use of government spending, and represent the preferences of citizens. While the paper discusses some of the challenges of measuring budget governance in aid and resource dependent countries, the empirical analysis focuses on one aspect of budget governance: the extent to which countries can produce sustainable fiscal balances over time. For this purpose, we have produced a new dataset of 47 low and lower middle income countries whose economies depend on aid or natural resource inflows between 1995 and 2006. The analysis builds on indicators of party competition and democracy, good governance, budgetary processes and institutions, and aid and resource dependency. Preliminary findings suggest that greater executive power is positively associated with improved fiscal performance in resource dependent countries, but this is also associated with lower levels of party competition and democracy. Conversely, greater levels of aid dependency are inversely associated with both executive power and fiscal performance. Keywords: budget process; fiscal outcomes; political institutions; aid effectiveness; resource dependency; low income countries.