Foreign Aid and Fiscal Governance in Melanesia

SummaryRecent research suggests that foreign aid is effective at spurring economic growth in recipient countries but its effectiveness is likely to depend upon a number of factors. Arguably, the most important factor determining aid effectiveness is how recipient governments mediate foreign aid inflows. This paper investigates this issue for the Melanesian countries of Fiji, Papua New Guinea, the Solomon Islands, and Vanuatu for the period 1989–2002. Results suggest that foreign aid has led to increases in developmental expenditures and to falls in tax revenues and borrowing. Results also suggest a very different response to aid grants versus loans.