ABSTRACT
This chapter discusses the role of foreign aid as a source of public sector revenue. The early experiences of foreign aid originated from the financial support that the US provided for the reconstruction of post-Second World War Europe. Foreign aid provides some advantages for the donor country, such as the possibility to establish more collaborative ties with the recipient country, which may take the form of various concessions for economic or geo-political purposes. Dependency on foreign aid may hamper the development of local administrative and financial management capacity. It may also stimulate rent-seeking behaviour in various forms where direct or indirect benefits from aid funds is preferred to undertaking entrepreneurial activities or devising alternative schemes for public sector revenue generation. The possibility for governments of recipient countries to raise revenue from foreign aid poses the question of whether such a form of revenue is advantageous.
