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This paper assesses the impact of aid on tax revenue effort in the context of a fragile state, using the case of the Comoros. The paper estimates a fiscal response model within a cointegrated vector autoregressive framework with annual data for the Comoros’ post-independence period (1984-2017). The data suggest that grants and tax revenue in the Comoros had a significant negative relationship in the long run that remained stable throughout the post-independence period. Grants are a politically less costly source of finance, reducing the urgency of fragile states’ fiscal planners to expend their reduced political capital and administrative capacity on tax collection reforms. This effect may be amplified by the large one-off budget support grants, which represent a windfall of resources to the Comoros from bilateral partners, which often may have stopped tax reform initiatives. Although the paper does not suggest a decrease in aid to fragile states, as aid constitutes an essential support for these countries, being aware of this historically negative relationship is an important step to ensure that the government’s tax revenue efforts do not slow down following, for instance, large one-off unconditional budgetary support. In addition, the paper argues that prioritizing conditional aid, focusing on aid effectiveness, and engaging more resources for capacity-building tax revenue projects and technical assistance could increase the impact of donors’ interventions.

This paper studies the effect of market distortions in the manufacturing sector in Morocco. Recent microdata are used to calculate the extent of resource misallocation associated to these distortions and the potential total factor productivity (TFP) gain resulting from their removal. Market distortions in the manufacturing sector in Morocco are higher compared with developed countries and slightly more important compared with other developing countries, such as China and India. These distortions decreased between 2007 and 2013. Full liberalization would raise TFP by about 84 percent. If distortions are removed to the level of selected developed countries with better resource allocation, the increase in TFP would be of 56 percent. The paper also finds that industries that are more opened to competition (international and domestic) such as machinery and textiles industries present lower levels of market distortions compared with more protected industries with relatively little competition, such as the food industry. Besides, a higher level of TFP can be achieved if more resources are allocated to “young” and “small” firms. The main results of the paper are robust to an alternative estimation that uses a different methodological framework with a less extensive theoretical framework. The paper discusses policies to further limit the extent of product and factor market distortions in Morocco.