Tax competition, official development assistance and macroeconomic performance in Sub-Saharan Africa

Despite the enormous flows of foreign direct investment and aid in direction to Africa, sub-Saharan Africa still struggles to improve macroeconomic outcomes. This thesis aims to analyze tax competition and foreign aid as contributing elements of macroeconomic performance in sub-Saharan Africa. The study employs the gravity model, static and dynamic panel techniques to data spanning from 2005 to 2019 for analysis. The findings not only reveal evidence of horizontal tax competition and vertical tax competition but also show that these competitions have negative effects on macroeconomic performance. Likewise, foreign aid exerts negative effects on macroeconomic performance in the region. This may be explained by several reasons, including the nature of tax competition models similar to the monopolist competition market, and the inefficiency of aid to reduce poverty. Hence, we recommend policymakers to further efforts in fighting against corruption, fraud, tax evasion, and profit shifting by improving transparency and exchange of information; fighting against embezzlement, taking much more severe sanctions against officials who are involved in, and improving governance. Furthermore, a better accountability system should be developed. That system should be transparent and include all forms of aid from all international agencies. That could guarantee that aid is strictly used for development purposes only. Besides, to ensure a better impact of aid, governments should channel aid inflows to key sectors such as education, health, and infrastructure. In short, aid should be tailored to poverty reduction.