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Foreign sectoral aid fungibility, growth and poverty reduction

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  • Jan Pettersson

    (Stockholm University, Stockholm, Sweden)

Abstract

If development assistance targeted at specific sectors is not used as intended, aid is said to be fungible. While fungible aid is in general perceived as being less effective than aid used as specified, this has not been formally tested. This paper attempts at filling this gap and hence, tries to assess to what extent fungibility is something donors should be concerned about. Country-specific estimates of fungibility are obtained for 57 aid-recipient countries, suggesting that sectoral aid is indeed fungible on average. These estimates are then incorporated into an empirical model of aid and economic growth. I do not find any evidence of non-fungible sectoral aid working better than fungible aid. Then, I focus on sectoral aid to 'pro-poor' government expenditure sectors to assess the effect on infant mortality. While the results indicate that non-fungible aid is welfare improving, this is not robust to small changes in the specification. My results suggest that the concept of fungibility may be too narrow and should possibly not be the most central concern when aid is debated or given. Copyright © 2007 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of International Development.

Volume (Year): 19 (2007)
Issue (Month): 8 ()
Pages: 1074-1098

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Handle: RePEc:wly:jintdv:v:19:y:2007:i:8:p:1074-1098

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Web page: http://www3.interscience.wiley.com/journal/5102/home

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References

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  1. Amartya Sen, 1995. "Mortality as an Indicator of Economic Success and Failure," Innocenti Lectures innlec95/2, UNICEF Innocenti Research Centre.
  2. Mark McGillivray & Oliver Morrissey, 2000. "Aid fungibility in Assessing Aid: red herring or true concern?," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 413-428.
  3. Ritva Reinikka & Jakob Svensson, 2004. "Local Capture: Evidence From a Central Government Transfer Program in Uganda," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 678-704, May.
  4. Swaroop, Vinaya & Jha, Shikha & Sunil Rajkumar, Andrew, 2000. "Fiscal effects of foreign aid in a federal system of governance: The case of India," Journal of Public Economics, Elsevier, vol. 77(3), pages 307-330, September.
  5. Filmer, Deon & Pritchett, Lant, 1999. "The impact of public spending on health: does money matter?," Social Science & Medicine, Elsevier, vol. 49(10), pages 1309-1323, November.
  6. Pack, Howard & Pack, Janet Rothenberg, 1990. "Is Foreign Aid Fungible? The Case of Indonesia," Economic Journal, Royal Economic Society, vol. 100(399), pages 188-94, March.
  7. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  8. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
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Citations

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Cited by:
  1. Pettersson, Jan & Johansson, Lars M, 2009. "Tied Aid, Trade-Facilitating Aid or Trade-Diverting Aid?," Working Paper Series 2009:5, Uppsala University, Department of Economics.
  2. Lukasz Marc, 2014. "The Causal Links between Aid and Government Expenditures," Tinbergen Institute Discussion Papers 14-012/V, Tinbergen Institute.
  3. Calì, Massimiliano & te Velde, Dirk Willem, 2011. "Does Aid for Trade Really Improve Trade Performance?," World Development, Elsevier, vol. 39(5), pages 725-740, May.
  4. Fabrizio Carmignani & Grace Lordan & KK Tang, 2010. "Does aid for HIV respond to media pressure?," Discussion Papers Series 414, School of Economics, University of Queensland, Australia.
  5. Axel Dreher & Peter Nunnenkamp & Rainer Thiele, 2008. "Does Aid for Education Educate Children? Evidence from Panel Data," World Bank Economic Review, World Bank Group, vol. 22(2), pages 291-314, April.
  6. Morrissey, Oliver, 2012. "Aid and Government Fiscal Behaviour: What Does the Evidence Say?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  7. Mark McGillivray, 2010. "Aid Allocation and Fragile States," Working Papers id:3062, eSocialSciences.
  8. Michael A. Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting chickens when they hatch: The short-term effect of aid on growth," International Finance 0407010, EconWPA.
  9. Feeny, Simon, 2007. "Foreign Aid and Fiscal Governance in Melanesia," World Development, Elsevier, vol. 35(3), pages 439-453, March.
  10. Lukasz Marc, 2012. "New Evidence on Fungibility at the Aggregate Level," Tinbergen Institute Discussion Papers 12-083/2, Tinbergen Institute.
  11. Minoiu, Camelia & Reddy, Sanjay G., 2010. "Development aid and economic growth: A positive long-run relation," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(1), pages 27-39, February.
  12. Jan Pettersson, 2007. "Child Mortality: Is Aid Fungibility in Pro-Poor Expenditure Sectors Decisive?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(4), pages 673-693, December.
  13. McGillivray, Mark, 2006. "Aid Allocation and Fragile States," Working Paper Series DP2006/01, World Institute for Development Economic Research (UNU-WIDER).
  14. Anwar, Mumtaz & Rashid, Muhammad Khalid, 2011. "Effectiveness of foreign aid in the light of millennium development goal on the education sector: a case study of Pakistan," MPRA Paper 37141, University Library of Munich, Germany.
  15. Lukasz Marc, 2012. "New Evidence on Fungibility at the Aggregate Level," Tinbergen Institute Discussion Papers 12-083/2, Tinbergen Institute.
  16. Wagstaff, Adam, 2008. "Fungibility and the impact of development assistance: evidence from Vietnam's health sector," Policy Research Working Paper Series 4800, The World Bank.

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