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Is foreign aid fungible? Evidence from the education and health sectors

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  • Nicolas Van de Sijpe

Abstract

This paper takes a fresh look at the issue of foreign aid fungibility. Unlike the bulk of existing empirical studies, I employ panel data that contain information on the specific purpose for which aid is given. This allows me to link aid given for education and health purposes to recipient public spending in these sectors. In addition, I attempt to distinguish between aid flows that are recorded on the recipient’s budget and those that are off-budget, and illustrate how a failure to differentiate between on- and off-budget aid produces biased estimates of fungibility. Sector programme aid is the measure of on-budget aid, while technical cooperation serves as a proxy for off-budget aid. In both sectors, across a range of specifications, technical cooperation leads to at most a small displacement of recipient public expenditure, implying limited fungibility for this type of aid. In static fixed effects models sector programme aid shows an almost one-for-one correlation with recipient public expenditure, again suggesting low fungibility, but this effect becomes imprecise and volatile in dynamic models estimated with system GMM.

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Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2010-38.

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Date of creation: 2010
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Handle: RePEc:csa:wpaper:2010-38

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Keywords: foreign aid; fungibility; public education expenditure; public health expenditure;

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Cited by:
  1. Jonathan R. W. Temple & Nicolas Van de Sijpe, 2014. "Foreign Aid and Domestic Absorption," CSAE Working Paper Series, Centre for the Study of African Economies, University of Oxford 2014-01, Centre for the Study of African Economies, University of Oxford.
  2. Aaron Batten, 2011. "Aid and Oil in Papua New Guinea: Implications for the Financing of Service Delivery," Development Policy Centre Discussion Papers, Development Policy Centre, Crawford School of Public Policy, The Australian National University 1104, Development Policy Centre, Crawford School of Public Policy, The Australian National University.
  3. Rohen D'Aiglepierre & Laurent Wagner, 2011. "Aid and Universal Primary Education," Working Papers, HAL halshs-00552241, HAL.
  4. Nicolas Van de Sijpe, 2013. "The Fungibility of Health Aid Reconsidered," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 49(12), pages 1746-1754, December.
  5. Morrissey, Oliver, 2012. "Aid and Government Fiscal Behaviour: What Does the Evidence Say?," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  6. Axel Dreher & Silvia Marchesi, 2013. "Information Transmission and Ownership Consolidation in Aid Programs," CESifo Working Paper Series, CESifo Group Munich 4437, CESifo Group Munich.
  7. Patrick GUILLAUMONT & Laurent WAGNER, 2014. "Aid effectiveness for poverty reduction: lessons from cross-country analyses, with a special focus on vulnerable countries," Working Papers, FERDI P96, FERDI.
  8. Aaron Batten, 2009. "How much foreign aid given to PNG has stayed within the sectors to which it has been allocated and how much has it allowed the PNG Government to free up its own resources for other spending priorities," International and Development Economics Working Papers, International and Development Economics idec09-05, International and Development Economics.
  9. Zenthöfer, A.F., 2013. "Essays on development economics," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-5906745, Tilburg University.

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