New Evidence on Fungibility at the Aggregate Level
AbstractThis study examines the fungibility of foreign aid and makes three contributions to the existing literature. Firstly, fungibility of aid at the aggregate level is reexamined on a richer panel dataset of 91 developing countries for 1980-2009, taking into account endogeneity of aid and autocorrelation in residuals. Results indicate that aid is strongly fungible: around 80 % is substituting rather than increasing government spending in the short run. There is also substantial heterogeneity in the sample, with aid being more fungible for countries with a low share of aid in GDP. Secondly, aid is disaggregated into bilateral and multilateral components. Despite substantial differences between both components, there are only very small indications that multilateral aid is less fungible than bilateral aid and estimates are volatile when aid is instrumented. Thirdly, this study attempts to distinguish between off- and on-budget aid at the aggregate level using the value of technical cooperation as a proxy for off-budget aid. While on-budget aid is strongly fungible, off-budget aid is non-fungible. In the long run, around 50 % of aid increases government expenditures, although results are not stable. High levels of fungibility (except for off-budget aid) suggest that resources spent on earmarking may be wasted and donors should rethink the way aid is distributed.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 12-083/2.
Date of creation: 14 Aug 2012
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foreign aid; fungibility; government expenditures;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F35 - International Economics - - International Finance - - - Foreign Aid
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
- O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-08-23 (All new papers)
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