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What does aid to Africa finance?

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  • Devarajan, Shantayanan
  • Rajkumar, Andrew Sunil
  • Swaroop, Vinaya
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    Abstract

    If a donor gives aid for a project that the recipient government would have undertaken anyway, the aid finances expenditures other than the intended project. The notion that aid in this sense may be"fungible"has recently received empirical support. The authors look at why aid isfungible or nonfungible, and the extent to which it is fungible in Sub-Saharan Africa. Their results suggest that aid may be partially fungible in Africa and suggests some reasons. They find relatively little evidence that aid leads to greater tax relief in Africa. Every dollar of aid leads to a 90-cent increase in government spending. The implications of this result are by no means clear. If the marginal cost of taxation is exceptionally high - which it might be in African countries - using aid for tax relief may be the best use of foreign resources. Aid's effect on the composition of current and capital spending? They increase equally. Even if all aid were intended to finance capital spending, the reallocation to current spending might not necessarily be harmful. The fungible of loans to specific sectors generally mirrors patterns found in a broader sample of countries. Aid to energy, transport, and communication sectors increase public spending in those sectors somewhat but by no means one for one. (By contrast, in the worldwide sample, aid to transport and communications was almost fully nonfungible). Aid to the education sector - which had no discernible effect on education spending in the global sample - had an almost one-for-one effect on education spending in Africa. Even in these partially fungible sectors, governments spend more out of aid resources than they do out of their own resources, at the margin. Governments do not spend all sectoral aid in that sector - nor do they treat such aid as merely budgetary support. The more donors to a country, the more likely aids is to be fungible. If the number of donors represents a proxy for monitoring costs, it is not surprising that most aid is partly fungible.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2092.

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    Date of creation: 31 Mar 1999
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    Handle: RePEc:wbk:wbrwps:2092

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    Related research

    Keywords: Economic Adjustment and Lending; Development Economics&Aid Effectiveness; Gender and Development; Payment Systems&Infrastructure; School Health; School Health; Public Sector Economics&Finance; Economic Adjustment and Lending; Urban Economics; Development Economics&Aid Effectiveness;

    References

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    1. 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.
    2. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
    3. Peter Boone, 1995. "Politics and the Effectiveness of Foreign Aid," CEP Discussion Papers dp0272, Centre for Economic Performance, LSE.
    4. Cashel-Cordo, Peter & Craig, Steven G., 1990. "The public sector impact of international resource transfers," Journal of Development Economics, Elsevier, vol. 32(1), pages 17-42, January.
    5. Peter Boone, 1995. "Politics and the Effectiveness of Foreign Aid," NBER Working Papers 5308, National Bureau of Economic Research, Inc.
    6. Helleiner, G. K., 1992. "The IMF, the World Bank and Africa's adjustment and external debt problems: An unofficial view," World Development, Elsevier, vol. 20(6), pages 779-792, June.
    7. Devarajan, Shantayanan & Squire, Lyn & Suthiwart-Narueput, Sethaput, 1997. "Beyond Rate of Return: Reorienting Project Appraisal," World Bank Research Observer, World Bank Group, vol. 12(1), pages 35-46, February.
    8. Khilji, Nasir M. & Zampelli, Ernest M., 1994. "The fungibility of U.S. military and non-military assistance and the impacts on expenditures of major aid recipients," Journal of Development Economics, Elsevier, vol. 43(2), pages 345-362, April.
    9. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
    10. Pack, Howard & Pack, Janet Rothenberg, 1993. "Foreign Aid and the Question of Fungibility," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 258-65, May.
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    Cited by:
    1. Alice Sindzingre, 2003. "Liberalisation, Multilateral Institutions and Public Policies : The Issue of Sovereignty In Sub-Saharan Africa," Mondes en développement, De Boeck Université, vol. 123(3), pages 23-56.
    2. J. de Ree & E. Nillesen, 2006. "Aiding violence or peace? : the impact of foreign aid on the risk of civil conflict in Sub-Saharan Africa," Working Papers 06-09, Utrecht School of Economics.
    3. Ratha, Dilip, 2001. "Demand for World Bank lending," Policy Research Working Paper Series 2652, The World Bank.
    4. David Stasavage, 2003. "Democracy and education spending: has Africa's move to multiparty elections made a difference to policy?," LSE Research Online Documents on Economics 6645, London School of Economics and Political Science, LSE Library.
    5. Silvia Marchesi & Alessandro Missale, 2012. "Did high debts distort loans and grants allocation to IDA countries?," Working Papers 226, University of Milano-Bicocca, Department of Economics, revised Aug 2012.
    6. Silvia Marchesi & Alessandro Missale, 2004. "What does motivate lending and aid to the HIPCs?," Development Working Papers 189, Centro Studi Luca d\'Agliano, University of Milano.
    7. 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.
    8. Elliot Berg, 2003. "Augmenter l'efficacité de l'aide : une critique de quelques points de vue actuels," Revue d’économie du développement, De Boeck Université, vol. 17(4), pages 11-42.
    9. David Stasavage, 2004. "Electoral Competition and Public Spending on Education: Evidence from African Countries," Public Economics 0409006, EconWPA.

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