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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.

Suggested Citation

  • Jan Pettersson, 2007. "Foreign sectoral aid fungibility, growth and poverty reduction," Journal of International Development, John Wiley & Sons, Ltd., vol. 19(8), pages 1074-1098.
  • Handle: RePEc:wly:jintdv:v:19:y:2007:i:8:p:1074-1098
    DOI: 10.1002/jid.1378
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    File URL: http://hdl.handle.net/10.1002/jid.1378
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    References listed on IDEAS

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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 188-194, March.
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    5. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
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    Cited by:

    1. Wagstaff, Adam, 2011. "Fungibility and the impact of development assistance: Evidence from Vietnam's health sector," Journal of Development Economics, Elsevier, vol. 94(1), pages 62-73, January.
    2. 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.
    3. 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.
    4. repec:bla:rdevec:v:21:y:2017:i:3:p:627-663 is not listed on IDEAS
    5. Lukasz Marc, 2014. "The Causal Links between Aid and Government Expenditures," Tinbergen Institute Discussion Papers 14-012/V, Tinbergen Institute.
    6. 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.
    7. Michael Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting Chickens When They Hatch: The Short-term Effect of Aid on Growth," Working Papers 44, Center for Global Development.
    8. Feeny, Simon, 2007. "Foreign Aid and Fiscal Governance in Melanesia," World Development, Elsevier, vol. 35(3), pages 439-453, March.
    9. Ojeaga, Paul, 2012. "Does Foreign Aid Promote Trade? Evidence from Some Selected African Countries," MPRA Paper 55580, University Library of Munich, Germany.
    10. Ojeaga, Paul, 2012. "Foreign Aid and African Exporters: Help or Harm?," MPRA Paper 55564, University Library of Munich, Germany.
    11. Martínez Álvarez, Melisa & Borghi, Josephine & Acharya, Arnab & Vassall, Anna, 2016. "Is Development Assistance for Health fungible? Findings from a mixed methods case study in Tanzania," Social Science & Medicine, Elsevier, vol. 159(C), pages 161-169.
    12. Morrissey, Oliver, 2015. "Aid and Government Fiscal Behavior: Assessing Recent Evidence," World Development, Elsevier, vol. 69(C), pages 98-105.
    13. Łukasz Marć, 2017. "The Impact of Aid on Total Government Expenditures: New Evidence on Fungibility," Review of Development Economics, Wiley Blackwell, vol. 21(3), pages 627-663, August.
    14. Atsuko Tanaka, "undated". "Notes on Foreign Aid Selectivity Based on Human Capital," Working Papers 2015-23, Department of Economics, University of Calgary, revised 27 Sep 2015.
    15. Jan Pettersson, 2007. "Child Mortality: Is Aid Fungibility in Pro-Poor Expenditure Sectors Decisive?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(4), pages 673-693, December.
    16. Alessandra Pelloni & Thanasis Stengos & Ilaria Tedesco, 2018. "Aid to agriculture, trade and take-off," Working Paper series 18-04, Rimini Centre for Economic Analysis.
    17. Lukasz Marc, 2012. "New Evidence on Fungibility at the Aggregate Level," Tinbergen Institute Discussion Papers 12-083/2, Tinbergen Institute.
    18. 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.
    19. repec:unu:wpaper:wp2012-01 is not listed on IDEAS
    20. McGillivray, Mark, 2006. "Aid Allocation and Fragile States," WIDER Working Paper Series DP2006/01, World Institute for Development Economic Research (UNU-WIDER).
    21. Lars M. Johansson & Jan Pettersson, 2008. "Tied Aid, Trade-Facilitating Aid or Trade-Diverting Aid?," DEGIT Conference Papers c013_008, DEGIT, Dynamics, Economic Growth, and International Trade.
    22. 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.
    23. Jean-Louis Combes & Rasmané Ouedraogo & Sampawende J Tapsoba, 2016. "What Does Aid Do to Fiscal Policy? New Evidence," IMF Working Papers 16/112, International Monetary Fund.

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