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

  • Nicolas Van de Sijpe

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 healt purposes to recipient public spending in these sectors.� In addition, I attempt to distinguish between aid flows taht 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 fungibiity for this type of aid.� In static fixed effects models sector programme aid shows an almsot one-for-one correlation with recipient public expenditure, again suggesting low fungiblity, but this effect becomes imprecise and volatile in dynamic models estimated with system GMM.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number CSAE WPS/2010-38.

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Date of creation: 01 Nov 2010
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Handle: RePEc:oxf:wpaper:csae-wps/2010-38
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