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What does aid to Africa finance?

Author

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

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.

Suggested Citation

  • Devarajan, Shantayanan & Rajkumar, Andrew Sunil & Swaroop, Vinaya, 1999. "What does aid to Africa finance?," Policy Research Working Paper Series 2092, The World Bank.
    • Handle: RePEc:wbk:wbrwps:2092
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    References listed on IDEAS

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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. Norman Myers & Jennifer Kent, 2001. "Food and hunger in Sub-Saharan Africa," Environment Systems and Decisions, Springer, vol. 21(1), pages 41-69, March.
    3. Pedrosa-Garcia, Jose Antonio, 2017. "Trends and Features of Research on Foreign Aid: A Literature Review," MPRA Paper 82134, University Library of Munich, Germany.
    4. de Ree, Joppe & Nillesen, Eleonora, 2009. "Aiding violence or peace? The impact of foreign aid on the risk of civil conflict in sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 88(2), pages 301-313, March.
    5. 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. 11(4), pages 11-42.
    6. Ratha, Dilip, 2005. "Demand for World Bank lending," Economic Systems, Elsevier, vol. 29(4), pages 408-421, December.
    7. Alessandro Missale & Silvia Marchesi, 2004. "What does motivate lending and aid to the HIPCs?," International Finance 0411006, University Library of Munich, Germany.
    8. Yener Altunbas & John Thornton, 2011. "Does Paying Taxes Improve the Quality of Governance? Cross‐Country Evidence," Poverty & Public Policy, John Wiley & Sons, vol. 3(3), pages 1-17, September.
    9. Marchesi, Silvia & Missale, Alessandro, 2013. "Did High Debts Distort Loan and Grant Allocation to IDA Countries?," World Development, Elsevier, vol. 44(C), pages 44-62.
    10. 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.
    11. Mohammed Elhaj Mustafa Ali & Manal Mahagoub Elshakh & Ebaidalla Mahjoub Ebaidalla, 2018. "Does Foreign Aid Promote Economic Growth in Sudan? Evidence from ARDL Bounds Testing Analysis," Working Papers 1251, Economic Research Forum, revised 13 Nov 2018.
    12. Elsabé Loots, 2006. "Aid And Development In Africa: The Debate, The Challenges And The Way Forward," South African Journal of Economics, Economic Society of South Africa, vol. 74(3), pages 363-381, September.
    13. Liang, Li-Lin & Mirelman, Andrew J., 2014. "Why do some countries spend more for health? An assessment of sociopolitical determinants and international aid for government health expenditures," Social Science & Medicine, Elsevier, vol. 114(C), pages 161-168.
    14. David Stasavage, 2004. "Electoral Competition and Public Spending on Education: Evidence from African Countries," Public Economics 0409006, University Library of Munich, Germany.
    15. Stasavage, David, 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.
    16. Dykstra, Sarah & Glassman, Amanda & Kenny, Charles & Sandefur, Justin, 2019. "Regression discontinuity analysis of Gavi's impact on vaccination rates," Journal of Development Economics, Elsevier, vol. 140(C), pages 12-25.

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