Is Foreign Aid Fungible? Evidence from the Education and Health Sectors
This paper adopts a new approach to the issue of foreign aid fungibility. In contrast to most existing empirical studies, panel data are employed that contain information on the specific purposes for which aid is given. This allows linking aid that is provided for education and health purposes to recipient public spending in these sectors. In addition, aid flows that are recorded on a recipient's budget are distinguished from those that are not recorded on budget, and the previous failure to differentiate between on- and off-budget aid is shown to produce biased estimates of fungibility. Sector program aid is the measure of on-budget aid, whereas technical cooperation serves as a proxy for off-budget aid. The appropriate treatment of off-budget aid leads to lower fungibility estimates than those reported in many previous studies. Specifically, in both sectors and across a range of specifications, technical cooperation, which is the largest component of total education and health aid, leads to, at most, a small displacement of recipient public expenditures.
Summary: | This paper adopts a new approach to the
issue of foreign aid fungibility. In contrast to most
existing empirical studies, panel data are employed that
contain information on the specific purposes for which aid
is given. This allows linking aid that is provided for
education and health purposes to recipient public spending
in these sectors. In addition, aid flows that are recorded
on a recipient's budget are distinguished from those
that are not recorded on budget, and the previous failure to
differentiate between on- and off-budget aid is shown to
produce biased estimates of fungibility. Sector program aid
is the measure of on-budget aid, whereas technical
cooperation serves as a proxy for off-budget aid. The
appropriate treatment of off-budget aid leads to lower
fungibility estimates than those reported in many previous
studies. Specifically, in both sectors and across a range of
specifications, technical cooperation, which is the largest
component of total education and health aid, leads to, at
most, a small displacement of recipient public expenditures. |
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