Journal Article

Is Foreign Aid Fungible? Evidence from the Education and Health Sectors

Nicolas Van de Sijpe

in The World Bank Economic Review

Volume 27, issue 2, pages 320-356
Published in print June 2013 | ISSN: 0258-6770
Published online October 2012 | e-ISSN: 1564-698X | DOI: http://dx.doi.org/10.1093/wber/lhs023
Is Foreign Aid Fungible? Evidence from the Education and Health Sectors

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  • Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
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This paper adopts a new approach to the issue of foreign aid fungibility. Unlike most existing empirical studies, I employ panel data that contain information on the specific purposes for which aid is given. This approach enables me to link aid that is provided for education and health purposes to recipient public spending in these sectors. In addition, I distinguish between aid flows that are recorded on a recipient's budget and those that are not recorded, and I illustrate how the previous failure to differentiate between on- and off-budget aid produces 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. I show that the appropriate treatment of off-budget aid leads to lower fungibility estimates than those reported in many previous studies. Specifically, I find that 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.

Keywords: E62; F35; H50; O23

Journal Article.  14925 words.  Illustrated.

Subjects: Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook ; International Finance ; National Government Expenditures and Related Policies ; Development Planning and Policy

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