A close look at foreign aid fungibility and government spending: Evidence from Sub Saharan Africa

Abstract

Foreign aid in different times and at different places has been highly effective, totally ineffective, and everything in between. Primarily, aid is intended to boost public spending in social and economic sector of the recipient government. However, foreign aid, in some cases used for 'non-productive' or 'wasteful' forms of recurrent expenditure such as enlarging the army or paying off the debts of parastatal organizations, increases of salaries of government officials. Hence, aid has a fungible portion in which it will be difficult to determine its impact on government spending. In this study, nine countries panel data were used for the annual observation of 1980-2003 to investigate the effect of foreign aid on aggregate and sectoral public spending.

At aggregate level, foreign aid is found to be fungible for both total foreign aid and concessional loans. The study also found that a good part of the non fungible portion of aid is going to government consumption. In sectoral analysis, aid is fully fungible in educational sector and partially fungible in agriculture. While in health sector, aid is fully non fungible. Still, fungibility may not be inherently bad for development but results in the study reveal that aid has no significant effect on economic growth. Perhaps, this is due to the fact that the non fungible portion of foreign aid finances government consumption over public investments.

Date of Award	2007
Original language	American English
Awarding Institution	Eastern Illinois University
Supervisor	Mukti P Upadhyay (Supervisor)