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

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

Measuring and Explaining Government Inefficiency in Developing Countries

We show the relevance of government expenditure inefficiency using the Barro (1990) model. We estimate government inefficiency for 52 developing countries using a data envelopment analysis. The estimated inefficiencies are subsequently used in a general to specific approach in order to identify their determinants. We find the government expenditure inefficiency is primarily determined by governance and political variables, and structural country variables. Economic policy determinants apparently count less. Government inefficiency of the Sub Saharan countries in the sample is substantially higher. --Government inefficiency,data envelopment analysis,economic development

Measuring and Explaining Government Inefficiency in Developing Countries

We show the relevance of government expenditure inefficiency using the Barro (1990) model. We estimate government inefficiency for 52 developing countries using a data envelopment analysis. The estimated inefficiencies are subsequently used in a general to specific approach in order to identify their determinants. We find the government expenditure inefficiency is primarily determined by governance and political variables, and structural country variables. Economic policy determinants apparently count less. Government inefficiency of the Sub Saharan countries in the sample is substantially higher

Foreign Aid and Domestic Absorption

This paper introduces a new ‘supply-push’ instrument for foreign aid, to be used together with an instrumental variable estimator that filters out unobserved common factors. We use this instrument to study the effects of aid on macroeconomic ratios, and especially the ratios of consumption, investment, imports and exports to GDP. We cannot reject the hypothesis that aid is fully absorbed rather than used to build foreign reserves or exiting as capital flight, nor do we find evidence of Dutch Disease effects. Aid leads to higher consumption, while the evidence that it promotes investment is less robust

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

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

Foreign aid and government behaviour

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The fungibility of health aid reconsidered

This paper draws further attention to the importance of taking into account off-budget aid when estimating the degree of foreign aid fungibility. It does so by re-evaluating the results of a recent, influential paper which concluded that health aid is fully fungible in the long run. Allowing for the presence of off-budget aid indicates that the degree of fungibility of health aid is much more uncertain than at first blush appears. Under plausible assumptions about the role of off-budget aid, the conclusion of full fungibility is overturned and at most only a limited degree of fungibility is found

Democracy, Growth, Heterogeneity, and Robustness

I motivate and empirically investigate differential long-run growth effects of demo-cratisation across countries. While the existing literature recognises the potential for such heterogeneity, empirical implementations to date unanimously assume a common democracy-growth nexus across countries. Adopting novel methods for causal inference in policy evaluation I relax the homogeneity assumption. My results confirm that in the long-run democracy has a positive and significant average effect on per capita income, albeit at 10% this is at best half the magnitude of recent estimates in the literature. Guided by existing theories, additional analysis probes the patterns of the heterogeneous 'democratic dividend' across countries. Adopting two rule-based robustness exercises I furthermore demonstrate that, in contrast to recent contributions to the literature, my approach yields empirical findings that are robust to substantial changes to the sample

Measuring and explaining government efficiency in developing countries

Governments in developing countries play an important role in the growth process, most notably through their budgetary policies. This potentially beneficial role is, however, hindered by government expenditure inefficiency. This is illustrated in a basic model of public spending and economic growth. Government efficiency is estimated for 52 developing countries using data envelopment analysis and subsequently employed in a general to specific approach in order to identify its determinants. We find government expenditure efficiency is primarily determined by structural country variables and governance indicators. Economic policy determinants apparently count less. The Asian countries and low income European countries in the sample have a significantly higher and lower efficiency, respectively.JEL Codes: H21, H50, O23,