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Foreign Sectoral Aid Fungibility, Growth and Poverty Reduction
Stockholm University, Faculty of Social Sciences, Department of Economics.
2007 (English)In: Journal of International Development, ISSN 0954-1748, E-ISSN 1099-1328, Vol. 19, no 8, 1074-1098 p.Article in journal (Refereed) Published
Abstract [en]

If development assistance targeted at specific sectors is not used as intended, aid is said to be fungible. While fungible aid is in general perceived as being less effective than aid used as specified, this has not been formally tested. This paper attempts at filling this gap and hence, tries to assess to what extent fungibility is something donors should be concerned about. Country-specific estimates of fungibility are obtained for 57 aid-recipient countries, suggesting that sectoral aid is indeed fungible on average. These estimates are then incorporated into an empirical model of aid and economic growth. I do not find any evidence of non-fungible sectoral aid working better than fungible aid. Then, I focus on sectoral aid to ‘pro-poor’ government expenditure sectors to assess the effect on infant mortality. While the results indicate that non-fungible aid is welfare improving, this is not robust to small changes in the specification. My results suggest that the concept of fungibility may be too narrow and should possibly not be the most central concern when aid is debated or given.

Place, publisher, year, edition, pages
2007. Vol. 19, no 8, 1074-1098 p.
Keyword [en]
foreign aid, fungibility, growth, poverty, public expenditure
National Category
URN: urn:nbn:se:su:diva-23533DOI: 10.1002/jid.1378OAI: diva2:192522
Available from: 2005-01-10 Created: 2005-01-10 Last updated: 2011-03-01Bibliographically approved
In thesis
1. Three Empirical Studies on Development: Democracy, the Resource Curse and Aid
Open this publication in new window or tab >>Three Empirical Studies on Development: Democracy, the Resource Curse and Aid
2005 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This thesis presents three self-contained essays focusing on empirical questions in growth and development economics. Each article addresses specific questions on why countries perform differently. In particular, I analyse the effect of democracy on economic development, the relationship between natural resources and growth and the efficiency of foreign development assistance.

In the first essay, Democracy, Consolidation and Growth, I analyse the effect of democracy on economic growth. In this context, I argue that an important aspect to consider is how consolidated political systems are. Put simply, I find that it is not only a question of how democratic countries are, but also how long they have been democratic. In other words, economic performance tends to improve with the duration of uninterrupted democracy. The performance of autocracies, on the other hand, tends to deteriorate over time. However, for newly established political systems, there seems to be a cost of being democratic. This implies that democracies only bear their fruit after some time. The analysis has important policy implications: To overcome initial straits, international assistance focused on democratic consolidation may be important, and a very good investment in fostering long-run development.

The second essay, Resource Curse or not: A Question of Appropriability (together with Anne Boschini and Jesper Roine), is concerned with the relation between natural resources and economic development. For most laymen, as well as for most economists, it would seem reasonable that countries richly endowed in natural resources also benefit from this wealth. However, a large literature has found a systematic negative effect of natural resource abundance on economic growth. We suggest that this so-called resource curse is not determined by resource endowments alone, but rather by the interaction between the type of resources a country possesses, and the quality of institutions in the country. This combination of factors determines what we call the appropriability of a resource. The concept of appropriability captures the likelihood of natural resources leading to rentseeking, corruption or conflicts which, in turn, will harm economic development. Our results suggest that, if institutions are good enough, the curse may be turned into a blessing. This may explain why some countries, such as Norway and Botswana, tend to benefit from their resources, while others, such as Angola and Sierra Leone, do not.

The third and final essay of this thesis, Foreign Sectoral Aid Fungibility, Growth and Poverty Reduction, is a contribution to the aid-efficiency literature, which is concerned with the question of whether aid helps or hinders economic development. Foreign development assistance is often targeted on specific public expenditure sectors. If this aid is not used in the sector for which it was granted (e.g. health, education) it is said to be fungible, and donors may end up financing something completely different from what they intended (e.g. military expenditures). The major concern about sectoral fungibility is that the alternative use of aid may be less productive or less socially useful. However, measuring fungibility is not sufficient to determine whether foreign sectoral aid fungibility is actually harmful. What is important is how the funds treated as fungible are used. The essay starts by obtaining estimates of fungibility for 57 countries. The results suggest that sectoral aid is indeed largely treated as fungible by recipient countries. Next, to assess the economic and health effects of fungibility, these estimates are incorporated into an empirical model of aid and growth as well as into a model of aid and infant mortality. Altogether, I find no evidence of more fungible sectoral aid leading to worse performance.

Place, publisher, year, edition, pages
Stockholm: Nationalekonomiska institutionen, 2005. 180 p.
Dissertations in Economics (Stockholm), ISSN 1404-3491 ; 2005:2
Democracy, Economic Growth, Consolidation, Political Systems, Natural Resources, Appropriability, Property Rights, Institutions, Development, Foreign Aid, Fungibility, Poverty, Public Expenditure
National Category
urn:nbn:se:su:diva-326 (URN)91-7265-991-2 (ISBN)
Public defence
2005-01-31, hörsal 7, hus D, Universitetsvägen 10, Stockholm, 10:00
Available from: 2005-01-10 Created: 2005-01-10Bibliographically approved

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