Does Funding From Donors Displace Government Spending For Health In Developing Countries?

Abstract

The notable increases in funding from various donors for health over the past several years have made examining the effectiveness of aid all the more important. We examine the extent to which donor funding for health substitutes for--rather than complements--health financing by recipient governments. We find evidence of a strong substitution effect. The proportionate decrease in government spending associated with an increase in donor funding is largest in low-income countries. The results suggest that aid needs to be structured in a way that better aligns donors' and recipient governments' incentives, using innovative approaches such as performance-based aid financing.

Matching Grants for New and Underutilized Vaccines in Resource-poor Settings: Determinants of Generation of New Money

“…Lack of common understanding is likely to have had a significant impact on levels of cofinancing funds from the government. Studies have shown that in instances where there is lack of common understanding between donors and grant recipients, recipient government are unlikely to increase their share of contributions but rather tend to remove their own money from the activity [4,26,27].…”

“…In recent times, levels of donor funding for health have increased considerably [2], most notably in immunization programs of low-income countries, but effectiveness of the aid in terms of progression of recipients towards sustainable self-financing among beneficiary countries has not been achieved [3,4]. While many donors would like to see governments take over financial responsibility of immunization programs [5], ongoing introduction of expensive new vaccines has only increased concerns about sustained donor dependency among low-income countries [6,7].…”

“…However, other researchers have questioned the validity of grant response propositions of conventional theory because of the assumption of grant recipients as individual decision makers [21]. In practice, recipients tend to be groups of individuals whose response to grants is influenced by determinants of collective decision making such as administrative requirements, participant institutions in decision making [17,18,21], alignment with recipients' preferences, and political interests [4,20,22,23]. Other grant response determinants include grant structure [18], economic conditions [18,24], and realistic budgets and knowledge of the true cost of target intervention [19].…”

Aid Effectiveness in the Health Sector

“…The existence of fungibility of development assistance has been documented extensively in the literature from as early as 1993 (Pack andPack 1993, World Bank 1998). Fungibility can occur at the macroeconomic (Gottret and Schieber 2006), sector (Farag et al 2009, Gottret and Schieber 2006, Lu et al 2010) and subsector (Shiffman 2008, Gottret andSchieber 2006) level. Although the data available on health sector spending in low-income countries is often scarce and of bad quality, several studies have found that it is particularly affected by fungibility (Lancaster 1999).…”

“…Although the data available on health sector spending in low-income countries is often scarce and of bad quality, several studies have found that it is particularly affected by fungibility (Lancaster 1999). Estimates of the extent of fungibility in the health sector for every dollar spent vary from a decrease in US$0.27-$1.65 (Farag et al 2009, Gottret and Schieber 2006, Lu et al 2010) to a US$1.50 increase (Mishra and Newhouse 2007). Much of these calculations in regards to DAH depend on methodologies used including how the dependent variable is constructed.…”