The Impact of Aid on Total Government Expenditures: New Evidence on Fungibility

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This study has been prepared within the UNU-WIDER visiting scholar and PhD internship programmes. Terms of use: Documents in Copyright © UNU-WIDER 2015ISSN 1798-7237 ISBN 978-92-9230-895-7 Typescript prepared by the author.UNU-WIDER gratefully acknowledges the financial contributions to the research programme from the governments of Denmark, Finland, Sweden, and the United Kingdom.The World Institute for Development Economics Research (WIDER) was established by the United Nations University (UNU) as its first research and training centre and started work in Helsinki, Finland in 1985. The Institute undertakes applied research and policy analysis on structural changes affecting the developing and transitional economies, provides a forum for the advocacy of policies leading to robust, equitable and environmentally sustainable growth, and promotes capacity strengthening and training in the field of economic and social policy-making. Work is carried out by staff researchers and visiting scholars in Helsinki and through networks of collaborating scholars and institutions around the world.UNU-WIDER, Katajanokanlaituri 6 B, 00160 Helsinki, Finland, wider.unu.eduThe views expressed in this publication are those of the author(s). Publication does not imply endorsement by the Institute or the United Nations University, nor by the programme/project sponsors, of any of the views expressed.Abstract Aid is said to be fungible at the aggregate level if it raises government expenditures by less than the total amount. This happens when the recipient government decreases domestic revenue, decreases net borrowing, or when aid bypasses the budget. This study makes three contributions to both fungibility and fiscal response literature. First, fungibility at the aggregate level is re-examined on a bigger recent panel dataset, distinguishing between short-and longterm impact of aid. The results indicate that aid is partly fungible in the long run and highly fungible in the short run. Second, to account for aid bypassing the budget, technical cooperation is used as a proxy for off-budget aid. Off-budget aid is found to be non-fungible and on-budget aid is partly fungible. Third, fungibility of bilateral and multilateral aid is analysed: the results indicate lower fungibility of multilateral aid.

Does agricultural official development assistance facilitate foreign direct investment in agriculture: Evidence from 63 developing countries

“…In this 9 I acknowledge one reviewer's point about the aid fungibility issue. Unlike the empirical findings of Feyzioglu et al (1998), Marć (2017), and Kaya and Kaya (2020), however, agricultural ODA does not impact government expenditure to agriculture in this case (Appendix S3).…”

The fiscal management of permanent and temporary foreign aid: Evidence from sub‐Saharan Africa

“…An important observation in the top panel of Figure 5 is that government spending increases by less than the amounts of both permanent aid and temporary aid (α P < 1 and α < 1), which makes both permanent and temporary aid fungible. This result is consistent with Chatterjee et al (2012) and Marc (2017) who found that foreign aid increases government spending by less than the amount of aid, even though it is not consistent with my baseline results presented in Figure 2. Chatterjee et al (2012) and Marc (2017) used the same donor-reported aid data used in this robustness exercise, which overestimate the amount of aid that actually goes into recipient countries' budget (Morrissey, 2012).…”

“…This result is consistent with Chatterjee et al (2012) and Marc (2017) who found that foreign aid increases government spending by less than the amount of aid, even though it is not consistent with my baseline results presented in Figure 2. Chatterjee et al (2012) and Marc (2017) used the same donor-reported aid data used in this robustness exercise, which overestimate the amount of aid that actually goes into recipient countries' budget (Morrissey, 2012). Donor-reported aid data include a significant amount of aid that is spent by donor countries on services related to the projects financed, which might not be spent inside the recipient country, and do not go into the recipient government's budget.…”

“…The increase in government spending in response to foreign aid shocks is consistent with the theoretical assumptions of Chatterjee and Turnovsky (2005) and with the empirical evidence in most fiscal response studies that aid is mostly spent by recipient governments. However, the fact that government spending increases by more than the amount of a permanent aid shock seems to contradict the empirical evidence on aid fungibility, such as Chatterjee et al (2012) and Marc (2017), who found that foreign aid increases government spending by less than the amount of aid. Various reasons contribute to explaining these differences.…”

“…Recipient governments need to finance the additional spending either by raising additional tax revenue or increasing government borrowing. However, the literature on foreign aid fungibility has typically found that foreign aid is partially fungible, whereby government spending increases by less than the amount of aid (Chatterjee et al, 2012;Kaya & Kaya, 2020;Marc, 2017).…”