Foreign Aid Fungibility, Growth, and Poverty Reduction

This paper tries to assess to which extent fungibility in sectoral foreign development assistance is something donors should be concerned about. This is done in three steps. First, country specific estimates of the degree of fungibility are obtained. These are then incorporated in a well established empirical aid-growth equation. Third, arguing that the aid-growth relation may not be the relevant specification in order to evaluate the effect of fungibility, we instead incorporate our measures of fungibility in an aid-poverty alleviation specification. While the estimation of fungibility measures as well as their incorporation into existing empirical specifications entail a number of problems, we do not find any strong case for non-fungible sectoral aid to work ”better” than fungible aid.