Is Donors' Concern about the Fungibility of Foreign Aid Justified?: A Panel Data Analysis

This paper addresses donors' policy of providing external assistance to developing countries using an inter-temporal framework, over a finite horizon. While the framework adopted tracks the motivation of providing foreign aid, it is altogether consistent with the paradigm of forwardlooking gove...

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Bibliographic Details
Published in:The Journal of developing areas 2010-03, Vol.43 (2), p.299-311
Main Authors: Sobhee, Sanjeev K., Nath, Shyam
Format: Article
Language:English
Subjects:
Critical values
Decision making
Developed countries
Developing countries
Economic development
Economic uncertainty
Expenditures
Foreign aid
Government
Government budgets
Hypotheses
LDCs
Political aspects
Political economy
Public finance
Root test
Studies
Volatility
World Bank
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Summary:This paper addresses donors' policy of providing external assistance to developing countries using an inter-temporal framework, over a finite horizon. While the framework adopted tracks the motivation of providing foreign aid, it is altogether consistent with the paradigm of forwardlooking governments in developed economies. Given uncertainties surrounding income flows, and the gradual convergence towards generational accounting conventions in public finances of donor countries, an attempt is made to empirically ascertain whether foreign assistance is provided on a random basis or is backed by a systematic foreign aid policy. Our findings from a panel of 27 developing countries clearly contest the hypothesis that grants are provided on a random basis. This would otherwise suggest the existence of a consistent policy characterising granting behaviour, urging the need for recipient governments to incorporate grants in their budgetary decision-making.
ISSN:0022-037X
1548-2278
1548-2278
DOI:10.1353/jda.0.0071