Where Has All the Money Gone? Foreign Aid and the Composition of Government Spending

38 Pages Posted: 14 Oct 2010 Last revised: 23 Oct 2012

See all articles by Santanu Chatterjee

Santanu Chatterjee

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

Paola Giuliano

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Ilker Kaya

American University of Sharjah - School of Business and Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 10, 2012

Abstract

This paper examines the link between foreign aid and the composition of government spending in aid-recipient countries. Two questions are addressed: (i) does foreign aid crowd out government spending in aid-recipient countries, and (ii) does the degree of fungibility vary across different categories of aid? Using a panel dataset of 67 countries for 1972-2000 we find that at the aggregate level about 70 percent of total aid is fungible. We also find that aid targeted for public investment crowds out about 80-90 percent of domestic government spending on public investment. Aid does not affect private investment, but has a strong positive impact on household consumption. The results are also robust to checks for causality. These findings are significant, since more than two-thirds of all aid flows to developing countries are tied to public investment projects.

Keywords: Foreign Aid, Aid Effectiveness, Economic Growth, Fungibility, Fiscal Policy

JEL Classification: E6, F3, F4, O1

Suggested Citation

Chatterjee, Santanu and Giuliano, Paola and Kaya, Ilker, Where Has All the Money Gone? Foreign Aid and the Composition of Government Spending (July 10, 2012). Available at SSRN: https://ssrn.com/abstract=1691650 or http://dx.doi.org/10.2139/ssrn.1691650

Santanu Chatterjee (Contact Author)

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Department of Economics
University of Georgia
Athens, GA 30602
United States
706-542-1709 (Phone)

HOME PAGE: http://https://sites.google.com/view/schatterjee/home

Paola Giuliano

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Ilker Kaya

American University of Sharjah - School of Business and Management ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

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