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Licensed Unlicensed Requires Authentication Published by De Gruyter August 20, 2012

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

  • Santanu Chatterjee EMAIL logo , Paola Giuliano and Ilker Kaya


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.

Published Online: 2012-8-20

©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston

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