Editing Aid effectiveness (section)

=== Analyses of factors limiting aid effectiveness ===

==== Aid fragmentation ====
Aid flows significantly increased in the first decade of the 21st century, but at the same time aid has become increasingly fragmented. There was an explosion in the number of donors, and while the number of projects multiplied, their average size dropped. Small projects being often limited in size, scope and duration, they resulted in little lasting benefit beyond the immediate effect.<ref>Fengler, M.G and Kharas, H. ''Delivering Aid Differently: Lesson from the Field''. Brookings Institution, Washington D.C. 2010.</ref> With more players, aid became less predictable, less transparent and more volatile.<ref>Kharas, H., Makino, K., Jung, W. ''Catalizing Development''. Brookings Institution Press, Washington D.C. 2011</ref>

Fragmentation means an increase in costs for recipient countries, as government offices are forced to divert administrative resources to cope with requests and meetings with donors<ref>As an example, in 2005, government authorities in Vietnam received 791 missions from donors, which means more than two a day, including weekends and holidays. See, for example, OECD, DAC, "The Challenge of Capacity Development: Working Towards Good Practice", Paris, 2006.</ref> Decades of development have shown that if countries are to become less dependent on aid, they must follow a bottom-up approach, where they determine their own priorities and rely on their own systems to deliver that aid.<ref>Deutscher, E., and Fyson, S., "Improving the Effectiveness of Aid", ''Finance and Development'', Vol. 25, n. 3, The International Monetary Fund, September 2008.</ref>

==== Volatility/unpredictability of aid ====
Information, at the donors' as well at the recipients' level, is often poor, incomplete and difficult to compare with other data, and beneficiaries' feedback and formal project evaluations are rare. Aid is predictable when partner countries can be confident about the amount and the timing of aid disbursement. Not being predictable has a cost: one study assessed the [[deadweight loss]] associated with volatility at an average of 10% to 20% of a developing country's programmable aid from the European Union in recent years.<ref name=":2">Kharas, H. "Measuring the Cost of Aid Volatility". Wolfensohn Centre for Development, Working Parper 3, Brookings Institution, Washington D.C. 2008</ref>

==== Reducing the accountability of governments ====
Revenue generation is one of the essential pillars for developing [[state capacity]]. Effective taxation methods allow a state to provide public goods and services, from ensuring justice to providing education.<ref>{{Cite journal|last=Bräutigam|first=Deborah|date=2002|title=Building Leviathan: Revenue, State Capacity and Governance|url=https://deborahbrautigam.files.wordpress.com/2013/04/2002-building-leviathan.pdf|journal=IDS Bulletin|volume= 33| issue = 3|pages=1–17|doi=10.1111/j.1759-5436.2002.tb00034.x}}</ref> Taxation simultaneously serves as a government accountability mechanism, building state-citizen relationships, as citizens can now expect such service provisions upon their consent to taxation. For developing and fragile states that lack such revenue capabilities, while aid can be a seemingly necessary alternative, it has the potential to undermine institutional development. States that rely on higher percentages of aid for government revenue are less accountable to their citizens by avoiding the state-citizen relationships that taxation builds and face fewer incentives to develop public institutions.<ref>{{Cite news|url=https://www.cgdev.org/publication/aid-institutions-paradox-review-essay-aid-dependency-and-state-building-sub-saharan|title=An Aid-Institutions Paradox? A Review Essay on Aid Dependency and State Building in Sub-Saharan Africa- Working Paper 74|work=Center For Global Development|access-date=2017-05-17|language=en}}</ref> The limited government capacity resulting from subpar institutional presence and effectiveness leads to: “ubiquitous corruption of state officials, large gaps between the law and actual practice in business regulation, workers who do not even show up, doctors that do not doctor, teachers who do not teach.”<ref>{{Cite journal|last1=Pritchett|first1=Lant|last2=Woolcock|first2=Michael|last3=Andrews|first3=Matt|date=2013-01-01|title=Looking Like a State: Techniques of Persistent Failure in State Capability for Implementation|journal=The Journal of Development Studies|volume=49|issue=1|pages=1–18|doi=10.1080/00220388.2012.709614|s2cid=14363040|issn=0022-0388|url=https://www.hks.harvard.edu/sites/default/files/centers/cid/files/publications/faculty-working-papers/239_PritchettWoolcockAndrews_Looking_like_a_state_final.pdf}}</ref>

In the view of [[James Shikwati]], aid in Africa sustains political elites who implement a colonial or neo-colonial agenda of subsidy and distortion of markets which holds African countries back.<ref name=":4">{{cite journal|last=Shikwati|first=James|year=2006|title=The Future of Africa in the World|url=http://www.irenkenya.com/modules/articles/index.php?article_title_id=18|url-status=dead|journal=Inter Region Economic Network|pages=6|archive-url=https://web.archive.org/web/20130617124226/http://www.irenkenya.com/modules/articles/index.php?article_title_id=18|archive-date=2013-06-17}}</ref>

====The tying of aid====
[[Tied aid]] is defined as project aid contracted by source to private firms in the donor country. It refers to aid tied to goods and services supplied exclusively by donor country businesses or agencies. Tied aid increases the cost of assistance and has the tendency of making donors to focus more on the commercial advancement of their countries than what developing countries need. There are many ways aid can be designed to pursue the commercial objectives of donors. One of such pervasive means is by insisting on donor country products.

Others have argued that tying aid to donor-country products is common sense; it is a strategic use of aid to promote donor country's business or exports. It is further argued that tied aid - if well designed and effectively managed - would not necessarily compromise the quality as well as the effectiveness of aid.<ref>Aryeetey, 1995; Sowa 1997.</ref> However, this argument would hold particularly for programme aid, where aid is tied to a specific projects or policies and where there is little or no commercial interest. It must be emphasized, however, that commercial interest and aid effectiveness are two different things, and it would be difficult to pursue commercial interest without compromising aid effectiveness. Thus, the idea of maximizing development should be separated from the notion of pursuing commercial interest. Tied aid improves donors export performance, creates business for local companies and jobs. It also helps to expose firms, which have not had any international experience on the global market to do so.<ref name="tiedaid">[https://archive.today/20130105111331/http://www3.interscience.wiley.com/journal/112138351/abstract?CRETRY=1&SRETRY=0 Tied Aid and Multi-Donor Budgetary Support], ''Journal of International Development'', Vol 17. Issue 8</ref>

==== Fungibility of aid ====

Aid fungibility refers to the fact that upon receiving [[Development aid|international aid]], and therefore have more [[Fiscal policy|fiscal flexibility]], recipient countries and their governments may divert their resources to other expenses. Especially, when projects financed by international aid achieve some goals that the government would have needed to achieve on its own, absent of aid, the local resources that were saved can be used for other purposes.<ref name="WorldBank1998">World Bank. (1998). The implications of foreign aid fungibility for development assistance (Policy Research Working Paper WPS 2022). [http://documents.worldbank.org/curated/en/660401468766542269/The-implications-of-foreign-aid-fungibility-for-development-assistance World Bank]</ref> It is a factor in the discussion about aid effectiveness and the effects of aid fungibility on development are debated.

===== Concept and Mechanisms =====  

Foreign aid can be categorized as either '''earmarked aid''' (allocated for a specific project or sector) or '''general budget support''' (provided with fewer restrictions). When aid is fungible, recipient governments may reduce their own spending in areas where donors provide assistance and reallocate those funds to other priorities, which may not align with donors' initial intentions.<ref name="Pack1993">Pack, H., & Pack, J. R. (1993). Foreign aid and the question of fungibility. ''The Review of Economics and Statistics'', 75(2), 258–265. [https://doi.org/10.2307/2109431 doi:10.2307/2109431]</ref><ref name="Feyzioglu1998">Feyzioglu, T., Swaroop, V., & Zhu, M. (1998). A panel data analysis of the fungibility of foreign aid. ''The World Bank Economic Review'', 12(1), 29–58.</ref> In the case of earmarked aid, the goal is often to limit fungibility by specifying how funds should be spent (infrastructure, health, education), though difficult to enforce. Using general budget support provides governments with more flexibility, enabling recipient them to allocate funds according to their own priorities, thereby increasing the likelihood of fungibility.  

In practice, aid fungibility can occur through several mechanisms:  

* '''Sectoral substitution''': Governments may decrease domestic spending in sectors where they receive foreign aid and reallocate funds elsewhere, whether it is for military spending or debt repayment. In the education and health sector, it appears that technical cooperation reduces fungibility.<ref name="Sijpe2013">Van de Sijpe, N. (2013). Is foreign aid fungible? Evidence from the education and health sectors. ''The World Bank Economic Review'', 27(2), 320–356. [http://www.jstor.org/stable/43774110 JSTOR]</ref>  
* '''Geographical reallocation''': Aid targeted at specific regions may allow governments to divert resources to other areas. An example is the Case Study on Chinese aid in Africa.<ref name="Dreher2019">Dreher, A., Fuchs, A., Hodler, R., Parks, B. C., Raschky, P. A., & Tierney, M. J. (2019). African leaders and the geography of China’s foreign assistance. ''Journal of Development Economics'', 140, 44–71. [https://doi.org/10.1016/j.jdeveco.2019.05.001 doi:10.1016/j.jdeveco.2019.05.001]</ref>

* '''Macroeconomic adjustments''': Aid may affect overall government fiscal policies, including tax collection and borrowing strategies.<ref name="Jones2005">Jones, K. (2005). Moving money: Aid fungibility in Africa. ''The SAIS Review of International Affairs'', 25(2), 167–180. [https://www.jstor.org/stable/26999284 JSTOR]</ref> 

===== Implications for Development =====  

The effects of aid fungibility on development outcomes are debated. Some studies suggest that fungibility reduces aid effectiveness by weakening donor control over expenditures, potentially allowing funds to be used for purposes unrelated to development.<ref name="WorldBank1998" /> Others argue that fungibility can have positive effects if governments reallocate the resources to areas with greater needs, or if it enhances overall [[Welfare spending|welfare]].<ref name="Rana2020">Rana, Z., & Koch, D.-J. (2020). Why fungibility of development aid can be good news: Pakistan case study. ''World Development Perspectives'', 20, 100248. [https://doi.org/10.1016/j.wdp.2020.100248 doi:10.1016/j.wdp.2020.100248]</ref><ref name="Rana2022">Rana, Z., & Koch, D.-J. (2022). Can fungibility of development aid lead to more effective achievement of the SDGs? An analysis of the aggregate welfare effect of aid fungibility (WIDER Working Paper 122/2022). UNU-WIDER. [https://doi.org/10.35188/UNU-WIDER/2022/255-3 doi:10.35188/UNU-WIDER/2022/255-3]</ref>  

Aid fungibility can also impact governance and accountability. When governments have more discretion over aid funds, it may lead to more efficient spending or, conversely, increased opportunities for misallocation.<ref name="Seim2020">Seim, B., Jablonski, R., & Ahlbäck, J. (2020). How information about foreign aid affects public spending decisions: Evidence from a field experiment in Malawi. ''Journal of Development Economics'', 146, 102522. [https://doi.org/10.1016/j.jdeveco.2020.102522 doi:10.1016/j.jdeveco.2020.102522]</ref>

Aid projects can also be in competition with government projects. If successful, they can become substitutes for government performance. In that case, voters' [[accountability]] towards their leaders is flawed, as the governments becomes popular due to the success of projects it is not responsible for, while taking credit for the work done by NGOs.<ref>{{cite book |last1=Birdsall |first1=Nancy |title=Deadly Sins: Reflections on Donor Failings |date=2006 |publisher=Routledge |isbn=9781315128252 |pages=16 |url=https://doi.org/10.4324/9781315128252}}</ref> This relates to literature about [[Dependency theory|aid dependency]], as aid can become a substitute and disincentivize state capacity of the government. Higher dependence on aid lowers state capacity and ultimately distorts the link between the government and its citizens.

===== Case Studies =====  

Empirical research has provided mixed evidence on the extent and consequences of aid fungibility:  

* A study on '''China’s foreign aid to Africa''' found that aid projects were often located in politically strategic areas, suggesting that recipient governments influence aid allocation.<ref name="Dreher2019" /> Indeed, aid provided by China is found to be redirected to local leaders' ethnic homeland, as compared to other regions. On the other hand, this effect is not present with development projects financed by the World Bank.
* Research in '''Pakistan''' suggested that aid fungibility might contribute to better overall resource allocation, improving social outcomes.<ref name="Rana2020" /> In this study, it is shown that there is a "U-shaped" relationship between aid received by the government and its expenditures on development projects. That is, when receiving a low amount of aid, the government will invest more in development projects with its resources. When the amount of aid received increases, the incentive to spend on development projects decreases.
* Studies on '''Rwanda'''<ref name="Rana2022-2" /> and '''Malawi'''<ref name="Seim2020" /> examined how recipient governments’ control over aid influences public spending, with varied effects on efficiency and transparency.<ref name="Rana2022" /> The experiment in Malawi showed that politicians receiving information about existing development projects in local schools were less likely to send development money to those schools and target other needy but not-yet-targeted areas. The study in Rwanda investigates aid fungibility when countries take ownership of their development programs. Akin to the Pakistan study,<ref name="Rana2020" /> a "U-shaped" relationship between aid received and government expenditures on development. While the government was able to shift aid to projects that were in its priorities, increasing aid effectiveness, concerns were raised about certain sectors being left aside, and the need for control from institutions.<ref name="Rana2022-2">Rana, Z. A., & Koch, D.-J. (2022, September). What happens to aid fungibility when the recipient government takes control? effects of aid ownership in rwanda. Development Policy Review , 40 (5). Retrieved
from https://doi.org/10.1111/dpr.12604 doi: 10.1111/dpr.12604</ref>