Editing Aid effectiveness (section)

===== 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>