Editing Aid effectiveness (section)

==Findings and critiques on aid effectiveness==

{{See also|Aid#Criticism}}There is wide agreement that aid alone is not enough to lift developing countries out of poverty and that it is not the most powerful potential instrument for promoting this end. The debates on aid effectiveness are over the degree of significance of aid's effects, the extent of its unfavourable effects, and the relative effectiveness of different kinds of aid.

=== Major critiques ===

==== P. T. Bauer ====
British economist [[Peter Thomas Bauer|P. T. Bauer]] argued that aid did more harm than good, notably in his books "Dissent on Development" (1972)<ref>{{Cite book|last=Bauer|first=P. T.|url=https://www.worldcat.org/oclc/2666082|title=Dissent on development|date=1976|publisher=Harvard University Press|isbn=0-674-21282-7|location=Cambridge, Mass.|oclc=2666082}}</ref> and "Reality and Rhetoric" (1984).<ref>{{Cite book|last=Bauer|first=P. T.|url=https://archive.org/details/realityrhetorics0000baue/|title=Reality and rhetoric : studies in the economics of development|date=1984|publisher=Harvard University Press|isbn=0-674-74946-4|location=Cambridge, Mass.|oclc=9894295}}</ref> The main harmful effect was that aid channelled resources through governments, enabling inefficient state planning and producing a general "politicization of life" in which the population shifted its activities to the political sphere rather than the economic one.<ref name=":3">{{Cite book|last=Bauer|first=P. T.|url=https://archive.org/details/realityrhetorics0000baue/page/46|title=Reality and rhetoric : studies in the economics of development|date=1984|publisher=Harvard University Press|isbn=0-674-74946-4|location=Cambridge, Mass.|pages=27–28, 46|oclc=9894295}}</ref> On the other side, Bauer saw aid's benefits as being limited to the avoidance of commercial loan costs, which he did not consider to be a significant factor in countries' development (pp.&nbsp;47–49). He believed that the choices of aid projects were usually controlled by recipient governments less interested in alleviating poverty than enriching the elite (pp.&nbsp;49–52).

==== Dambisa Moyo ====
Noted Zambian economist [[Dambisa Moyo]] has been a fierce opponent to development aid, and calls it “the single worst decision of modern developmental politics”. Her 2009 book, [[Dambisa Moyo|Dead Aid]] describes how aid has encouraged kleptocracies, corruption, aid-dependency and a series of detrimental economic effects and vicious downward spirals of development in Africa. She argues that foreign aid provides a windfall to governments which can encourage extreme forms of [[rent-seeking]] and through providing a positive shock of revenue, lead to [[Dutch Disease]]. Furthermore, this easy money offers governments an exit from the contract between them and their electorate: the contract that states that they must provide public goods in exchange for taxes.  In short, it "allows the state to abdicate its responsibilities toward its people".<ref>{{cite book|last=Moyo|first=Dambisa|title=Aid: Why Aid Is Not Working and How There Is a Better Way for Africa.|publisher=Douglas & Mcintyre|year=2009|isbn=978-1-55365-542-8}}</ref> It is important to note that Moyo alludes specifically to government bilateral and multilateral aid and not small-holder charity, humanitarian or emergency aid.
Her prescriptions call for increased trade and foreign direct investment, emphasizing China's burgeoning role in Africa.<ref>{{cite book|last=Moyo|first=Dambisa|title=Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa|publisher=Douglas & Mcintyre|year=2009|pages=124}}</ref>  Moyo also makes a case for micro-financing schemes, as popularized by the widespread success of Grameen Bank, to spark entrepreneurship within the continent on the ground level, thus building from the bottom-up as opposed to the top-down approach aid takes.

=== Econometric Studies ===
Many econometric studies have attempted to establish broad conclusions about aid, using regression analysis on a panel of recipient countries (seeing if their differing amounts and timings of aid received could be correlated with development indicators). These have created a mixed picture on the average effectiveness of aid, but one in which pessimism in the late 20th century has seemed to yield to qualified optimism in the early 21st century.<ref>{{Cite journal|last1=Mahembe|first1=Edmore|last2=Odhiambo|first2=Nicholas M.|date=2019-01-01|editor-last=Read|editor-first=Robert|title=Foreign aid and poverty reduction: A review of international literature|journal=Cogent Social Sciences|language=en|volume=5|issue=1|pages=1625741|doi=10.1080/23311886.2019.1625741|issn=2331-1886|doi-access=free}}</ref> See the table in the sub-section on "Major econometric studies and their findings", below.

==== Challenges for measurement ====
It must be borne in mind that such econometric studies face many problems. One challenge for assessing the effectiveness of aid is that aid is intended to serve a variety of purposes: some of it is aimed primarily at poverty alleviation, some at economic growth, and some at other objectives such as better governance or reduction of social inequalities. Often it is not very clear what objectives are foremost, making it hard to measure results against intentions.<ref>{{cite journal|last=Barder|first=Owen|date=2009-04-21|title=What is Poverty Reduction?|url=http://www.cgdev.org/content/publications/detail/1421599|journal=CGD Working Papers|access-date=2010-06-02}}</ref> Roodman (2007), for instance, discovered that the results of seven previous econometric studies – including the very influential one by Burnside and Dollar (1997, 2000) – could not survive defining key terms in other plausible ways.<ref>{{cite journal|last=Roodman|first=David|year=2007|title=The Anarchy of Numbers: Aid, Development and Cross-Country Empirics|journal=The World Bank Economic Review|volume=21|issue=2|pages=255–277|doi=10.1093/wber/lhm004|hdl-access=free|s2cid=14359188|hdl=10.1093/wber/lhm004}}</ref> Moreover, different objectives have different implications for the time-scale in which results should be sought.<ref name=":0">{{Cite journal|last=Clemens MA|display-authors=etal|date=2011|title=Counting Chickens when they Hatch: Timing and the Effects of Aid on Growth|journal=The Economic Journal|volume=122|issue=561|pages=590–617|doi=10.1111/j.1468-0297.2011.02482.x|doi-access=free}}</ref> Varying sectors and modalities of aid have different effects, as do the contextual factors in recipient countries.<ref name=":1">{{Cite journal|last=Petrikova|first=Ivica|date=2015|title=Aid for food security: does it work?|url=https://researchportal.port.ac.uk/ws/files/3106941/Petrikova_2015_IJDI.pdf|journal=International Journal of Development Issues|volume=14|pages=41–59|doi=10.1108/IJDI-07-2014-0058}}</ref> However, increasingly sophisticated analyses have made progress in accounting for these complicated effects.<ref name=":0" /><ref name=":1" />

Econometric studies frequently show more pessimistic results than might be expected from the accumulation of successes reported by donor and implementing agencies in their projects and programs. Paul Mosley termed this the '''micro-macro paradox''' and offered three potential explanations: inaccurate measurement, fungibility, and "backwash" or negative side-effects of component aid projects.<ref>{{cite book|last=Mosley|first=Paul|url=https://archive.org/details/foreignaiditsdef0000mosl|title=Foreign Aid: Its Defense and Reform|publisher=University Press of Kentucky|year=1987|isbn=978-0-8131-1608-2|quote=Paul Mosley.|access-date=December 7, 2009|url-access=registration}}</ref> The micro-macro paradox has also been attributed to inadequate assessment practices. For example, conventional assessment techniques often over-emphasize inputs and outputs without taking sufficient account of societal impacts. The shortcomings of prevalent assessment practices have led to a gradual international trend towards more rigorous methods of impact assessment.<ref>{{cite journal|last=Faust|first=Jörg|year=2009|title=Reliable evidence of impact|url=http://www.inwent.org/ez/articles/084417/index.en.shtml|url-status=dead|journal=Development and Cooperation|volume=36|issue=1|pages=14–17|archive-url=https://web.archive.org/web/20100227005515/http://www.inwent.org/ez/articles/084417/index.en.shtml|archive-date=2010-02-27}}</ref>

==== Major econometric studies and their findings ====
The main findings of major econometric studies are summarized in the following table.
{{alternating rows table|class=wikitable}}
|+ Table of econometric studies on aid effectiveness
! Author/year<ref>Bibliographic reference to be given in a note</ref>
! Period
! Findings on aid effectiveness;
|-
|Mosley 1987<ref>{{Cite book|last=Mosley|first=Paul|url=https://www.worldcat.org/oclc/14240724|title=Foreign aid, its defense and reform|date=1987|publisher=University Press of Kentucky|isbn=0-8131-1608-2|location=Lexington, Ky.|oclc=14240724}}</ref>
|1960-1980
|Aid had no significant effect on economic growth. The reason seemed to be fungibility: aid likely released other resources for unproductive uses.
|-
|Boone 1996<ref>{{cite report|url=https://www.nber.org/system/files/working_papers/w5308/w5308.pdf|title=Politics and the effectiveness of foreign aid|last1=Boone|first1=Peter|date=1995|publisher=National Bureau of Economic Research|access-date=2021-02-19}}</ref><ref>A similar version was published as {{Cite journal|last=Boone|first=Peter|date=1996|title=Politics and the effectiveness of foreign aid|journal=European Economic Review|volume=40|issue=2 |pages=289–329|doi=10.1016/0014-2921(95)00127-1 |s2cid=154155908 |url=http://cep.lse.ac.uk/pubs/download/DP0272.pdf |via=Science Direct}}</ref>
| 1971-1990
| Aid had no clear effect on rates of [[infant mortality]] and [[primary education]].
|-
|Burnside and Dollar 1997,<ref>{{cite report|url=http://documents1.worldbank.org/curated/en/698901468739531893/pdf/multi-page.pdf|title=Aid, policies and growth|last1=Burnside|first1=Craig|last2=Dollar|first2=David|date=1997|publisher=World Bank|access-date=2021-02-20}}</ref> 2000<ref>{{Cite journal|last1=Burnside|first1=Craig|last2=Dollar|first2=David|date=September 2000|title=Aid, Policies, and Growth|url=https://www.aeaweb.org/articles?id=10.1257/aer.90.4.847|journal=American Economic Review|language=en|volume=90|issue=4|pages=847–868|doi=10.1257/aer.90.4.847|s2cid=14261087 |issn=0002-8282|url-access=subscription}}</ref>
|1970-1993
|Aid had a positive impact on growth in developing countries with good policies. But the overall effect of aid was unclear because donors did not especially target such countries.
|-
|Svensson 1999<ref>{{Cite journal|last=Svensson|first=J.|date=1999|title=Aid, Growth and Democracy|url=https://onlinelibrary.wiley.com/doi/abs/10.1111/1468-0343.00062|journal=Economics & Politics|language=en|volume=11|issue=3|pages=275–297|doi=10.1111/1468-0343.00062|issn=1468-0343|url-access=subscription}}</ref>
|1980s, 1990s
|Aid had a positive impact on growth in more democratic countries. But aid on average was not channeled to more democratic countries.
|-
| Arvin and Borillas 2002<ref>{{Cite journal|last1=Arvin|first1=B. Mak|last2=Barillas|first2=Francisco|date=2002-11-01|title=Foreign aid, poverty reduction, and democracy|url=https://doi.org/10.1080/00036840210136718|journal=Applied Economics|volume=34|issue=17|pages=2151–2156|doi=10.1080/00036840210136718|s2cid=154546476 |issn=0003-6846|url-access=subscription}}</ref>
|1975-1998
|Aid had no clear effect on [[Gross national income|GNP]] per capita.
|-
|Kosack 2003<ref>{{Cite journal|last=Kosack|first=Stephen|date=2003-01-01|title=Effective Aid: How Democracy Allows Development Aid to Improve the Quality of Life|url=https://www.sciencedirect.com/science/article/pii/S0305750X02001778|journal=World Development|language=en|volume=31|issue=1|pages=1–22|doi=10.1016/S0305-750X(02)00177-8|issn=0305-750X|url-access=subscription}}</ref>
|1974-1985
|Aid had no clear effect on average, but improved the quality of life when combined with democracy.
|-
|Dunning 2004 <ref>{{Cite journal|last=Dunning|first=Thad|date=2004|title=Conditioning the Effects of Aid: Cold War Politics, Donor Credibility, and Democracy in Africa|url=https://www.cambridge.org/core/journals/international-organization/article/abs/conditioning-the-effects-of-aid-cold-war-politics-donor-credibility-and-democracy-in-africa/08C903F1F4E5C33D0F7E50B6EB7EB8E9|journal=International Organization|language=en|volume=58|issue=2|pages=409–423|doi=10.1017/S0020818304582073|doi-broken-date=2 December 2024 |s2cid=154368924 |issn=1531-5088|url-access=subscription}}</ref>
|1975-1997
|In the first few years after the Cold War foreign aid produced a small positive effect on democracy in sub-Saharan African countries, unlike in the previous 15 years.
|-
|Easterly et al. 2004<ref>{{Cite journal|last1=Easterly|first1=William|last2=Levine|first2=Ross|last3=Roodman|first3=David|date=2004-05-01|title=Aid, Policies, and Growth: Comment|url=https://pubs.aeaweb.org/doi/10.1257/0002828041464560|journal=American Economic Review|language=en|volume=94|issue=3|pages=774–780|doi=10.1257/0002828041464560|issn=0002-8282|url-access=subscription}}</ref>
|1970-1997
|The finding of Burnside and Dollar (2000, see above) is not robust to different definitions of aid and good policy.
|-
| Mosley et al. 2004<ref>{{Cite journal|last1=Mosley|first1=Paul|last2=Hudson|first2=John|last3=Verschoor|first3=Arjan|date=2004-06-01|title=Aid, Poverty Reduction and the 'New Conditionality'|url=https://academic.oup.com/ej/article/114/496/F217/5089279|journal=The Economic Journal|language=en|volume=114|issue=496|pages=F217–F243|doi=10.1111/j.1468-0297.2004.00220.x|s2cid=55919902 |issn=0013-0133|url-access=subscription}}</ref>
|1980-2000
|Aid increased pro-poor public spending in low-income countries.
|-
|Rajan and Subramanian 2005 <ref>{{cite report|url=https://www.nber.org/system/files/working_papers/w11513/w11513.pdf|title=Aid and growth: What does the cross-country evidence really show?|last1=Rajan|first1=Raghuram G.|last2=Subramanian|first2=Arvind|date=2005|publisher=National Bureau of Economic Research|access-date=2021-02-23}}</ref>
|1960-2000
|There was on average no robust positive relationship between aid and growth.
|-
|Yontcheva and Masud 2005<ref>{{cite report|url=https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Does-Foreign-Aid-Reduce-Poverty-Empirical-Evidence-from-Nongovernmental-and-Bilateral-Aid-17973#:~:text=Empirical%20Evidence%20from%20Nongovernmental%20and%20Bilateral%20Aid,-Author%2FEditor%3A&text=Summary%3A,impact%20on%20human%20development%20indicators.&text=Our%20results%20show%20that%20NGO,effectively%20than%20official%20bilateral%20aid.|title=Does Foreign Aid Reduce Poverty? Empirical Evidence from Nongovernmental and Bilateral Aid|last1=Yontcheva|first1=Boriana|last2=Masud|first2=Nadia|date=2005|publisher=IMF|access-date=2021-02-19}}</ref>
|1990-2001
|Aid by [[Non-governmental organization|NGOs]] co-financed by the [[European Commission]] reduced infant mortality but bilateral aid generally did not.
|-
|Calderon et al. 2006<ref>{{cite report|url=https://publications.iadb.org/publications/english/document/Foreign-Aid-Income-Inequality-and-Poverty.pdf|title=Foreign aid, income inequality, and poverty|last1=Calderon|first1=Mark|last2=Chong|first2=Alberto|date=2006|publisher=Inter-American Development Bank|last3=Gradstein|access-date=2021-02-20}}</ref><ref>A similar version was published as {{Cite journal|last1=Chong|first1=Alberto|last2=Gradstein|first2=Mark|last3=Calderon|first3=Cecilia|date=2009-07-01|title=Can foreign aid reduce income inequality and poverty?|url=https://doi.org/10.1007/s11127-009-9412-4|journal=Public Choice|language=en|volume=140|issue=1|pages=59–84|doi=10.1007/s11127-009-9412-4|s2cid=154071767 |issn=1573-7101|url-access=subscription}}</ref>
|1971–2002
|Aid had no clear effect on poverty, inequality, economic growth or democratic institutions.
|-
|Mosley and Suleiman 2007<ref>{{Cite journal|last1=Mosley|first1=Paul|last2=Suleiman|first2=Abrar|date=2007|title=Aid, Agriculture and Poverty in Developing Countries|url=https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-9361.2006.00354.x|journal=Review of Development Economics|language=en|volume=11|issue=1|pages=139–158|doi=10.1111/j.1467-9361.2006.00354.x|s2cid=154905396 |issn=1467-9361}}</ref>
|1980-2002
|Aid most effectively reduced poverty when it supported public expenditures on agriculture, education and infrastructure.
|-
|Bahmani-Oskooee and Oyolola 2009<ref>{{Cite journal|last1=Bahmani-Oskooee|first1=Mohsen|last2=Oyolola|first2=Maharouf|date=2009-01-01|title=Poverty reduction and aid: cross-country evidence|url=https://doi.org/10.1108/01443330910965796|journal=International Journal of Sociology and Social Policy|volume=29|issue=5/6|pages=264–273|doi=10.1108/01443330910965796|issn=0144-333X|url-access=subscription}}</ref>
|1981-2002
|Aid was on average effective in reducing poverty.
|-
|Clemens et al. 2011<ref>{{Cite journal|last1=Clemens|first1=Michael A.|last2=Radelet|first2=Steven|last3=Bhavnani|first3=Rikhil R.|last4=Bazzi|first4=Samuel|date=2012-06-01|title=Counting Chickens when they Hatch: Timing and the Effects of Aid on Growth|journal=The Economic Journal|language=en|volume=122|issue=561|pages=590–617|doi=10.1111/j.1468-0297.2011.02482.x|issn=0013-0133|doi-access=free}}</ref>
|1970-2000
|Aid had a modest positive effect on economic growth.<ref>The study re-analyzed data from Boone (1996), Burnside and Dollar (2000), and Rajan and Subramanian (2008), treating time-lags differently.</ref>
|-
|Alvi and Senbeta 2012<ref>{{Cite journal|last1=Alvi|first1=Eskander|last2=Senbeta|first2=Aberra|date=2012|title=Does Foreign Aid Reduce Poverty?|url=https://onlinelibrary.wiley.com/doi/abs/10.1002/jid.1790|journal=Journal of International Development|language=en|volume=24|issue=8|pages=955–976|doi=10.1002/jid.1790|issn=1099-1328|url-access=subscription}}</ref>
|1981-2004
|Aid—especially multilateral aid—significantly reduced poverty.
|-
|Kaya et al. 2013<ref>{{Cite journal|last1=Kaya|first1=Ozgur|last2=Kaya|first2=Ilker|last3=Gunter|first3=Lewell|date=2013|title=Foreign Aid and the Quest for Poverty Reduction: Is Aid to Agriculture Effective?|url=https://onlinelibrary.wiley.com/doi/abs/10.1111/1477-9552.12023|journal=Journal of Agricultural Economics|language=en|volume=64|issue=3|pages=583–596|doi=10.1111/1477-9552.12023|issn=1477-9552}}</ref>
|1980-2003
|Aid to agriculture significantly reduced poverty.
|-
|Hirano and Otsubo 2014<ref>{{cite report|url=https://openknowledge.worldbank.org/handle/10986/19397|title=Aid Is Good for the Poor|last1=Hirano|first1=Yumeka|last2=Otsubo|first2=Shigero|date=2014|publisher=World Bank|access-date=2021-02-20}}</ref>
|1990s, 2000s
|Social aid directly benefitted the poorest in society, while economic aid increased the income of the poor through growth.
|-
|Nunn and Qian 2014<ref>{{Cite journal|last1=Nunn|first1=Nathan|last2=Qian|first2=Nancy|date=2014-06-01|title=US Food Aid and Civil Conflict|url=https://pubs.aeaweb.org/doi/10.1257/aer.104.6.1630|journal=American Economic Review|language=en|volume=104|issue=6|pages=1630–1666|doi=10.1257/aer.104.6.1630|s2cid=12935268 |issn=0002-8282}}</ref>
|1971-2006
|U.S. food aid increased the incidence and duration of civil conflicts, but had no robust effect on inter-state conflicts or the onset of civil conflicts.<ref>Nunn and Qian acknowledged that such aid might also have other, possibly beneficial, effects</ref>
|-
|Arndt et al 2015<ref>{{Cite journal|date=2015-05-01|title=Assessing Foreign Aid's Long-Run Contribution to Growth and Development|journal=World Development|language=en|volume=69|pages=6–18|doi=10.1016/j.worlddev.2013.12.016|issn=0305-750X|doi-access=free|last1=Arndt |first1=Channing |last2=Jones |first2=Sam |last3=Tarp |first3=Finn }}</ref>
|1970-2007
|Aid moderately stimulated growth, promoted structural change, improved social indicators, and reduced poverty.
|-
|Petrikova 2015
|1994-2011
|Aid had a small positive effect on food security
|-
|Janjua et al. 2018<ref>{{Cite journal|last1=Janjua|first1=Pervez Zamurrad|last2=Muhammad|first2=Malik|last3=Usman|first3=Muhammad|date=2018-06-01|title=Impact of Project and Programme Aid on Economic Growth: A Cross Country Analysis|url=http://www.thepdr.pk/pdr/index.php/pdr/article/view/2780|journal=The Pakistan Development Review|language=en-US|volume=57|issue=2|pages=145–174|doi=10.30541/v57i2pp.145-174|doi-broken-date=1 November 2024 |issn=0030-9729|doi-access=free|url-access=subscription}}</ref>
|1995-2009
|Project aid had a significant effect on economic growth. Programme aid had a significant effect on social development.
|-
|Abellán and Alonso 2022<ref>{{Cite journal|last1=Abellán|first1=Javier|last2=Alonso|first2=José Antonio|date=2022|title=Promoting global access to water and sanitation: A supply and demand perspective|url=https://www.researchgate.net/publication/358066020|journal=Water Resources and Economics|language=en|volume=38|issue=|pages=100194|doi=10.1016/j.wre.2022.100194|s2cid=246261266 |doi-access=|bibcode=2022WRE....3800194A }}</ref>
|1990-2015
|Aid had a positive effect on access to safe drinking water, this effect being especially important when consistent long-term investments are put into place.
|-
|}

=== 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>