Aid fungibilty - spirited debate in the blogs

[harnett]

The Guardian (9/4/10) reports:

Nations Slash Health Funding if Sent Aid

Governments in developing countries have cut the budgets of their health ministries as a result of aid donations they receive for healthcare from wealthy nations, according to a study published today.

The authors of the painstaking and controversial research, published in the Lancet, pointed out that developing world governments have massively increased the amount they spend on health by nearly 100% between 1995 and 2006.

But the substantial extra money in donations for health – whether to treat HIV/Aids or improve maternity care – that in recent years has been arriving from abroad has supplanted some of the money that would otherwise have been earmarked by finance ministers for health departments.

The study, which has major implications for foreign aid policy, was carried out by Professor Christopher Murray of the Institute for Health Metrics and Evaluation, University Of Washington, Seattle, and Dr Chunling Lu from Harvard University and their colleagues. They used records from the World Health Organisation and the International Monetary Fund, but acknowledge that there were major problems getting the data needed, because of the inadequacies of some of the record-keeping within governments.

"For every $1 of DAH [development assistance for health] given to government, the ministry of finance reduces the amount of government expenditures allocated to the ministry of health and other government agencies that engage in health spending by about $0.43 to $1.14," they write. "From the global health community's perspective, this means that to increase government health spending by $1, global health funders need to provide at least $1.75 of DAH."

When they looked at donor funds given to non-governmental organisations (NGOs) for specific projects, however, they found a different picture – government spending went up, not down. But the researchers, and also the authors of a commentary published with the study, warn against simplistic conclusions.

"Many developmental economists might view these findings as evidence of rational behaviour on the part of ministries of finance," write Murray and colleagues. An important question is whether the government money goes instead to education or poverty alleviation which may help prevent ill-health rather than funding the military. Repayment of loans has also been a major issue in the past.

If interested, the full article can be read at;

http://www.thelancet.com/journals/lancet/article/PIIS0140-6736%2810%2960233-4/fulltext

[petagny]

We've all heard about fungibility and here's some evidence. Laura Freschi has something to say about this piece of research on the Aid Watch blog.

http://aidwatchers.com/2010/04/does-health-aid-to-governments-make-governments-spend-more-on-health/

The final sentence is 'The Lancet findings are scandalous, relative to the naïve but widespread belief that donors can use earmarked aid to force bad governments to behave.'

[STONE]

Good one. I loved the electricity project - brothel quote!

[russcraig7]

The Lancet started a heavy debate with this article on aid fungibility: http://www.thelancet.com/journals/lancet/article/PIIS0140-6736%2810%2960233-4/fulltext . Lots of follow up discussion between health purists who insist that aid should be additional and economists who point out that sovereign governments are free to spend where they will and anyway a real counterargument would need to examine the marginal costs of shifting the money from health to say education.

See also: http://www.thelancet.com/journals/lancet/article/PIIS0140-6736%2810%2960233-4/fulltext .

[harnett]

Make love not war.  Better a brothel than the electicity project - arms expenditure scenario I suppose

So are all us economists going to pat ourselves on the back for knowing about fungibility for the last few decades and leave it at that?  What do we really think of sectoral or even general budget support's impact?  Sure, I can remember advising a group of DFID economists in 1997 that there was no evidence that (the then equivalent of) budget support had any impact on poverty reduction in Mozambique and was roundly attacked for suggesting such heresy.  Since then I've watched budget support increase exponentially and into countries with appalling governance/corruption indicators.  Maybe we should be looking at the conditions in which it will/might work and in which it won't - he says, still agreeing with fundamental principles behind GBS.  Can of worms?