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

Author

Listed:
  • Chatterjee Santanu

    (University of Georgia)

  • Giuliano Paola

    (UCLA, Anderson School of Management)

  • Kaya Ilker

    (American University of Sharjah)

Abstract

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.

Suggested Citation

  • Chatterjee Santanu & Giuliano Paola & Kaya Ilker, 2012. "Where Has All the Money Gone? Foreign Aid and the Composition of Government Spending," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-36, August.
    • Handle: RePEc:bpj:bejmac:v:12:y:2012:i:1:p:1-36:n:31
    DOI: 10.1515/1935-1690.2458
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