Aid Illusion and Public Sector Behaviour

Authors: M. McGillvray; O. Morrissey

Source: Journal of Development Studies, Volume 37, Number 6, August 01, 2001 , pp. 118-136(19)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

Conventional treatments of fungibility, such as in Assessing Aid, are concerned with evidence that aid recipients do not increase sufficiently (that is, by the amount of aid) expenditure on specific areas favoured by donors. In other words, fungibility implies that recipients divert aid to expenditure on areas donors do not wish to fund. However, there is evidence that aggregate expenditure, and even spending on donor-supported areas, rises by more than the value of the aid inflow. This contribution, using insights from the public choice research on fiscal illusion, provides a range of theoretical scenarios to explain this outcome. Included are scenarios where, even where all the features of fungibility are present, expenditure on areas favoured by the donor can increase by more than the value of the aid inflow. The study concludes by suggesting new directions for research on aid policy and the impact of aid on the public sector in developing countries.

Keywords: Aid Recipients; Fungibility; Donors; Expenditure; New Research Directions; Aid Policies; Public Sector; Developing Countries

Document Type: Research article

Publication date: 2001-08-01