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UNU-WIDER gratefully acknowledges specific programme contributions from the governments of Denmark (Ministry of Foreign Affairs, Danida) and Sweden (Swedish International Development Cooperation Agency—Sida) for the Research and Communication (ReCom) programme. UNU-WIDER also acknowledges core financial support to UNU-WIDER’s work programme from the governments of

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.

Recent debates have focused on the negative role of the proliferation of foreign aid facilities and donor fragmentation for development outcomes and recipient country institutions. This article investigates an overlooked positive side effect of donor proliferation. With an increasing number of donors, exposure to negative aid shocks decreases, as well as the impact of such shocks on violent political conflict. Using data on 106 recipient countries for the years 1970 to 2008 and employing event history and mediation analysis, we find strong evidence that fragmentation signifi-cantly reduces the risk for political destabilization associated with aid shocks. Keywords foreign aid, conflict, bargaining, internal armed conflict, political economy The proliferation of governmental and nongovernmental organizations (NGOs) that provide aid to developing countries has been at the center of recent academic and policy debates (see, e.g., Aldasoro, Nunnenkamp, and Thiele 2010; Easterly 2007). There is evidence that donor fragmentation has negative consequences, both for the efficacy of aid (Djankov, Montalvo, and Reynal-Querol (2009) and for domestic institutions in recipient countries (Morss 1984; Knack and Rahman 2007).

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This Dissertation is brought to you for free and open access by the Graduate School at Trace: Tennessee Research and Creative Exchange. It has been

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