Is donors’ concern about the fungibility of foreign aid justified?:a panel data analysis

This paper addresses donors’ policy of providing external assistance to developing countries using an inter-temporal framework, over a finite horizon. While the framework adopted tracks the motivation of providing fore ign aid, it is altogether consistent with the paradigm of forward-looking governments in developed economies. Given uncertainties surrounding income flows, and the gradual convergence towards generational accounting conventions in public finances of donor countries, an attempt is made to empirically ascertain whether foreign assistance is provided on a random basis or is backed by a systematic foreign aid policy. Our findings from a panel of 27 developing countries clearly contest the hypothesis that grants are provided on a random basis. This would otherwise suggest the existence of a consistent policy characterising granting behaviour, urging the need for recipient governments to incorporate grants in their budgetary decision-making.