Description
This paper replicates and extends a well known model of quantifying categorical fungibility of foreign aid to study the effect of aid on government consumption, magnitude and composition of government investment and revenue mobilization in Nepal. I find that aid intended for a particular sector has, by and large, been spent within that sector and, in fact, induced the government to augment its spending on that particular sector for most categories studied. This broadly corroborates the evidence on the “flypaper effect” of aid not just at the aggregate level but also at the sectoral level. I also find that aid has enhanced the government’s revenue effort but not quite to the extent that would enable the government to self-finance the inflating government consumption, which, I find, has a strong positive aid elasticity.
Putting money where the mouth is: does aid to Nepal finance what the donors say they want to finance?
This paper replicates and extends a well known model of quantifying categorical fungibility of foreign aid to study the effect of aid on government consumption, magnitude and composition of government investment and revenue mobilization in Nepal. I find that aid intended for a particular sector has, by and large, been spent within that sector and, in fact, induced the government to augment its spending on that particular sector for most categories studied. This broadly corroborates the evidence on the “flypaper effect” of aid not just at the aggregate level but also at the sectoral level. I also find that aid has enhanced the government’s revenue effort but not quite to the extent that would enable the government to self-finance the inflating government consumption, which, I find, has a strong positive aid elasticity.