The fungibility of US assistance to developing countries and the impact on recipient expenditures: a case study of Pakistan

Summary. -- Development assistance continues to be an important source of funds to developing nations. Donor countries prefer to provide categorical (or project) aid since it is believed that the tyiing of aid to a specific project will help to ensure that the funds are used in accordance with the designated objectives. Development literature indicates, however, that the ability to tie aid may be illusory. Specifically, recipient nations can cut the ties associated with categorical aid and effectively transform it into purely income-augmenting funds, i.e., purely fungible resources. The funds legally designated for specific development purposes may finance projects whose purposes are not in line with the developmental objective. The fungibility of development assistance has received little empirical attention. This paper is an effort to fill that gap. We formulate an econometric model that explains the response of Pakistan's spending for defense, public nondefense, and private consumption to US assistance within the 'fungibility' framework. Our reuslts suggest that US assistance to Pakistan, whether military or nonmilitary, is fully transformed into fungible resources with an impact on public spending less signfiicant than expected.