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AbstractIf development assistance targeted at specific sectors is not used as intended, aid is said to be fungible. While fungible aid is in general perceived as being less effective than aid used as specified, this has not been formally tested. This paper attempts at filling this gap and hence, tries to assess to what extent fungibility is something donors should be concerned about. Country‐specific estimates of fungibility are obtained for 57 aid‐recipient countries, suggesting that sectoral aid is indeed fungible on average. These estimates are then incorporated into an empirical model of aid and economic growth. I do not find any evidence of non‐fungible sectoral aid working better than fungible aid. Then, I focus on sectoral aid to 'pro‐poor' government expenditure sectors to assess the effect on infant mortality. While the results indicate that non‐fungible aid is welfare improving, this is not robust to small changes in the specification. My results suggest that the concept of fungibility may be too narrow and should possibly not be the most central concern when aid is debated or given. Copyright © 2007 John Wiley & Sons, Ltd.

Donor aid is often regarded as being informally tied (aid increases donorrecipient exports) and this effect is, in general, interpreted as being harmful to aid recipients. However, in this paper, using a gravity model, we show that aid is also positively associated with recipient-donor exports. That is, aid increases bilateral trade ows in both directions. Our interpretation is that an intensi ed aid relation reduces the e ective cost of geographic distance. We find a particularly strong relation between aid in the form of technical assistance and exports in both directions. When we disaggregate aid to specifically study the effects from trade-related assistance (Aid for Trade) the effect is small and fully accounted for by aid to investments in trade-related infrastructure. Our sample includes all 184 countries for which data is available during the period 1990 to 2005.

This paper shows that whether natural resources are good or bad for a country's development depends crucially on the interaction between institutional setting and the type of resources that the country possesses. Some natural resources are for economical and technical reasons more likely to cause problems such as rent-seeking and conflicts than others (termed technically appropriable resources). This potential problem can, however, be countered by good institutional quality (rendering these resources less institutionally appropriable). In contrast to the traditional resource curse hypothesis we show that the impact of natural resources on economic growth is non-monotonic in institutional quality. Mineral rich countries are cursed only if they have low quality institutions, while the curse is reversed if institutions are good enough. Using new data we find that this is even more stark for countries rich in diamonds and precious metals.