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Reader exercise: please explain “aid fungibility” to our Secretary of State

UPDATE: OK I finally define fungibility (see end of post). It involves brothels.


 the United States said Friday that it planned increased aid for Pakistan’s military over the next five years.

Secretary of State Hillary Rodham Clinton made the announcement in Washington …

In announcing the aid, Mrs. Clinton did not discuss the administration’s moves to stop financing certain elements in the Pakistani Army that have killed unarmed prisoners and civilians.

On Thursday, senior administration and Congressional officials said that the Obama administration planned to cut off funds to those units.

From today’s NYT

T or F: Increasing aid to Pakistani military while you “stop financing certain elements” who kill civilians is equivalent to increasing aid to these same “certain elements.”

UPDATE: OK, OK I can tell you guys really want me to define “aid fungibility”. Here’s the official definition given by the World Bank’s Chief Economist in the 1950s:

It’s when we think we’re financing a power plant, and we’re really financing a brothel.

Aid Fungibility is when the Donor gives the Government Aid for Good Thing A and refuses to fund Bad Thing B. The clever Government then reduces its own spending on Good Thing A one for one with the aid, so that total spending (Donor + Government) on Good Thing A is unchanged. The government uses its savings on A to spend more on Bad Thing B. So de facto (compared to the pre-aid situation)  the Donor really has no effect on A and only has the effect of increasing total spending on Bad Thing B.

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  1. HV wrote:

    “Aid fungibility” or “insanity” as in doing the same thing over and over and expecting different results.

    Posted October 22, 2010 at 12:55 pm | Permalink
  2. Josh wrote:

    Couldn’t it be that the State department understands this dynamic well but doesn’t care? It seems like Pakistan can either be an enemy to whom we provide aid, or a worse enemy to whom we don’t. We opt for the latter, even though we know that money will be misdirected. Maybe cutting off aid to certain elements is just a way of saving face after giving $2.2 billion in aid to a country that may or may not have allowed the Taliban to sabotage the NATO supply line. But what else can they really do?

    Posted October 22, 2010 at 11:44 pm | Permalink
  3. Alan Eastham wrote:

    Explain it to Patrick Leahy. He put the law in question (the “Leahy Amendment”) into the State Department approps bill some years back, thus prompting a massive and largely unproductive exercise of checking EVERY name of EVERY soldier receiving military training at US expense, plus vetting their units.

    Posted October 23, 2010 at 11:25 am | Permalink
  4. Rune wrote:

    Fungibility is an important issue in aid. So is being precise. Fungibility only means no additional spending on good thing A if i) the recipient does not want to spend more on it as more resources becomes available (from any source) and ii) you can’t force through additional spending in any way (e.g. through aid in kind). For most things most governments would want to spend a little extra if they get additional funding, and so aid would increase both good thing A and bad thing B (by crowding-out the recipient’s own spending on A, but not by 100%).

    Posted October 26, 2010 at 5:18 am | Permalink

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