Evaluating the Hypothesis of Aid Fungibility: A Focus on Human Development in Nigeria

Abstract

The thrust of this paper is the empirical investigation of the aid fungibility hypothesis with a focus on the effectiveness of net ODA received, grants and technical cooperation grants in driving the pace of human development. The research method relied on quasi-experimental approach with fully modified Least Squares (FMOLS) and error correction mechanism as techniques for the data analysis. The unit root tests results from the Augmented Dickey-Fuller method showed that all the series are difference stationary I(1). In addition to the unit root test, the Hansen cointegration tests results shows evidence of cointegration among the series. This is suggestive of parameter stability in each of the model. The cointegrating regression results indicate that technical cooperation grant exerts significant positive impact on human development in Nigeria in both long run and short run. This suggests that free-standing funds from international sources committed to the development of technical and managerial skills or technology fostered human development by making resources available for longevity and improved standard of living. Similarly, the dynamic regression result shows that Nigeria tends to leverage on grants in addition to technical cooperation grants in boosting the level of human development in the short run. On the contrary, the results show that net ODA received has adverse effect on the underlying human development indicators in the short run. This suggests that net ODA received is a fungible source of aid considering its ineffectiveness in fostering human development. Accordingly, it is recommended for aid policy to focus on Aid-on-Delivery (AoD) and General Budget Support (GBS) in order to improve the effectiveness of aid in scaling up the pace of human development in Nigeria.

Keywords: Human development, Fungibility, ODA, Grants and Technical cooperation grants