Does Funding From Donors Displace Government Spending For Health In Developing Countries?

TLDR

The notable increases in donor health funding over recent years have heightened the need to assess aid effectiveness. The study investigates whether donor health funding substitutes for, rather than complements, government health financing. The analysis shows a strong substitution effect, especially in low‑income countries, indicating that donor aid reduces government health spending and should be restructured—e.g., via performance‑based financing—to better align incentives.

Abstract

The notable increases in funding from various donors for health over the past several years have made examining the effectiveness of aid all the more important. We examine the extent to which donor funding for health substitutes for—rather than complements—health financing by recipient governments. We find evidence of a strong substitution effect. The proportionate decrease in government spending associated with an increase in donor funding is largest in low-income countries. The results suggest that aid needs to be structured in a way that better aligns donors' and recipient governments' incentives, using innovative approaches such as performance-based aid financing.