Fiscal behavior, Aid and Decentralization in Uganda – FISCAID

We believe that the Ugandan context is relevant not just due to data availability but also its status of aid recipient. Uganda has a substantial aid history as an «aid darling«, but aid flows began to decrease after the mid-2000s, partly due to political concerns and the adoption of specific laws related to individual rights. Today, the country exemplifies the importance of aid for East African countries. In 2021, net ODA accounted for 6.3% of GNI and 50.1% of central government expenses, close to regional averages. Uganda also mirrors the global trend of increased donors’ fragmentation, rising from 29 donors in 2010 to 77 by 2021. Simultaneously, Uganda initiated effective devolution in the late 1990s and fully implemented it in 2014. It is acknowledged as one of Africa's top fiscal performers, enabling fiscal and spending adjustments in response to aid flows.
We expect to observe aid fungibility at two levels. In the short term, we anticipate adjustments in public expenditures triggered by unforeseen fluctuations in aid flows but no adjustments on fiscal revenues. Looking ahead to the medium term, we envision districts making fiscal adjustments and adjust their domestic resource mobilization in response to aid dynamics. We also hypothesize that the degree of aid fungibility may vary upon the nature of the flow, distinguishing between budget support and aid project as the information from the recipient’s perspective could be incomplete.
We hypothesize that aid can influence competition among local jurisdictions through its effect on local resources but are uncertain on the sign and magnitude of its effects. On one hand, recipient local governments may benefit from these external resources to reduce the need for efforts induced by interjurisdictional competition. The effect of aid then mirrors that of intergovernmental transfers and raises the risk of disincentivizing revenue collection efforts and the flypaper effect. Conversely, local governments may compete to attract decentralized aid, especially when it depends on the effectiveness of recipient governments. In this case, competition could be heightened due to the possibility of receiving aid flows. Finally, we expect aid effectiveness to be affected by aid fungibility. Our capacity to take into account reallocation of domestic resources between sector and/or districts would lead to a renew of the analysis of aid effectiveness at the subnational and national level.

The final output will constitute a significant contribution to the understanding of the effects of aid predictability on economic (local activities, public finance efficiency) and human development (population health). This knowledge will guide decision–makers in enhancing aid allocation and implementation through constructive collaboration between donors and recipient governments.

This project would be a first step to test aid fungibility at the local level.

To be done

FISCAID proposes to use Uganda as an empirical case study to provide an in-depth analysis of the various mechanisms through which foreign assistance affects the fiscal behavior of the recipient country, focusing on public domestic expenditure and revenues at the national and sub-national levels as well as to revisit the macro-micro paradox of aid effectiveness. To this aim, we will mobilize administrative data from the Ugandan Ministry of Finance, Planning, and Economic Development with empirical (econometrical) analyses addressing the following questions: i) to what extent aid is fungible and affects the fiscal behavior of the recipient government in a context of aid fragmentation and decentralization? ii) do those fiscal effects affect aid effectiveness and more generally development?