A lot has been made of the increase in aid flows for health to developing countries, however, national governments remain the most important financier of health programs in their own countries.   From a sustainability perspective, in particular given the expected contraction or flatlining of health aid flows, and for many other reasons, national financing may be preferred method of financing.  Arguably, government spending on health is a good indictor of the extent to which a government prioritizes health.

It turns out we actually have quite poor information on how countries have actually done relative to these goals.  Health expenditure data is theoretically collected in standardized ways across countries by groups such as the WHO as well as the IMF, however, the country-specific methodologies and missing data means that making comparisons across countries or over time has been a real pain.  I’ve tried using some of this data before, and I always have major reservations.

In theory, the data should include all government expenditures, including those financed by external donors, but it gets complicated when some of these flows are provided off-budget or in other ways.  I once asked a colleague who is responsible for the National Health Accounts exercise in his country how he collects information on money from PEPFAR.  He told me he goes to the PEPFAR website, figures out how much they say they spend in his country, and then he just assumes about 70% of that money is what is actually spent in his country.  That is his solution, but I am sure every country has their own way of doing it.

There is a long-standing debate in the aid effectiveness literature that has explored whether or not foreign aid is fungible.  Fungibility occurs when domestic resources are reallocated to other purposes when new monies arrive from donors.  Ideally, donor spending should increase the total amount of money available for a specific purpose, but if allocations are fungible than it may not always be the case.  For example, if an external donor commits X million to a health program in a given country, and that country reduces its budget to the health sector by Y, than the total budget has only increased by (X-Y).  If Y is large, than new aid may do little to increase total resources.  In the government expenditure data it would still look like total funding has increased, although by a lot less than hoped by donors.

A new study by the tireless folks at the Institute of Health Metrics and Evaluation, out today in the Lancet, provides the first good analysis of health expenditures in developing countries.  They make a number of important contributions, which I will try to outline here.

First, they confirm that current health expenditure data is bad and should only be used cautiously.  For the study, they compared health expenditure data from both the WHO and IMF, which I think was judicious, and end up with substantially different estimates depending on which data source is used.

Second, they do find that health expenditures in absolute terms developing countries have grown substantially in recent years.  They find that HE have grown by nearly 100% from 1995 to 2006.  For the most part, growth in funding has been driven largely by increases in GDP in many countries (some regions, such as sub-Saharan Africa has seen substantial growth in GDP during this time period), an increased share of total government expenditures on health, but a decreased share of GDP spent by government.

Third, the authors find substantial evidence of fungibility in a huge way: on average $1 of health aid given to governments, the ministry of finance reduces health expenditures by about $0·43 to $1·14.  Yes, depending on the data source, health aid may have actually decreased overall health spending.  This is particularly problematic in Sub-Saharan Africa, which is the region that has seen the highest growth in health aid – presumably because the health situation is the most dire in this region.

Curiously, they find that when health aid is given to non-governmental organizations as opposed to the government, not only does it not lead to the fungibility finding of above, it is actually associated with increased government spending.  This might suggest some other mechanism is at work, but the positive effect makes me worry more about some sort of unaccountable selection effect.  I also have tried to use this variable in the health funding before and have found it a bit suspect, so I am not making too much of this finding.

I think these results may come as quite surprising – and depressing – to many in the global health community.  Have all past efforts to scale up development assistance for health actually reduced spending on health in the poorest countries?

I also think we should be really worried about the fungibility given how aid flows are generally allocated by donors – for disease-specific projects and recently for the purchase of commodities such as drugs and bed nets – where as typically government expenditures are more geared towards more system related spending: primary health infrastructure and health worker salaries.  Donor aid might be squeezing out spending on systems in a great way.  To the Ministry of Finance a dollar is a dollar, but to a patient in Africa a free bed net might be a poor substitute for a doctor to deliver a baby.

These findings are very important in how we think about the role of donors in financing health in developing countries – how are they really making things better?  It might help explain the lack of good evidence that that aid for health has had much impact on health outcomes.  I really encourage everyone to read this important paper and decide for themselves what they think.   All comments are very welcome.

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5 Responses to “Is aid to the health sector fungible? Apparently.”

  1. April says:

    You are right Karen. These findings are very worrisome, and I hope the generate serious discussions.
    They don't, of course, show causality, just correlation. At the same time, if you get a finance ministry official in a candid moment, most will tell you that of course they re-allocate when the get more funding for health from donors. And from the country's perspective, this may even make sense.
    As you said, one of the most problematic implications is the big distortion that comes from the fact that donors spend more vertically – whereas governments spend more horizontally. It's not hard to imagine that in some countries, depending on the magnitude of donor inflows – we could well be doing more harm than good.

  2. April says:

    You'll note the study results also seriously undermine the "cost based" requests to fund a specific issue. It's common in global health, for "issues" to raise money by doing analysis that shows if donors allocate X dollars to (say) maternal and child health, we can reduce maternal and child mortality by Y.

    See this webpage, and study results on the investment case for maternal and child health

    The costing study results suggest that the MCH movement can turn $15 billion into mortality reductions sufficient to meet MDGs 4 and 5.

    If donor money spent on MCH reduces gov't money spent on health (as it undoubtedly does), and if gov't money spent on health was contributing AT ALL to MCH – then this raises an important question of what is the net effect. Maybe it's still positive. If the reallocation reduces other health outcomes though, as is likely given how much more "horizontal" is gov't spending, the total health effect could be negative.

    Even if you ONLY care about your health goal (say maternal health), you would need to take into account the need to make up for the re-allocated funding in implementing your programs.
    Which means these figures need to have some sort of standard "fungibility deflator" when stating how much mortality reduction/ health improvement donors can "buy" when spending money on their issue.

    And, no matter how bad the data is on the funding executed via non-governmental channels, the fact that the study shows these channels don't exhibit displacement, means that there should be a lot more discussion and analysis of the different channels through which donor funds may flow.

    Just as an example, Ghana and Rwanda have insurance mechanisms in place. Could health donors achieve more (in the sense of reducing reallocation) by transferring their funds via these mechanisms? Or should donors be putting a lot more funding in via transfers to individuals (via vouchers or conditional/non-conditional cash transfers?).

  3. Kathryn Luttman says:

    Karen your awesome! This is a great site. I have bookmarked your blog site so it shall never leave me. Thanks.

  4. Simon Wright says:

    The way the news media have grabbed this and misreported it is a big problem. It is a correlation and not necessarily a cause. Also the discussion does not frame itself by looking at the proper roles of NGOs and governments or the Paris Principles. What it should spark off is debates about whether it is appropriate for donors to impose their priorities on recipient governments. My blog here discusses these aspects: http://www.savethechildren.org.uk/blogs/2010/04/association-or-cause/

  5. […] spends about 1 dollar less of its own resources on health. This result attracted much attention in the […]

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