Counterpart funds refer to (1) the local currency generated by the sale of food and other commodity aid, or (2) foreign exchange aid over whose use the donor has some control. This paper attempts to resolve the debate surrounding the development impact of counterpart funds — whether they have a systematically positive or negative impact on development, whether they are inflationary, and whether they heighten friction between donor and host governments (among other issues). The report begins with a historical summary of how counterpart funds have been used to promote development since the 1940″s, plus a look at the data to determine the magnitude of counterpart funds in developing countries, especially those generated by U.S. assistance. Next, it outlines the major technical economic issues in the debate, including the effect of the funds on money supply, balance of payments, and government budgets. The report then establishes an innovative framework for assessing the funds” impact. This framework enables one to analyze the economic effects of counterpart funds as they relate to the appropriate (and inappropriate) uses of counterpart funds in each of four different sets of country situations. Using counterpart funds in one way may yield a positive development impact in one country situation, but be counterproductive in another. The report concludes with a discussion of eight case studies describing how A.I.D. Missions actually used counterpart funds and relating that experience to the preceding theoretical framework. (Author abstract, modified)
