External and internal development funds may be substitutes or complementary in financing development projects. We construct a welfare-maximizing model of a community, explicitly incorporating the decision-makers' choice between internal and external resources for development purposes. The model is estimated with Mauritian data, which include periods of rising foreign aid and substantial repayment. The computed values of substitution elasticity between the two sources of funds, derived from the social choice process, indicate that internal and external funds are complementary and therefore external funds do not seem to be fungible.
S. H. Y. A. M. NATH and Sobhee, S. K., “Is external development assistance fungible? The case of Mauritius”, Oxford Development Studies, vol. 30, pp. 307–315, 2002.