Fungibility and room for funding

When evaluating charities, we don't simply look to the cost-effectiveness of their existing programs: we assess the cost-effectiveness of additional donations, to make sure that your contributions will have the greatest impact. It's important to find programs with room for additional funding, where your giving can be used to support highly cost-effective interventions.

The issue of funding gaps is related to the problem of fungibility. This occurs when units of a resource are interchangeable, and can be swapped between uses. Your dollars are fungible with other donors' dollars. This makes it difficult to donate 'for' a single program if the charity is spending money on multiple programs. Whilst it might seem that you're helping the particular program that inspired your donation, the problem of fungibility means that a charity might simply alter the distribution of their existing funds, reducing the impact of your donation.

Fungibility concerns crop up in a variety of places when it comes to aid. One worry is that the recipients of aid will spend the money in ways the donors don't approve of. Another is that aid crowds out other sources funding: it might be that a government relying on aid to carry out a program would otherwise cover its costs through taxes, and will now spend its money on a less useful activity.

Fungibility concerns also arise with large, diversified charities. Whilst large organisations are likely to carry out some cost-effective interventions, these might not be prioritised internally, or might already receive sufficient funding. If so, even earmarked donations will result in the reallocation of other funds away from the good program and towards less effective interventions. Amongst our reasons for ceasing to recommend the tuberculosis charity Stop TB were concerns of this kind regarding fungibility between programs.

Fungibility needn't always be a problem. Local personnel often have better information at their disposal than distant central planners. The more confidence you have in the rationality of the beneficiaries, and the amount of extra information you think they can use in their decision making, the less you should be concerned with fungibility - it might even be an advantage. On the other hand, if your intervention was carefully chosen for being exceptionally good, reallocation resulting from a pre-existing surfeit of funds will be disappointing.

So what can we do about this?

We can donate to single-issue charities. If a charity runs a single program, there's no risk that they will reallocate resources elsewhere in response to your donation. Alternatively, you could donate to a charity where all the programs are of roughly equal calibre. In general there is little reason for charities to diversify, and we prefer charities that do one thing well.

There are also cases in which an organisation's ability to reallocate their funds is limited: for example, if all other funding is already earmarked, funds cannot be moved between programs.