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Where Did All the Aid Go? An Empirical Analysis of Absorption and Spending

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  • Shekhar Aiyar
  • Ummul Hasanath Ruthbah

Abstract

This paper examines the macroeconomic usage of aid using panel data for a broad sample of aid-recipients. By definition an increase in aid must go toward a reduction in the current account balance (absorbed aid), an increase in capital outflows, or reserve accumulation. It is found that short-run absorption is typically very low, with much aid exiting through the capital account. Moreover, aid spending, defined in terms of the increase in government fiscal expenditures as a result of aid, is significantly greater than aid absorption, implying that aid systematically leads to an injection of domestic liquidity in recipient economies. The evidence here may help illuminate the rather weak link between aid and growth found in the literature. It reinforces the case for greater coordination between fiscal and monetary authorities in response to aid inflows.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/34.

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Length: 34
Date of creation: 01 Feb 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/34

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Keywords: Government expenditures; Current account balances; current account balance; reserve accumulation; current account; capital formation; central bank; capital outflows; foreign aid; current account deficit; balance of payments; capital outflow; capital inflows; current account deficits; capital flows; gross capital formation; private capital flows; capital expenditures; private capital; domestic debt; domestic financing; external loans; public debt; government deficit; debt outstanding; government debt;

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References

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  1. Raghuram G. Rajan & Arvind Subramanian, 2008. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 643-665, November.
  2. Barry P. Bosworth & Susan M. Collins, 1999. "Capital Flows to Developing Economies: Implications for Saving and Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 143-180.
  3. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, Elsevier, vol. 64(2), pages 547-570, April.
  4. Alesina, Alberto & Weder, Beatrice, 2002. "Do Corrupt Governments Receive Less Foreign Aid?," Scholarly Articles 4553011, Harvard University Department of Economics.
  5. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  6. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, Elsevier, vol. 40(2), pages 289-329, February.
  7. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2001. "On the Empirics of Foreign Aid and Growth," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 03-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Sep 2003.
  8. Collier, Paul & Dollar, David, 2002. "Aid allocation and poverty reduction," European Economic Review, Elsevier, Elsevier, vol. 46(8), pages 1475-1500, September.
  9. Michael A. Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting chickens when they hatch: The short-term effect of aid on growth," International Finance, EconWPA 0407010, EconWPA.
  10. William Easterly & Ross Levine & David Roodman, 2003. "New Data, New doubts: A Comment on Burnside and Dollar's "Aid, Policies, and Growth" (2000)," NBER Working Papers 9846, National Bureau of Economic Research, Inc.
  11. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, Elsevier, vol. 65(1), pages 9-15, October.
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Citations

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Cited by:
  1. Henrik Hansen & Derek Headey, 2010. "The Short-Run Macroeconomic Impact of Foreign Aid to Small States: An Agnostic Time Series Analysis," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 46(5), pages 877-896.
  2. Pedro M. G. Martins, 2010. "Aid Absorption and Spending in Africa: A Panel Cointegration Approach," Working Paper Series 1010, Department of Economics, University of Sussex.
  3. Pedro M G Martins, . "Aid Absorption and Spending in Africa: A Panel Cointegration Approach," Discussion Papers 10/06, University of Nottingham, CREDIT.
  4. Andrew Berg & Rafael A Portillo & Luis-Felipe Zanna, 2014. "Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime," IMF Working Papers 14/18, International Monetary Fund.
  5. Henri Bezuidenhout, 2009. "A regional perspective on Aid and FDI in Southern Africa," Working Papers 147, Economic Research Southern Africa.
  6. Shonchoy, Abu, 2010. "The Dynamics of Spending and Absorption of Aid: Panel Data Analysis," MPRA Paper 24530, University Library of Munich, Germany.

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