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Measuring absorptive capacity constraints to foreign aid

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  • Feeny, Simon
  • de Silva, Ashton

Abstract

To assist with progress towards the United Nations Millennium Development Goals (MDGs) in developing countries, the international community is scaling-up foreign aid to record levels. Concurrently, there are concerns that additional aid will not be used effectively due to a problem of absorptive capacity in recipient countries. Empirical studies lend support to these concerns with many finding that there are diminishing returns to foreign aid. This paper reviews the extensive aid effectiveness literature to identify the various dimensions of absorptive capacity. It proceeds by devising a composite index of absorptive capacity for individual recipient countries which can assist policymakers in guiding the allocation of their aid. The relevance of the index is confirmed through its employment in a standard empirical model of aid effectiveness. The paper highlights the developing countries that currently receive high levels of aid relative to their estimated level of absorptive capacity.

Suggested Citation

  • Feeny, Simon & de Silva, Ashton, 2012. "Measuring absorptive capacity constraints to foreign aid," Economic Modelling, Elsevier, vol. 29(3), pages 725-733.
  • Handle: RePEc:eee:ecmode:v:29:y:2012:i:3:p:725-733
    DOI: 10.1016/j.econmod.2012.01.013
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    References listed on IDEAS

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    Cited by:

    1. Gualberti, Giorgio & Singer, Christine Eibs & Bazilian, Morgan, 2013. "The capacity to spend development funds in the energy sector," Utilities Policy, Elsevier, vol. 26(C), pages 36-44.
    2. Patrick Guillaumont & Laurent Wagner, 2014. "Aid Effectiveness for Poverty Reduction: Lessons from Cross?country Analyses, with a Special Focus on Vulnerable Countries," Revue d’économie du développement, De Boeck Université, vol. 22(HS01), pages 217-261.
    3. Bandyopadhyay, Subhayu & Lahiri, Sajal & Younas, Javed, 2015. "Financing growth through foreign aid and private foreign loans: Nonlinearities and complementarities," Journal of International Money and Finance, Elsevier, vol. 56(C), pages 75-96.
    4. repec:eee:poleco:v:51:y:2018:i:c:p:1-14 is not listed on IDEAS
    5. Sam Barrett, 2015. "Subnational Adaptation Finance Allocation: Comparing Decentralized and Devolved Political Institutions in Kenya," Global Environmental Politics, MIT Press, vol. 15(3), pages 118-139, August.
    6. Laurent Wagner, 2014. "Identifying thresholds in aid effectiveness," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(3), pages 619-638, August.
    7. Presbitero, Andrea F., 2016. "Too much and too fast? Public investment scaling-up and absorptive capacity," Journal of Development Economics, Elsevier, vol. 120(C), pages 17-31.
    8. Jean-Louis Combes & Rasmane Ouedraogo & Sampawende J.-A. Tapsoba, 2016. "Structural shifts in aid dependency and fiscal policy in developing countries," Applied Economics, Taylor & Francis Journals, vol. 48(46), pages 4426-4446, October.
    9. repec:liu:liucej:v:15:y:2018:i:2:p:249-276 is not listed on IDEAS
    10. Harb, Nermeen & Hall, Stephen G., 2019. "Does foreign aid play a role in the maintenance of economic growth? A non-linear analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 73(C), pages 192-204.
    11. Feeny, Simon & Vuong, Vu, 2017. "Explaining Aid Project and Program Success: Findings from Asian Development Bank Interventions," World Development, Elsevier, vol. 90(C), pages 329-343.
    12. Hammady Ahmed DINE RABEH, 2013. "Firm Resources’ Entanglement Determines ITS Absorptive Capacity: A Review Towards A New Reconceptualization," Working Papers 270, Laboratoire de Recherche sur l'Industrie et l'Innovation. ULCO / Research Unit on Industry and Innovation.
    13. Axel Dreher & Valentin F. Lang & Sebastian Ziaja, 2017. "Foreign Aid in Areas of Limited Statehood," CESifo Working Paper Series 6340, CESifo Group Munich.
    14. Gnangnon, Sèna Kimm & Priyadarshi, Shishir, 2016. "Has the multilateral Hong Kong Ministerial decision on duty free quota free market access provided a breakthrough in the Least developed countries' export performance?," WTO Staff Working Papers ERSD-2016-06, World Trade Organization (WTO), Economic Research and Statistics Division.
    15. Jean-Louis Combes & Rasmané Ouedraogo & Sampawende J Tapsoba, 2016. "What Does Aid Do to Fiscal Policy? New Evidence," IMF Working Papers 16/112, International Monetary Fund.

    More about this item

    Keywords

    Foreign aid; Absorptive capacity; Developing countries; Economic growth;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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