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

By Shekhar Aiyar, Ummul Hasanath Ruthbah

February 1, 2008

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Shekhar Aiyar, and Ummul Hasanath Ruthbah. Where Did All the Aid Go? An Empirical Analysis of Absorption and Spending, (USA: International Monetary Fund, 2008) accessed December 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Current account balance, Private investment, Public investment and public-private partnerships (PPP), Reserves accumulation, Terms of trade

Keywords: Current account, GDP, Mean GDP, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/034
Stock No:

WPIEA2008034
ISBN:

9781451868968
ISSN:

1018-5941

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