Where Did All the Aid Go? An Empirical Analysis of Absorption and Spending
IMF Working Papers, February 1, 2008
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- Where Did All the Aid Go? An Empirical Analysis of Absorption and Spending
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Bibliographic details
- Authors: Shekhar Aiyar, Ummul Hasanath Ruthbah
- Published: February 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451868968.001
Summary and scope
- 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.
- Aid spending is defined as the increase in government fiscal expenditures as a result of aid.
Key empirical findings
- Short-run absorption is typically very low.
- Much aid exits through the capital account.
- Aid spending is significantly greater than aid absorption, implying that aid systematically leads to an injection of domestic liquidity in recipient economies.
- The evidence may help illuminate the rather weak link between aid and growth found in the literature.
Policy implications and recommendations
- Reinforces the case for greater coordination between fiscal and monetary authorities in response to aid inflows.
- Managing the liquidity injection from aid requires attention to both fiscal expenditure behavior and monetary/reserve responses.
Subjects and keywords
- 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