Measuring absorptive capacity constraints to foreign aid

Simon Feeny and Ashton de Silva

Economic Modelling, 2012, vol. 29, issue 3, 725-733

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.

Keywords: Foreign aid; Absorptive capacity; Developing countries; Economic growth (search for similar items in EconPapers)
JEL-codes: F35 O11 O40 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (36)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:3:p:725-733

DOI: 10.1016/j.econmod.2012.01.013

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