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

36 Pages Posted: 18 Feb 2008  

Shekhar S. Aiyar

International Monetary Fund (IMF)

Ummul H. Ruthbah

affiliation not provided to SSRN

Date Written: February 2008

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.

Keywords: Development assistance, Government expenditures, Consumption, Investment, Current account balances

Suggested Citation

Aiyar, Shekhar S. and Ruthbah, Ummul H., Where Did All the Aid Go? An Empirical Analysis of Absorption and Spending (February 2008). IMF Working Papers, Vol. , pp. 1-34, 2008. Available at SSRN: https://ssrn.com/abstract=1094216

Shekhar S. Aiyar (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW - HQ 5-403
Washington, DC 20431
United States
202-623-8638 (Phone)

Ummul H. Ruthbah

affiliation not provided to SSRN ( email )

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