Aid Absorption and Spending in Africa: A Panel Cointegration Approach

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper focuses on the macroeconomic management of large inflows of foreign aid. It investigates the extent to which African countries have coordinated fiscal and macroeconomic responses to aid surges. In practice, we construct a panel dataset to investigate the level of aid 'absorption' and 'spending'. This paper departs from the recent empirical literature by utilising better measures for aid inflows and by employing cointegration analysis. The empirical shortrun results suggest that, on average, Africa's low-income countries have absorbed two-thirds of (grant) aid receipts. This suggests that most of the foreign exchange provided by the aid inflows has been used to finance imports. The other third has been used to build up international reserves, perhaps to protect economies from future external shocks. In the long-run, absorption increases but remains below its maximum ('full absorption'). Moreover, we also show that aid resources have been fully spent, especially in support of public investment. There is only weak evidence that a share of aid flows have been 'saved', i.e. substituted domestic borrowing. Overall, these findings suggest that the macroeconomic management of aid inflows in Africa has been significantly better than often portrayed in comparable exercises. The implication is that African countries will be able to efficiently manage a gradual scaling up in aid resources.JEL Classification: C23, F35, O23, O55

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