The dynamics of spending and absorption of aid: panel data analysis

Abu Shonchoy

No 245, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: In September 1999, the International Monetary Fund (IMF) established the Poverty Reduction and Growth Facility (PRGF) to make the reduction of poverty and the enhancement of economic growth the fundamental objectives of lending operations in its poorest member countries. This paper studies the spending and absorption of aid in PRGF-supported programs, verifies whether the use of aid is programmed to be smoothed over time, and analyzes how considerations about macroeconomic stability influence the programmed use of aid. The paper shows that PRGF-supported programs permit countries to utilize all increases in aid within a few years, showing smoothed use of aid inflows over time. Our results reveal that spending is higher than absorption in both the long-run and short-run use of aid, which is a robust finding of the study. Furthermore, the paper demonstrates that the long-run spending exceeds the injected increase of aid inflows in the economy. In addition, the paper finds that the presence of a PRGF-supported program does not influence the actual absorption or spending of aid.

Keywords: Developing countries; Development aid; Poverty; International organization; Aid; Spending and Absorption; PRGF; Dynamic Panel Estimations; PRGF(Poverty Reduction and Growth Facility) (search for similar items in EconPapers)
JEL-codes: F34 F35 I32 (search for similar items in EconPapers)
Date: 2010-08
New Economics Papers: this item is included in nep-dev
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Published in IDE Discussion Paper = IDE Discussion Paper, No. 245. 2010-08

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Working Paper: The Dynamics of Spending and Absorption of Aid: Panel Data Analysis (2010)
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