Aid Absorption: Factors and Measurements

Abstract

Much of the aid allocation and aid absorption literature focuses on the effects of aid on growth, rather than private and public consumption and investment (Tengstam, 2017). This results in a large evidence gap, as findings in relation to aid and growth do not necessarily provide insights into the relationship between aid and other outcomes (Carter, 2014). Some of the literature emphasise that donors should not allocate aid solely based on growth targets and/or solely to countries with more efficient government and better institutions. Rather, aid could be used to raise the level of consumption of households in less efficiently governed countries that would otherwise experience prolonged poverty (Carter, 2014). Temple and Van de Sijpe (2017) find that aid is generally absorbed, but that household consumption responds more strongly than investment or government consumption.