The Absorption and Spending Capacity of Aid in the Economic Community of West African States

Abstract

The study focuses on the absorption and spending capacity of aid inside the member countries of the Economic Community of West African States (ECOWAS). The absorption and spending of aid are analyzed through the impact of aid on, respectively, the non-aid current account balance, and the non-aid government budget. One of the new features of the study is the inclusion of financial and government related variables in the list of control variables. This helps to capture well the estimators, and avoid the bias generated by the exclusion of relevant variables. In addition, the study uses more appropriate econometric tools. The analysis focuses on three econometric estimators, namely, a fixed effect model, an instrumental variable and the generalized method of moments. Results show that aid is more absorbed than spent inside the whole union. Countries that have less dependency on aid have better spending capacity than the ones who highly rely on aid. In highly-aid dependent countries, aid is used to reduce budget deficit rather than to finance government expenditures.

Keywords: Aid absorption, Aid spending, Fixed effect, Instrumental variable, Generalized Method of Moments.