Aid Absorption and Spending in Africa: A Panel Cointegration Approach

Abstract

This paper investigates whether African countries have coordinated fiscal and macroeconomic responses to foreign aid surges. We depart from the recent literature by utilising better aid measures and employing cointegration analysis. The short-run results suggest that recipients have absorbed two-thirds of aid, while the remaining has been used to build up international reserves. In the long-run, absorption increases but remains below its maximum. Moreover, we show that aid has been fully spent, especially in support of public investment. These findings suggest that the macroeconomic management of aid inflows in Africa has been significantly better than often portrayed in comparable exercises.