Big Push versus Absorptive Capacity: How to Reconcile the Two Approaches

We examine whether absorptive capacity represents a compulsory reason to reject the proposal of a large aid increase to support a big push. We argue that poverty trap is a probability for many countries, in particular the Least Developed Countries and that an aid increase is relevant for them. Moreover we show that the decrease in marginal aid returns is slower in vulnerable countries, what enhances the rationale to take vulnerability as one of the aid allocation criteria. We then examine the main limits to absorptive capacity, such as disbursement constraints and short term bottlenecks, macro economic troubles, including loss of competitiveness and macroeconomic volatility, as well as institution weakening. The general conclusion we draw to reconcile the two approaches is that absorptive capacity strongly depends on aid itself or on its very modalities. Big push and absorptive capacity approaches cannot be reconciled without an aid reform coming with an aid increase. First, needed is to balance the utilisation of aid between directly productive and social activities, in order to avoid transitory loss of competitiveness. Second, schemes helping to use aid as insurance against exogeneous shocks are to be enhanced because they lower the risk of Dutch disease and contribute to a faster and more equitable long term growth. Finally a performance-based conditionality should be substituted to the traditional policy-based one in order to cope with several absorptive capacity limitations, most importantly the socio-political one. An aid supported big push will not be effective without a new ownership of policy by the recipient countries.cerdi

State fragility and economic vulnerability: what is measured and why?

State fragility is a concept that emerged among the international community of donors in order to adapt aid policies to particularly difficult situations. Fragility has thus been measured to design a special treatment in favour of fragile states, otherwise left behind. In this context, but somewhat paradoxically, fragility has been measured by a low policy and institutional assessment, operated through the “CPIA”, in the multilateral development banks that also used this index as the major indicator to determine their aid allocation. Some other more multidimensional measures have broadened the scope of the indicators used to identify fragility. All these measures appear to be rather subjective, unstable, leading to discordant lists of fragile states and not really representing a risk to fail. For analytical and operational reasons, there may be advantages of turning to the concept of structural economic vulnerability (apparently close, but strongly different). Structural economic vulnerability, the risk to be durably affected by exogenous shocks, depends both on the size of the shocks and on the exposure to the shocks. It can be measured by the Economic Vulnerability Index (EVI), set up at the UN to identify the Least Developed Countries (LDCs). It is a rather objective and stable index, also reflecting a risk of becoming a fragile state, as illustrated by the fact that most of the LDCs have been considered as fragile at least once. Such an index can be used as a positive criterion of aid allocation, besides the CPIA, a low income per capita and a low level of human capital. Its inclusion among aid allocation criteria is supported by equity, effectiveness and transparency reasons. It allows one to treat the case of fragile states in an integrated framework, leaving only the most acute cases of fragility or failure for an exceptional treatment.State Fragility, aid policies

The exchange rate policy in Vietnam and the "Asian crisis".

Since 1992, Vietnam has been implementing a policy aimed at anchoring its currency vis-à-vis the dollar. Does the "Asian crisis" threaten this policy? The aim of this paper is to present the arguments of this debate through an analysis of both the consequences of the Asian financial crisis on the competitiveness of the Vietnamese economy, and the risk of a new Asian crisis in Vietnam.

Big Push versus Absorptive Capacity: How to Reconcile the Two Approaches

In this paper we examine whether absorptive capacity can constitute sufficient justification for rejecting the proposal of a large aid increase to support the ?big push?. We argue that the probability of a poverty trap exists for many countries, in particular the least developed countries (LDCs) and that an increase in aid is relevant for them. Moreover we show that the decrease in marginal aid returns is slower in vulnerable countries, which supports the rationale to include vulnerability as one of the aid allocation criteria. We examine the main obstacles to absorptive capacity, such as disbursement constraints and short-term bottlenecks, macroeconomic problems, including loss in competitiveness and macroeconomic volatility, as well as the weakening of institutions. The general conclusion that we draw for reconciling the two approaches is that absorptive capacity strongly influenced by aid itself or by its modalities. The big push and absorptive capacity approaches cannot be reconciled without aid reform supported by an aid increase. First, what is needed is to balance the utilization of aid between activities that are directly productive and those that are social ...absorptive capacity, big push, aid effectiveness, poverty trap, institutions

Big Push versus Absorptive Capacity: How to Reconcile the Two Approaches

We examine whether absorptive capacity represents a compulsory reason to reject the proposal of a large aid increase to support a big push. We argue that poverty trap is a probability for many countries, in particular the Least Developed Countries and that an aid increase is relevant for them. Moreover we show that the decrease in marginal aid returns is slower in vulnerable countries, what enhances the rationale to take vulnerability as one of the aid allocation criteria. We then examine the main limits to absorptive capacity, such as disbursement constraints and short term bottlenecks, macro economic troubles, including loss of competitiveness and macroeconomic volatility, as well as institution weakening. The general conclusion we draw to reconcile the two approaches is that absorptive capacity strongly depends on aid itself or on its very modalities. Big push and absorptive capacity approaches cannot be reconciled without an aid reform coming with an aid increase. First, needed is to balance the utilisation of aid between directly productive and social activities, in order to avoid transitory loss of competitiveness. Second, schemes helping to use aid as insurance against exogeneous shocks are to be enhanced because they lower the risk of Dutch disease and contribute to a faster and more equitable long term growth. Finally a performance-based conditionality should be substituted to the traditional policy-based one in order to cope with several absorptive capacity limitations, most importantly the socio-political one. An aid supported big push will not be effective without a new ownership of policy by the recipient countries.

Absorptive Capacity: More Than the Volume of Aid, its Modalities Matter

We examine whether absorptive capacity represents a valid reason to reject the proposal of a large aid increase in order to help poor countries to move out of the underdevelopment trap. We consider absorptive capacity, the set of limits to an effective use of aid inflows, under for main aspects: 1) disbursement constraints, which lead to under utilisation of credits; 2) macroeconomic troubles, including loss of competitiveness and macroeconomic volatility; 3) decrease of aid returns, actually slower in more vulnerable countries, 4) institutions weakening induced by aid dependency. We argue that these limits to absorptive capacity may be removed by an improvement of aid modalities, such as better balancing between productive and social activities financed by aid, using aid as insurance against exogenous shocks, giving priority in aid allocation to “least developed countries”, which are the most vulnerable, and finally substituting a performance-based conditionality to the traditional-policy based one.Aid effectiveness;absorptive capacity;Conditionality;volatility

Absorptive Capacity: More Than the Volume of Aid, its Modalities Matter

We examine whether absorptive capacity represents a valid reason to reject the proposal of a large aid increase in order to help poor countries to move out of the underdevelopment trap. We consider absorptive capacity, the set of limits to an effective use of aid inflows, under for main aspects: 1) disbursement constraints, which lead to under utilisation of credits; 2) macroeconomic troubles, including loss of competitiveness and macroeconomic volatility; 3) decrease of aid returns, actually slower in more vulnerable countries, 4) institutions weakening induced by aid dependency. We argue that these limits to absorptive capacity may be removed by an improvement of aid modalities, such as better balancing between productive and social activities financed by aid, using aid as insurance against exogenous shocks, giving priority in aid allocation to “least developed countries”, which are the most vulnerable, and finally substituting a performance-based conditionality to the traditional-policy based one.Conditionality, volatility, aid effectiveness, absorptive capacity

Working Paper 103 - Accounting for Vulnerability of African Countries in Performance Based Aid Allocation

The African Development Bank allocates itsconcessional resources through a procedurewhich is mainly based on the quality of thebeneficiary countries’ economic policy andgovernance. This allocation procedure reliesmainly on the Performance-Based Allocationformula which can be criticized on two grounds.Firstly, the weight on economic policy andgovernance is viewed as being excessive.Secondly, it lacks transparency and consistency.We consider how to amend that formula soas to take into account certain common characteristicsof many African countries. The mainproposal is to augment the formula by an economicvulnerability criterion. The numericalsimulations show that the introduction of theUnited Nations economic vulnerability index inthe formula gives rise to allocations which notonly account for post conflict situations butalso inherent fragility. We also consider a lowerpopulation weight in order to address the problemof country size. This change helps avoidinconsistencies arising from the application ofcountry allocation ceilings in the various stagesof the computation. Finally, a few proposalsconcerning the African Development Fund’ssupport to regional integration are explored.

State fragility and economic vulnerability: what is measured and why?

State fragility is a concept that emerged among the international community of donors in order to adapt aid policies to particularly difficult situations. Fragility has thus been measured to design a special treatment in favour of fragile states, otherwise left behind. In this context, but somewhat paradoxically, fragility has been measured by a low policy and institutional assessment, operated through the “CPIA”, in the multilateral development banks that also used this index as the major indicator to determine their aid allocation. Some other more multidimensional measures have broadened the scope of the indicators used to identify fragility. All these measures appear to be rather subjective, unstable, leading to discordant lists of fragile states and not really representing a risk to fail. For analytical and operational reasons, there may be advantages of turning to the concept of structural economic vulnerability (apparently close, but strongly different). Structural economic vulnerability, the risk to be durably affected by exogenous shocks, depends both on the size of the shocks and on the exposure to the shocks. It can be measured by the Economic Vulnerability Index (EVI), set up at the UN to identify the Least Developed Countries (LDCs). It is a rather objective and stable index, also reflecting a risk of becoming a fragile state, as illustrated by the fact that most of the LDCs have been considered as fragile at least once. Such an index can be used as a positive criterion of aid allocation, besides the CPIA, a low income per capita and a low level of human capital. Its inclusion among aid allocation criteria is supported by equity, effectiveness and transparency reasons. It allows one to treat the case of fragile states in an integrated framework, leaving only the most acute cases of fragility or failure for an exceptional treatment.State Fragility;aid policies