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

Abstract

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