Aid Project Proliferation and Absorptive Capacity

At a time when the international dialogue surrounding development is focused on increasing the quantity of aid, this paper focuses on how the donor community can improve the quality of foreign assistance. The author discusses the problem of project proliferation, and the tendency of developing countries who receive aid to become overburdened by the costs of administering aid projects. Using a sophisticated mathematical modeling process, the author analyzes the relationship between total aid and recipient activity, and the distribution of projects by size. The conclusions hold insights for policy-makers: when projects proliferate beyond a certain point, the effective marginal utility of aid declines sharply, and can even become negative. This negative effect of aid on development can be especially true if the aid delivery process drifts away from the goal of poverty reduction. In practice, therefore, the author suggests that when countries reach their absorptive capacity, aid dollars given beyond that point lose much of their effectiveness. This paper is part of the Center for Global Development's ongoing work on aid effectiveness. To learn more about the potential negative effect of aid on development, and specifically institution-building, read Working Paper 71, "Fiscal Implications of Large Aid Increases."