Aid project proliferation and absorptive capacity

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 modelling process, the author analyses 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. [Adapted from the author]