Absorptive capacity refers to ‘the ability to use additional aid without pronounced inefficiency of public spending and without induced adverse effects’ (Bourguignon and Sundberg, 2007, 640).
An absorptive capacity limit is a point at which a country can no longer absorb or spend aid efficiently and aid is then subject to diminishing returns (IES, 2017; Dornan and Pryke, 2017).
Absorptive capacity involves not only the ability of a recipient country to absorb aid but also the ability of donors to correctly assess and consider the recipient’s characteristics and absorptive
constraints in designing programmes (Choi et al., 2013).
Much of the aid allocation and aid absorption literature focuses on the effects of aid on growth, rather than private and public consumption and investment (Tengstam, 2017). This results in a
large evidence gap, as findings in relation to aid and growth do not necessarily provide insights into the relationship between aid and other outcomes (Carter, 2014). Some of the literature
emphasises that donors should not allocate aid solely based on growth targets and/or solely to countries with more efficient government and better institutions. Rather, aid could be used to
raise the level of consumption of households in less efficiently governed countries that would otherwise experience prolonged poverty (Carter, 2014). Temple and Van de Sijpe (2017) find
that aid is generally absorbed, but that household consumption responds more strongly than investment or government consumption.
Absorptive capacity and absorptive capacity limits vary across countries. General governmental instability is considered a constraint on absorptive capacity (Serie et al., 2009). Some studies,
find, however, that least developed countries (LDCs – with high vulnerability and low levels of human capital) experience increasing returns to aid and higher absorptive capacity, even if they
obtain lower average rates of success (Guillaumont and Wagner, 2014; Guillaumont and Guillaumont Jeanneney, 2006).
Despite the acknowledgement of the importance of absorptive capacity, empirical evidence on such constraints in developing countries is relatively limited (Presbitero, 2016). Constraints that are
identified in the literature include: macroeconomic constraints; institutional and policy constraints; technical, human and physical capital constraints; donor aid delivery constraints; social and
cultural constraints; and specific sector constraints.
Approaches to measuring absorptive capacity remain largely unsystematic and ad hoc (Lamb and Mixon, 2013). The Composite Index of Absorptive Capacity incorporates: capital constraints;
governance constraints; and donor practices. The Measuring Absorptive Capacity framework, which identifies barriers to absorption by testing development, plans against local conditions.
Some emphasise that absorptive capacity can only be understood in relation to specific objectives or particular projects, rather than in relation to a given country or to aid in general
(Choi et al., 2013).
Attempts to quantify absorptive capacity constraints have focused on the concept of an absorptive capacity threshold, limit or tipping point – a point of negative marginal net returns to aid. There are limited attempts, however, to develop a method of determining such a threshold, given that it would vary from country to country. The empirical evidence that does exist is drawn mainly from aid-growth regressions, with 20% often being identified as the threshold beyond which additional aid is correlated with negative returns. Such studies do not take into consideration other goals of aid and forms of absorptive capacity such as absorption based on household consumption.
Absorptive capacity is not fixed, but can potentially be improved through successful reform and effective policies. However, there has been little systematic analysis of how to overcome absorptive capacity constraints (Lam and Mixon, 2013). Ways in which to improve absorptive capacity could include: alleviating macroeconomic constraints; simple, technical capacity development, particularly around bureaucratic aspects; substantive capacity development, such as improved ability to manage the domestic fiscal space; improvements in donor aid delivery; alternate channels for aid distribution; targeting different aid aims, such as consumption; and phased aid.