Thresholds in Aid Effectiveness

Is the big push hypothesis consistent with capacity constraints in the study of aid effectiveness? Big push hypothesis suggests the existence of a minimum threshold below which aid is not effective, while the constraints referred to by the concept of absorptive capacity suggests the existence of another threshold above which aid is no longer effective. This paper addresses the issue of multiple thresholds characterizing the aid/growth relationship. Using a semiparametric econometric method we do find that aid become effective only above a critical level but also become detrimental to growth for higher value of aid flows. We also investigate how the quality of economic policies and vulnerability modifies the level of those two thresholds. We finally propose a dynamic explanation of the aid/growth relationship.