disbursement data completeness was below 60% prior to 2002, improved to 90% that year, and reached nearly 100% starting with 2007 flows. We felt that only using post-2002 data was not sufficient for time-series cross-country analyses, while including the data before 1995 would bias the results to some extent.<sup>16</sup> Since our intention was to examine the significance of the (directional) impact of aid rather than measuring the degree of elasticity in the aid coefficients, this study simply used commitment data. We judged that this would not change the significance of the impact of sectoral aid.<sup>17</sup> As to the measurement of aid, this study used the period average gross economic and social aid, as well as net aggregate aid received.<sup>18</sup>

# **3.3 Constructing Institutional Quality Indices**

The meaning, measurement and implications of institutions or “institutional quality” can differ considerably among researchers. We used specified institution indices to examine the impact on our research focus as the importance of using different components of institutions for growth regression has been discussed in the literature. Dalgaard et al (2004, p. 200), pointed out that a composite index of policies might encapsulate some components that enhance the return to aid while others diminish this impact, with the net effect possibly insignificant. Abramovitz (1986) argued that the growth-enhancing effects of economic integration depend on the absorptive capacity of the host economies and that institutional quality was one of the main factors underlying such capacity.

We constructed indices for the quality of institutions extracted from the ICRG of the PRS Group. The ICRG indicator is given by the ICRG Rating System, whose rating comprises 22 variables in three subcategories of risk: political (ICRG-P), financial (ICRG-F), and economic (ICRG-E) (PRS Group, 2012). Out of the various composites and individual indices contained in the ICRG, we formed the capacity sub-composite (ICRG Capacity) by compiling five specific components from the ICRG-P bracket: government stability, investment profile, corruption, law and order, and bureaucracy quality. Among the 12 indicators in the ICRG-P, these five indicators denote management capabilities of recipient countries, while the seven other indicators represent the security and stability of a country in a different form of “institutional” capacity. We consider institutional quality of a recipient country, and government managerial capacity in particular, to be key for development effectiveness.

As for the measurement, we placed greater importance on change in institutional quality rather than the

> 16 For instance, some earlier studies employed sectoral disbursement data before 1995 compiled from the CRS bulk data. They calculated the share of the sectoral aid to total disbursement in the CRS database, which was then divided by total ODA (gross). However, it should be noted that in addition to the limited supply of data in the CRS, it was not necessarily quiproportional by sector. In light of these constraints, this study simply used the commitment data, which OECD defines as “a firm obligation to furnish assistance of a specified amount under agreed financial terms and conditions and for specific purposes, for the benefit of a recipient country (OECD-DAC, 2007, p. 11).” OECD-DAC also advises that data on a commitment basis is of better quality than that based on disbursement.

> 17 The period average ratios of disbursement to commitment data are approximately 96% for the sample countries and periods used in this study.

> 18 The net value for sectoral data cannot be obtained from the CRS database system.

12