GPD while Burundi received 49 percent of GDP in aid and they conclude that Burundi was receiving aid four times its growth efficiency levels. They argue that as the contribution of aid falls to zero when aid reaches twice the growth efficient level and is negative beyond this level, aid contributed to negative growth in Burundi in 2004.

Budgetary practices and the low predictability of aid disbursement further affect the absorptive capacity of recipients for aid and therefore its impact on growth.<sup>13</sup> Many least developed countries continue to finance recurrent expenditures with domestic resources while financing investment expenditures through foreign aid. While the literature is mixed on the link between aggregate government expenditures and growth, many consider that appropriately selected and targeted public investment programs can affect growth positively. However, the combination of budgeting investment expenditures based on aid receipts and low predictability of aid affects the composition and effectiveness of spending and can further aggravate the bias towards government consumption. In fact, as Celasun and Walliser (2008) show, governments tend to cut investment spending in times of aid shortfalls and expand government consumption if additional aid becomes available unexpectedly. This is especially the case in low income countries that rely heavily on external assistance to fund their budget and have only limited access to international financial markets to fund budget shortfalls.

Finally, Collier and Hoeffler (2004) find that the absorptive capacity for aid is systematically different in post-conflict countries. They find that there is no significant difference in absorptive capacity and no bounce-back of growth in immediate aftermath of peacemaking (first three years). After this initial period, absorptive capacity approximately doubles. Aid is especially effective and critical for growth after peace has been fully established but its effectiveness diminishes after about seven years following the end of the conflict.

Our approach combines the methodology of Clemens et al. (2004) together with the insights from McGillivray and Feeny (2008) and Collier and Hoeffler (2004) work. While McGillivray and Feeny (2008) do not distinguish between the different categories of aid (as discussed above), their finding generally coincide with our finding that aid and growth are not positively correlated in Burundi in the recent past. However, we argue that the issue is not as simple as Burundi receiving too much aid for its absorptive capacity. In 2004, Burundi was still in the process of achieving full peace, which it did not reach until early 2009 with the signing of the peace agreement with the last rebel group. Burundi is in effect only now entering a true post-conflict period. Since 2000 a large proportion of aid to Burundi was emergency and humanitarian aid to stabilize the economy and ensure social cohesion by disarming and facilitating the return of rebel soldiers to civilian life. This aid would not necessarily correlate positively with growth.<sup>14</sup> Additionally, if we believe Collier and Hoeffler (2004) results, we should not expect any growth impact of aid for the next 3 years. Below, we discuss our findings in more details.

# 4.2. <u>Allocation of aid to Burundi</u>

The Creditor Reporting System (CRS) of the OECD Development Assistance Committee (DAC) provides data on aid allocation. Data on commitments are available starting 1995, but the low

> 13 The predictability of aid flows is defined as the difference between commitments and actual disbursements in a given year.

> 14 In fact, according to Clemens et al. (2004), while humanitarian aid does not correlate with growth, short-impact aid is best absorbed on average when it represents 8.1 percent of GDP and total aid is around 18 percent of GDP.  Some countries may be able to absorb more, some less.

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