Limited country capacity to absorb foreign aid

The absorptive capacity of a country may be defined as the amount of resources both of domestic and foreign origin which can be invested to yield a return over and above a socially acceptable rate. The factors limiting absorptive capacity can vary from country to country and over periods of time. They are either economic or institutional or, more broadly, may have their origin in socio-cultural conditions. If they stem from socio-cultural factors, they are difficult to overcome and only the development process itself is likely to eliminate them ultimately. The most important type of factor limiting absorptive capacity stems from limitations on the supply of resources. For example, proponents or promoters of development projects frequently overlook the decline in marginal efficiency of capital due to the scarcity of skilled manpower. Institutional limitations are frequently encountered in the form of: inefficiencies in the administrative infrastructure concerned with the formulation and evaluation of investment projects in the public sector; inefficiencies in the management of public or private enterprises; delays in the making of decisions, in taking action, or in changing administrative regulations.

Although almost totally dependent on aid, Bangladesh in the 1990s was only able to accept US$1.8 billion of the US$2.4 billion in aid that it was pledged to receive in governmental aid. Partly because of bureaucratic inefficiency and corruption, the country was unable to cope with the funds and projects provided by foreign governments.