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AEC 2012 - Macroeconomic Determinants of Exit from Aid-Dependence
This paper examines exit from aid-dependence. By ‘exit from aid’, we mean substantial and enduring decline over time in foreign aid as a share of national income. The relevant macroeconomic variables are identified by systematically comparing two groups of countries. These are countries that initially had similar and very high degrees of dependence on international aid but followed dramatically different trajectories of aid-dependence afterwards. This comparison was carried out over five decades since the 1960s using both non-parametric and parametric approaches. We find that the likelihood of exit from aid increases significantly with macroeconomic stability in the sense of maintaining moderate inflation, achieving high rate of investment; aggressive effort at domestic resource mobilisation; and structural change in favour of a growing manufacturing sector. If donors and recipients were to coordinate their aid efforts to support the above-mentioned policy objectives, aid could still be a development tool with diminishing importance.