Abstract
This paper examines the dynamics of aid-dependence using a large sample of recipient countries observed over five decades. High dependence on foreign aid exhibits strong persistence even after controlling for potential drivers of aid-to-GDP ratio. We find that investment rate and manufacturing intensity are negatively correlated with aid-dependence while a growing investment–savings gap and inflation contribute to its persistence. Among resource-abundant recipients, the probability of high aid-dependence increases with resource rents although oil exporters are on average more self-reliant than non-oil countries. The quality of political institutions is negatively associated with aid-dependence in countries with a history of heavy reliance on aid but not necessarily in the typical recipient country.
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