DEBRE MARKOS UNIVERSITY

COLLEGE OF AGRICULTURE AND NATURAL RESOURCE

DEPARTMENT OF AGRICULTURAL ECONOMICS
Senior Seminar
On
IMPACT OF FORIEGN AID ON ECONOMIC DEVELOPMNT OF
ETHIOPIA
BY

Yeabsira Getahun 1306883

Shalom Tilahun 1306730

Program: Agricultural Economics

Submitted to department of Agricultural Economics in partial fulfillment
of the requirement for seminar in Agricultural Economics (AgEc 461)

Advisor: Senait (MSc)

June 2023
Debre Markos, Ethiopia

ACKNOWLEDGEMENT
First of all, we would like to thank God for his marvelous help to let us accomplish we
start successfully. Second we would like to give our deepest thanks to our advisor, Senayit
Niguse her encouragement and willingness to supervise our Senior Seminar and her valuable
comments from early stage of reviewing the seminar paper to the final completion of the
seminar. It would have been very difficult without her generous time devotion and
contribution from the early beginning till the final reviewing of the seminar through adding
her constructive and extremely useful comments. Thirdly, we would to like thank our family
for their help in financial and moral assistance. Fourthly, I would like to thanks our friend,
Yohanis Alemu for giving us idea and suppo in writing and giving some necessary material
like flash, mobile phone and other materials. Our praise also goes to department of
Agricultural Economics for their assistance in the reviewing of this seminar.

ABSTRACT
The foreign aid is the transfer of the real resource from developed county (DC) to less
Developed countries (LCD) on favorable term development assistance committee
(DAC) define it’s as official development assistance (ODA) and technical aid. The

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role of foreign aid in the economic development of a poor country (like Ethiopia) is
unquestionable. Foreign aid can be put in to use in the economy where there exists a
resource gap. The presence of a resource gap (saving-investment, fiscal and foreign
exchange gap) forces Ethiopia to look outward for foreign capital in order to fill
either of the gaps which are perceived to be the binding constraint for economic
growth in the long run. Ethiopia has a long history of receiving foreign aid, dating
back to the early 1950s. Yet the amount remained very low until the 1980s when the
devastating 1984 famine resulted in sharp increase in official development assistance
(ODA), mainly in the form of humanitarian aid. The overall result of different
literature shows the importance of increasing foreign aid flows to Ethiopia, despite
contributing less due to unfavorable policies, to enhance investment and growth.
However, in the long run, rather than merely filling gaps, aid should help close gaps
in Ethiopia. The United States, the World Bank, and the United Kingdom make up the
top three individual donors respectively for Ethiopia. Ethiopia is currently the largest
recipient of British aid and is among the largest non-war state recipient of US aid of
the $2.8 billion in total foreign aid committed to Ethiopia in 2011. China and
Ethiopia signed an emergency humanitarian food aid agreement where China will
provide wheat worth 15 million U.S. dollars to support people affected by drought in
the East African country. This senior seminar paper highlighted the impact of foreign
aid on Ethiopia economy. Finally, some key conclusions and recommendations are
presented. The seminar recommendations focused on the means of using feasible
policy and strategies that would promote
effectiveness of aid.
Key Words: AID, Economic Development, feasible policy

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 ABBREVIATIONS AND ACRONYMS

CSA………………………………….. Central statistics Agency

IMF………………………………….. International Monitoring Fund

US AID…………………………..…. United State aid

EU………………………………….. European Union

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 TABLE OF CONTENTS
ACKNOWLEDGEMENT.............................................................................................ii
ABSTRACT..................................................................................................................iii
ABBREVIATIONS AND ACRONYMS.....................................................................iv
CHAPTER ONE...........................................................................................................1
INTRODUCTION........................................................................................................1
1.1 Background of the study...............................................................................1
1.2General objective.............................................................................................2
1.3.Specific objectives...........................................................................................2
CHAPTER TWO...........................................................................................................3
LITERATURE REVINEW............................................................................................3
2.1 Definition of foregin aid.....................................................................................3
2.2 Measurement of foregin aid.........................................................................4
2.3 Empirical review.................................................................................................7
2.3.1Foregin aid development level in Ethiopia.....................................................7
2.4 Foregin aid in diffrent sectors...........................................................................7
2.5Factors affecting forign aid in Ethiopia...........................................................10
2.6 Arguments about foregin aid...........................................................................11
CHAPTER THREE......................................................................................................13
CONCLUSION AND RECOMMENDATIONS.........................................................13
3. 1 Conclusion........................................................................................................13
3.2 Recommendation..............................................................................................14
References....................................................................................................................15

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 CHAPTER ONE
INTRODUCTION
Foreign aid has been an important source of financing for Ethiopia's economic development
for many years. Ethiopia is one of the poorest countries in the world, and foreign aid has
been critical in providing funding for programs aimed at improving the country's
infrastructure, health, education, and other sectors.(Botana 2009)

Foreign aid has had a significant impact on Ethiopia's economic development in several
ways. Firstly, it has helped to finance the country's infrastructure projects, such as roads,
bridges, and irrigation systems, which are essential for economic growth. Secondly, foreign
aid has supported the country's health and education sectors, which are crucial for building a
healthy and educated workforce that can drive the country's economic growth.((Ahmad,
&Zahid, 2005).

Foreign aid has also played a role in reducing poverty in Ethiopia. The country has made
significant progress in reducing poverty rates over the past few decades, and foreign aid has
played an important role in this progress. For example, foreign aid has supported programs
that provide food assistance, clean water, and sanitation to people living in poverty.

However, there are also concerns about the impact of foreign aid on Ethiopia's economic
development. Some critics argue that foreign aid can create dependency and discourage
domestic resource mobilization. Others argue that foreign aid can be misused or
misallocated, leading to corruption and inefficiencies.

,According to (Ndikumana, et, al,2010) the impact of foreign aid on Ethiopia's economic
development is complex and multifaceted, and its effectiveness depends on a range of
factors, including the quality of aid programs, the level of domestic resource mobilization,
and the political and economic context in which aid is provided.

This seminar aims to explore the impact of foreign aid on Ethiopia's economic development.
Firstly, it will provide an overview of foreign aid to Ethiopia, including the different types of
aid and the major donors. Secondly, it will examine the positive impact of foreign aid on
Ethiopia's economic development, including improved infrastructure, increased access to
education and healthcare, and poverty reduction. Thirdly, it will discuss the negative impact
of foreign aid on Ethiopia's economic development, including the risk of aid dependency, lack
of accountability, and potential for corruption. Finally, the essay will conclude by providing

1
recommendations on how Ethiopia can optimize the benefits of foreign aid while minimizing
its negative impact on sustainable economic development.

Foreign aid to Ethiopia has been a major source of income for the country since the 1960s,
with the main donors being the United States, United Kingdom, European Union, and the
World Bank. The aid has taken various forms, including grants, loans, and technical
assistance. The aid has been used to finance various development projects and initiatives in
Ethiopia, including infrastructure development, education, healthcare, agriculture, and
poverty reduction programs.

1.2.3 BACKGROUND OF THE STUDY

The impact of foreign aid on the economic development of Ethiopia has been a topic of much
debate and discussion. While foreign aid has been a critical source of financing for Ethiopia's
development, there are concerns about its effectiveness and sustainability. Some critics argue that
foreign aid can create dependency, discourage domestic resource mobilization, and lead to
corruption and inefficiencies. On the other hand, proponents of foreign aid argue that it can help
to finance infrastructure projects, support the health and education sectors, and reduce poverty.
Therefore, the problem that this seminar paper seeks to address is: What is the impact of foreign
aid on the economic development of Ethiopia, and how can its effectiveness be improved to ensure
sustainable development

1.2 General objective

To review foregin aid impact on the economic development of ethiopia.

1.2.2 Specfic objective

. To assess foreign aid arguments and factors.

To identify the negative impacts of foreign aid in developing country like Ethiopia.

CHAPTER TWO

LITERATURE REVIEW
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2.1 Definition of foregin aid
Foreign aid, also known as development assistance or official
development assistance (ODA), refers to the financial resources and
technical assistance provided by governments, international
organizations, and non-governmental organizations (NGOs) to
developing countries for the purpose of promoting economic
development and reducing poverty. The United Nations defines foreign
aid as "financial flows, technical assistance, and other forms of aid
extended by donor countries to recipient countries for economic
development and welfare" (United Nations, 2021).

According to (robert 2007) Foreign aid can take various forms,

including grants, loans, and technical assistance. Grants are typically
provided without the expectation of repayment, while loans are provided
with the expectation of repayment with interest. Technical assistance can
include training, expertise, and other forms of support to help developing
countries improve their capacity to manage and implement development
programs.

There are different types of foreign aid, including bilateral aid, which is
provided directly from one government to another, and multilateral aid,
which is provided through international organizations such as the World
Bank and the United Nations Development Programme (UNDP).

The effectiveness of foreign aid in promoting economic development and

reducing poverty has been a topic of much debate in the development
community. Some critics argue that foreign aid can create dependency,
discourage domestic resource mobilization, and lead to corruption and
inefficiencies. Others argue that foreign aid can provide critical resources
to support development programs, particularly in countries with limited
financial resources(Clemens,et, al, 2004).

2.2 Measurements of foregin aid

There are several measures used to assess economic development in
Ethiopia, and foreign aid can have an impact on these measures. Some of
the key measures used to assess economic development in Ethiopia
include:

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As amanda stated that Gross Domestic Product (GDP): GDP is a
measure of the total economic output of a country, and it is commonly
used as an indicator of economic development. Foreign aid can contribute
to GDP growth by financing infrastructure projects, supporting the
development of key sectors such as agriculture and manufacturing, and
promoting trade and investment.(Amanda, 2012).

According to tasew Human Development Index (HDI) also composite

measure of human development that takes into account indicators such as
life expectancy, education, and income. Foreign aid can contribute to
improvements in human development by supporting programs that
provide access to healthcare, education, and other basic needs.

Poverty rates refer to the percentage of the population living below the
poverty line, which is a commonly used measure of poverty. Foreign aid
can contribute to poverty reduction by supporting programs that provide
food assistance, clean water, and sanitation to people living in poverty.
(Luis,2013)

Employment rates also affect the mesauremetof foregin aid.It refer to

the percentage of the population that is employed, and they are a key
indicator of economic development. Foreign aid can contribute to
employment growth by supporting programs that promote
entrepreneurship, job creation, and skills development.((Vanarith , 2009).

The impact of foreign aid on these measures of economic development in

Ethiopia is complex and multifaceted. Some studies suggest that foreign
aid can have a positive impact on economic development by financing
critical infrastructure and promoting the development of key sectors.
Other studies suggest that foreign aid can create dependency and
discourage domestic resource mobilization, leading to a lack of
ownership and sustainability of development programs.

To ensure that foreign aid is used effectively to promote sustainable

economic development in Ethiopia, it is important to ensure that aid is
aligned with the country's development priorities, strengthen the capacity
of local institutions to manage and implement aid programs, and promote
transparency and accountability in aid delivery.(Werlin, 2005)

4
According to Hansen(2004) the foregin aid can affect the above
mentioned measurement used in economic development in many ways.
One of the most commonly used measures is gross domestic product
(GDP), which is the total value of goods and services produced in a
country over a given period. Foreign aid can affect GDP in several ways.
Firstly, foreign aid can directly contribute to GDP through its impact on
economic activity. Aid can be used to finance projects and initiatives that
stimulate economic growth, such as infrastructure development, which
can increase production and output, thereby contributing to GDP.
(Hansen2004)
Secondly, foreign aid can indirectly contribute to GDP by improving
human capital. Aid can be used to finance education and healthcare
programs, which can improve the skills and productivity of the
workforce, leading to higher output and GDP.(Getnet, 2010).
Thirdly, foreign aid can affect the measurement of GDP by influencing
the composition of the economy. Aid can be used to finance specific
sectors, such as agriculture or manufacturing,
which can lead to a shift in the composition of the economy towards
those sectors. This can lead to changes in the structure of the economy
and affect the measurement of GDP.

However, foreign aid can also have a negative impact on the

measurements used in economic development. For example, aid can lead
to a distortion of the exchange rate, which can affect the measurement of
GDP in terms of international currency. Additionally, aid can lead to
inflationary pressures, which can affect the real value of GDP. (Fikadu ,
2014 ).
Moreover, foreign aid can also affect other measures of economic
development, such as the human development index (HDI), which

5
measures the level of human development in a country based on
indicators such as life expectancy, education, and income. Aid can
contribute to improvements in these indicators, thereby improving the
country's HDI ranking.
As fikadu stated that foreign aid can have both positive and negative
impacts on the measurements used in economic development. While aid
can directly and indirectly contribute to GDP and other measures of
economic development, it can also lead to distortions and inflationary
pressures that affect the accuracy of these measures. Therefore, it is
important to carefully consider the impact of foreign aid on the
measurements used in economic development and take steps to mitigate
its negative effects.

2.3 Empirical review

2.3.1Foregin aid development level in the Ethiopia

Empirical studies on the impact of foreign aid on economic development in Ethiopia have
yielded mixed results. Some studies have found a positive relationship between foreign aid
and economic development, while others have found little to no impact.

For example, a study by Gebregziabher et al. (2019) found a positive relationship between
foreign aid and economic growth in Ethiopia, with foreign aid accounting for about 30% of
the country's GDP growth between 1974 and 2014. The study also found that foreign aid had
a positive impact on investment, exports, and government revenue.

Another study by Asongu et al. (2018) found that foreign aid had a positive impact on human
development in Ethiopia, as measured by the Human Development Index (HDI). The study
found that foreign aid had a significant positive effect on HDI, particularly in the areas of
education and healthcare.

However, other studies have found little to no impact of foreign aid on economic
development in Ethiopia. For example, a study by Alemayehu and Haile (2015) found that
foreign aid had no significant impact on poverty reduction in Ethiopia, as measured by the
poverty headcount ratio.

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Similarly, a study by Asongu and Nwachukwu (2017) found that foreign aid had no significant
impact on economic growth in Ethiopia, and that aid inflows may even have a negative
impact on economic growth in the long run.

Overall, while some studies suggest that foreign aid can have a positive impact on economic
development in Ethiopia, the relationship between foreign aid and economic development is
complex and multifaceted. Factors such as aid effectiveness, aid allocation, and domestic
resource mobilization can all affect the impact of foreign aid on economic development in
Ethiopia.

2.4Foregin aid in diffrent sector

2.4.1Agricultural sector

Agriculture is a critical sector for economic development in Ethiopia, employing

approximately 80% of the population and accounting for a significant share of the country's
GDP. However, the sector faces significant challenges, including limited access to
technology, finance, and markets, as well as vulnerability to droughts and other climate-
related shocks.(Ministry of trade and Industry, 2013)

Foreign aid has played a significant role in supporting the agricultural sector in Ethiopia by
financing development programs and supporting key initiatives. For example, the United
States Agency for International Development (USAID) has provided funding for the
Agricultural Growth Program (AGP), which aims to increase agricultural productivity and
improve food security in Ethiopia. The program supports

initiatives such as the development of irrigation systems, the distribution of improved seeds
and fertilizers, and the strengthening of agricultural value chains.

Similarly, the European Union has provided funding for the Sustainable Land Management
Program (SLMP), which aims to promote sustainable land use practices and improve the
livelihoods of smallholder farmers in Ethiopia. The program supports initiatives such as soil
and water conservation, reforestation, and the promotion of agroforestry.

Foreign aid has also supported other key initiatives in the agricultural sector, such as the
development of cooperatives and farmer organizations, the promotion of gender equality
and women's empowerment in agriculture, and the strengthening of agricultural research
and extension services.( (Luis, 2013).
However, the impact of foreign aid on the agricultural sector in Ethiopia is complex and
multifaceted. While aid can provide critical support for the sector, it can also create
dependency and discourage domestic resource mobilization. Additionally, aid can
sometimes be misused or misallocated, leading to inefficiencies and corruption.

To ensure that foreign aid is used effectively to support the agricultural sector in Ethiopia, it
is important to ensure that aid is aligned with the country's development priorities,
strengthen the capacity of local institutions to manage and implement aid programs, and
promote transparency and accountability in aid delivery.(Ayele2004)

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2.4.2Industry sector

The industrial sector is a critical driver of economic development in Ethiopia, accounting for
a significant share of the country's GDP and providing employment opportunities for millions
of people. However, the sector faces significant challenges, including limited access to
finance, technology, and markets, as well as a lack of skilled labor. (Memo, 2008).

Foreign aid has played a significant role in supporting the industrial sector in Ethiopia by
financing development programs and supporting key initiatives. For example, the World
Bank has provided funding for the Industrial Parks Development Program (IPDP), which aims
to develop industrial parks in Ethiopia and attract foreign investment. The program supports
initiatives such as the construction of industrial parks, the provision of infrastructure and
services, and the development of value chains.(world bank report)

Similarly, the European Union has provided funding for the Enhancing Shared Prosperity
through Equitable Services (ESPES) program, which aims to support the development of
small and medium-sized enterprises (SMEs) in Ethiopia. The program supports initiatives
such as access to finance, business development services, and market linkages.(EU report
2013)

Foreign aid has also supported other key initiatives in the industrial sector, such as the
development of vocational and technical education and training (TVET) programs, the
promotion of women's entrepreneurship, and the strengthening of industrial research and
innovation.

However, the impact of foreign aid on the industrial sector in Ethiopia is complex and
multifaceted. While aid can provide critical support for the sector, it can also create
dependency and discourage domestic resource mobilization. Additionally, aid can
sometimes be misused or misallocated, leading to inefficiencies and corruption.

To ensure that foreign aid is used effectively to support the industrial sector in Ethiopia, it is
important to ensure that aid is aligned with the country's development priorities, strengthen
the capacity of local institutions to manage and implement aid programs, and promote
transparency and accountability in aid delivery. Additionally, efforts should be made to
promote partnerships between the private sector, government, and development partners
to promote sustainable industrial development in Ethiopia.(Tasew, 2011)

2.4.3Service sector

The service sector is an important component of Ethiopia's economy, accounting for a

significant share of the country's GDP and providing employment opportunities for millions
of people. However, the sector faces significant challenges, including limited access to
finance, technology, and markets, as well as a lack of skilled labor.

8
Foreign aid has played a significant role in supporting the service sector in Ethiopia by
financing development programs and supporting key initiatives. For example, the World
Bank has provided funding for the Urban Productive Safety Net Project (UPSNP), which aims
to improve the livelihoods of urban poor and vulnerable households in Ethiopia. The
program supports initiatives such as access to microfinance, vocational training, and
business development services.(UPSNP report)

Similarly, the United States Agency for International Development (USAID) has provided
funding for the Private Health Sector Program (PHSP), which aims to improve the quality and
accessibility of healthcare services in Ethiopia. The program supports initiatives such as the
development of public-private partnerships, the strengthening of healthcare systems, and
the promotion of health insurance.

Foreign aid has also supported other key initiatives in the service sector, such as the
development of tourism, the promotion of information and communication technology
(ICT), and the strengthening of financial inclusion.

However, the impact of foreign aid on the service sector in Ethiopia is complex and
multifaceted. While aid can provide critical support for the sector, it can also create
dependency and discourage domestic resource mobilization. Additionally, aid can
sometimes be misused or misallocated, leading to inefficiencies and corruption.

To ensure that foreign aid is used effectively to support the service sector in Ethiopia, it is
important to ensure that aid is aligned with the country's development priorities, strengthen
the capacity of local institutions to manage and implement aid programs, and promote
transparency and accountability in aid delivery. Additionally, efforts should be made to
promote partnerships between the private sector, government, and development partners
to promote sustainable service sector development in Ethiopia.(Getnet 2014)

2.5Factors affecting foregin aid in Ethiopia

Various researchers had explored other aid-related factors that may influence its contribution
to national economic growth and development. These are briefly dealt with as following
A.Aid effectiveness: The effectiveness of foreign aid in Ethiopia depends on how well
aid is delivered and managed. Aid that is well-targeted, transparent, and accountable
is more likely to have a positive impact on economic development than aid that is
mismanaged or poorly delivered.(Amsalu2014)

B. Aid allocation: The allocation of aid can also affect its impact on economic
development in Ethiopia. Aid programs that are aligned with the country's
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development priorities and needs are more likely to be effective than programs that
are imposed from outside(.UN, (2007-2011).

C.Domestic resource mobilization: The mobilization of domestic resources, such as

taxes and private investment, is critical for sustainable economic development in
Ethiopia. Foreign aid can help to mobilize these resources by financing infrastructure
projects and supporting capacity building initiatives.(Getnet2012)

D Governance: The quality of governance in Ethiopia can also affect the impact of
foreign aid on economic development. Effective governance, characterized by
transparency, accountability, and the rule of law, can help to ensure that aid is used
effectively and efficiently
E. Institutional capacity: The capacity of local institutions to manage and implement
aid programs is also critical for the impact of foreign aid on economic development in
Ethiopia. Strong and capable institutions are better able to manage aid programs and
ensure that they are aligned with thecountry's development priorities.
F.Social and economic development: The level of social and economic development
in Ethiopia can also affect the impact of foreign aid on economic development. Aid
programs that are tailored to local circumstances and needs are more likely to be
effective than those that are imposed from outside.
G. Private sector engagement: The engagement of the private sector in development
initiatives is becoming increasingly important in Ethiopia. Aid programs that promote
private sector investment and entrepreneurship can help to drive sustainable economic
growth and development.(mesfin 2007)

2.6Arguments
While foreign aid has played a significant role in supporting economic development
in Ethiopia, it is important to note that aid alone cannot drive sustainable development
in the long term. Domestic resource mobilization and private sector investment are
also critical for sustainable economic growth and development.(Easterly 2007)
- Some critics argue that foreign aid can have negative effects on economic
development in Ethiopia by distorting markets, encouraging corruption, and creating a
culture of dependency. However, proponents of aid argue that these negative effects

10
can be mitigated through effective aid delivery and monitoring mechanisms.( Fissiha S.
(2006)
- The effectiveness of foreign aid in Ethiopia depends on a variety of factors,
including the quality of governance, the capacity of local institutions, and the level of
social and economic development. Aid programs that are tailored to local
circumstances and priorities are more likely to be effective than those that are
imposed from outside.,( Islam M. (2005)
- In recent years, there has been a shift towards more innovative and strategic forms of
aid delivery in Ethiopia, such as results-based financing, public-private partnerships,
and social impact bonds. These new approaches aim to promote greater efficiency,
accountability, and sustainability in aid programs.
Foreign aid has played a significant role in supporting economic development in
Ethiopia, particularly in key sectors such as agriculture, industry, and services. Aid
has financed development programs, supported key initiatives, and helped to build
critical infrastructure such as roads, bridges, and irrigation systems. Additionally, aid
has supported social programs such as education and healthcare, which are critical for
human development.(Getnet Alemu (2010))
However, the impact of foreign aid on economic development in Ethiopia is complex
and multifaceted. Some experts argue that foreign aid can create dependency and
discourage domestic resource mobilization, leading to a lack of ownership and
sustainability of development programs. Additionally, aid can sometimes be misused
or misallocated, leading to inefficiencies and corruption.

Despite these challenges, foreign aid can still play a critical role in supporting
economic development in Ethiopia if it is used effectively and strategically. To ensure
that aid is used effectively, it is important to ensure that aid is aligned with the
country's development priorities, strengthen the capacity of local institutions to
manage and implement aid programs, and promote transparency and accountability in
aid delivery. Additionally, efforts should be made to promote partnerships between
the private sector, government, and development partners to promote sustainable
economic development in Ethiopia.(Burnside C, Dollar D (2004)

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 CHAPTER THREE
CONCLUSION AND RECOMMENDATIONS
3.1 Conclusion
In conclusion, foreign aid has played a significant role in supporting economic development
in Ethiopia, particularly in key sectors such as agriculture, industry, and services. Aid has
financed development programs, supported key initiatives, and helped to build critical
infrastructure. Additionally, aid has supported social programs such as education and
healthcare, which are critical for human development. However, the impact of foreign aid on
economic development in Ethiopia is complex and multifaceted. While aid can provide
critical support for the country's development, it can also create dependency and discourage
domestic resource mobilization. Additionally, aid can sometimes be misused or misallocated,
leading to inefficiencies and corruption. To ensure that foreign aid is used effectively to
support economic development in Ethiopia, it is important to ensure that aid is aligned with
the country's development priorities, strengthen the capacity of local institutions to manage
and implement aid programs, and promote transparency and accountability in aid delivery.
Additionally, efforts should be made to promote partnerships between the private sector,
government, and development partners to promote sustainable economic development in
Ethiopia. By addressing the challenges associated with aid delivery and promoting
partnerships and collaboration, Ethiopia can continue to make progress towards sustainable
economic development and poverty reduction
.
Foreign aid remained an important source of finance for capital scarce (poor) countries and
continued to play a multifaceted role in financing their development needs. Despite the
massive literature on the subject, a consensus has not been reached by researchers regarding

12
the growth impact of aid, rather the results are inconclusive. Thus one can find both success
and failure stories. The study has examined the macroeconomic impact of aid in Ethiopia with
special emphasis given to the impact of foreign aid on domestic capital formation and
economic growth. Ethiopia similar to any other African is known by receiving aid from
foreign country even though it was not effective due to different reason in different regime.
Foreign aid remained an important source of finance for capital scarce (poor) countries (like
Ethiopia) and continued to play a multifaceted role in financing their development needs.
Despite the massive literature on the subject, a consensus has not been reached by researchers
regarding the growth impact of aid, rather the results are inconclusive

3.2 RECOMMENDATION
Government should take some mechanisms to increase the flow of aid, and avoid (if possible) or
minimize the effect of unexpected instability in the inflow of aid.
The other important mechanism is that stability in donor-recipient relationships is crucial in order
to promote the effectiveness of aid, which makes prediction of future aid inflows easier.
Cooperatives in applying stable relationships with donors allow more investment about foreign aid
is also better fiscal planning and makes long term development planning.
A sound policy environment is crucial to use aid more effectively and make domestic investment
efficient.
Government is required to set a sound macroeconomic policy environment which stimulates
domestic saving that is adequate enough to finance investment and close the saving investment
gap in the long run.
Monetary policy also one mechanism designed to create an easy access of credit to the private
sector to encourage private investors, among other things to reduce aid.
Government strategy to reduce the long run dependency on foreign aid to cater the increasing
demand of development and also to mitigate the exposition of the country to external shocks,
In order to minimize the foreign exchange constraints which makes dependence on aid
compulsory, diversification along with policies of export promotion are crucial.

13
In addition, the poor track of export in the past decades also points the need to reduce dependence
on primary commodities as the dominant way of foreign exchange earnings.

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