To meet development objectives, aid recipients and their donor partners need to effectively manage the macroeconomic effects of aid. Aid can improve the economy's supply-side and raise growth. But if the macroeconomic impact of aid is not managed well it can distort and sometimes undermine growth. In December 2011, AERC and UNU-WIDER held a conference under the ReCom programme on the 'Macroeconomic Management of Aid', which aimed to clarify aid's macroeconomic effects. This knowledge will contribute to improving aid's growth impact and help with the scaling up of aid itself.
Aid has potentially large effects on the structure of the recipient's economy and international competitiveness. These in turn greatly influence aid's effectiveness in achieving economic growth, employment creation, and poverty reduction. At the same time, the bigger macroeconomic picture for many aid-recipient countries is changing, the result of better export earnings, resource revenues, and more inward investment. Some are becoming less aid-dependent, and resource revenues now constitute a much bigger source of foreign exchange than foreign aid in some countries. All of these inflows need careful macroeconomic management to maximize their development effectiveness.
The purpose of the recent ReCom conference, held in Nairobi by the African Economic Research Consortium (AERC) and UNU-WIDER, was to focus not just on the macroeconomics of aid but on the bigger macroeconomic picture, particularly in Africa. It aimed to move the debate beyond generalities, to take a good look at country experiences, and to sharpen our tools and techniques. On this basis, macroeconomics can contribute to finding out what works in foreign aid; what could work; what is transferrable across countries, especially to the poorer and smaller countries that remain aid-dependent, and how the macroeconomics of scaling up aid can be managed. In this way, the conference contributed to the overall aims of ReCom.
The macroeconomics of aid
We now know more about the macroeconomics of aid and its effectiveness-the result of nearly three decades of research, and especially technical assistance, to build the capacity of macroeconomic policy in Africa and other recipient countries. However, there still remain many unanswered issues. Macroeconomic debates, particularly concerning aid and growth, tend to revolve around extreme positions which are not based on rigorous research. In particular, negative...