The Relationship Between Foreign Aid And Economic Growth in Ghana

ABSTRACT

Ghana as a developing country is faced with low per capita income, low savings and slow development. Foreign aid acts as a supplement to domestic sources of financing to stimulate economic growth and development. This study examines the short and long run relationship between foreign aid and economic growth in Ghana spanning the period 1980 to 2013. The study also examines whether foreign aid in Ghana is subject to diminishing returns. The study employs the ARDL Bounds testing technique for cointegration to investigate the relationship between foreign aid and economic growth in Ghana. The study finds that the impact of foreign aid is positive and statistically significant in both the short and long run. The study also finds that, although foreign aid has a positive impact, it is subject to diminishing returns. The study made recommendations of using policy to address the lack of absorptive capacity constraint and finding alternative means of sourcing resources such as foreign direct investment, broadening the tax base and encouraging domestic savings.