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The impact of foreign aid on national income in Ghana: a test for long-run equilibrium

Published Online:September 25, 2014pp 215-236https://doi.org/10.1504/AJESD.2014.065021

Abstract

This study sets out to investigate the relationship between foreign aid and national income in Ghana, between 1980 and 2005 using fully modified ordinary least squares (FM-OLS). This is to ascertain whether foreign aid receipts have had significant impact on the level of Ghana’s gross national income. The autoregressive distributed lags (ARDL) bounds test and the Johansen cointegrating equations are used to test for the long-run equilibrium. Three different sample periods namely the pre-structural break, post-structural break, and full-period were used in the analysis. The results in the pre-structural break showed a positive and significant relationship between foreign aid and national income with lower aid elasticity. The post-structural break estimate showed a positive but insignificant relationship. On the contrary, the full sample showed a negative and insignificant relationship with lower income elasticity. The study recommends that, long-run aid that seeks to impact on national income or growth should be accompanied by a well-developed strategic plan to forecast, receive and manage a country’s foreign aid.

Keywords

foreign aid, gross national income, GNI, cointegration, fully modified ordinary least squares, Ghana

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