LITERATURE REVIEW

Introduction

This essay reviews background literature on economic and political dimensions of foreign aid as an instrument for poverty reduction in Ghana. To fully grasp the causal conditions of aid and its motivations, a political economy perspective is reviewed. This directly feed into how foreign aid has flowed into Ghana, here we explore how the country has absorbed and used foreign aid. In the final section we critically analysis the literature on studies on aid effectiveness linking it with progress made towards the achievement of the Millennium Development goals (MDGs) as adopted in fighting poverty in Ghana. Our conclusion will highlight the relevance of this review to the study of how foreign aid flows reduce poverty.

Political economy perspective of foreign aid

According to Schraeder et al. (1998) the political economy perspective treats aid as a policy action of donors, explained by political and economic goals which are influenced by culture, institutions, power distribution and the dynamics of competing interests. Donors’ goals are varied and include national self-interest, commercial considerations, historical links, political goals and the desire to accelerate economic growth in developing countries but vary over time and among donors (Riddell, 1987). For example as Hopkins (2000) explains economic gains seem important in Japanese aid, political goals in French aid while global welfare improvement are the aim of Nordic aid. As world political conditions change, both the size and purpose of foreign aid change.

Until 1990, cold war concerns provided a core motivation for aid with economic development only a secondary concern (Grant and Nijman 1998). Over time though this changed to focus on international public goods such as political stability, seeking best package of long-term reduction in political crises and better future economic growth among states too risky for private sector funds To achieve these goals however, donors and recipients of foreign aid set terms (conditions) through bargaining (Putnam 1988). The subsequent analysis will explore the interactions of these public goods and how they influence aid conditions.

As Noel and Therien (1995) reiterate the institutionalisation of foreign aid occurred after the Second World War, during which period strategic political considerations were the major force shaping aid allocations especially bilateral aid (Wood 1986 and Ruttan 1996). These objectives changed following the demise of the United States as a hegemonic donor. For example US aid as a percent of GNP, dropped from over 2 per cent in 1950, to about 0.6 per cent in 1960-2, and only 0.08 per cent in 1997(Hopkins, 2000). With the role of the US diminishing, multilateral agencies like the World Bank and UNDP stepped in to facilitate co-ordination in aid administration, while the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) encouraged more generous giving among its member countries.

With active involvement of multilateral agencies the period between 1960 and 1992 saw an increase in the amount of official development assistance even after accounting for inflation. The important point is that aid during this period centred more on impoverished countries in Africa. Equitable development and economic reform were the main goals of donors. After 1991, though the flow of aid peaked and started to decline (Hopkin, 2000). This decline was due to the end of the cold war, globalisation of trade, budget pressures of donors, donors’ disappointment with the effectiveness of aid. Moreover, donor country special interest coalitions supporting aid unravelled and resurgent neo-liberal philosophies challenged some of the intellectual foundations of aid. For the purposes of this review we focus on how donors’ disappointment with performance caused decline in aid flows.

Otherwise known as ‘aid fatigue’, this reason is understood as lack of satisfaction of donors with the working of aid especially in Africa during the 1980s. This poor performance in Africa has been blamed on donors’ parochial political and commercial interests as well as capture by domestic publics and elites. These failures gave critics of aid credence against the backdrop of massive accumulation of failed aid projects (Burnside and Dollar, 1997). For example, dependency theorists claim that aid was really provided in order to exploit recipient countries, with the effect been slow economic development (Amin 1973 and Seligson and Passe-Smith 1998). In general, flaws in donor motivation, bureaucratic mismanagement and recipient country socio-political distortion of aid objectives were identified as major causes of project failure.

The allocation and absorption of aid according to non-economic factors greatly undermined its desired impact on development. Although Lumsdaine (1993) suggest altruistic motivation during this period, other studies suggest that this was only a secondary motive (Alesina and Dollar 1998, Noel and Therien 1995, White 1974 and Wall 1973). They conclude that most aid was given for political reasons. For example, political motivations as distorting aid effectiveness were a frequent conclusion in several economic analyses (Alesina and Dollar, 1998). Donors resisted broad aid objectives but tied success to adaptive project objectives which invariably limited the prospects of aid for accelerating development. In order to realign objectives for example, Lancaster (1999) propose an amendment of greater country targeting, capacity building and improvement of bureaucratic management for achieving greater aid effectiveness in support of economic performance. The preceding analysis sets a tone for understanding how foreign aid has flowed to Ghana. This is discussed next focusing on the kinds and forms of aid flows.

Foreign aid profile of Ghana

Earlier, we examined the political economy of aid architecture and how this impacted on disbursement and utilisation in the developing world. Our attention now shifts to aid flows in Ghana, showing how geopolitics of aid during the cold war influenced absorption and usage.

Ghana after independence in 1957 inherited substantial foreign exchange reserves, little debt, and a small public sector. With good economic climate, there was very little need of foreign support until 1961 when the country was hit with balance-of-payments crisis (Killick 1978; Harrigan and Younger 2000; Quartey 2002). In response to this balance-of-payments crisis the country devalued its currency and pursued a prudent fiscal budget at the urging of multilateral aid agencies. These reforms attracted foreign support which came in the form of general budgetary support, sector budget support (mainly health and education), and project aid. Aid inflows, however declined during the first half of the 1970s, picking up only during second half. For example, official development assistance (ODA) as a share of GDP increased from 0.013 per cent in 1974 to 0.023 in 1978. However to put this in perspective, between 1960 and 1983, per capita ODA to Ghana was about $10 which was less than the per capita ODA to the rest of sub-Saharan Africa. However, aid per capita increased from US$9.3 in 1983 to US$ 56.4 in 1991 but then declined to US$33.1 by 2001 and increasing again to US$66.4 by 2009(see figure 2).

Source: World Development indicators & Gl