Is foreign aid procyclical or countercyclical? A focus on Ghana and Zambia

Thesis submitted to the Department of Business Administration, Ashesi University, in partial fulfillment of Bachelor of Science degree in Business Administration, April 2018The question of whether foreign aid stimulates economic development still attracts intense debate. This perennial debate has been given fresh life due to the recent election of some of Africa’s more impactful leaders like Nana Akuffo Addo of Ghana who seems bent on wearing Ghana off aid. Akuffo Addo’s “Ghana Beyond Aid” agenda is interesting because historically, while some scholars have a benign view of aid, others accuse foreign aid of being responsible for Africa’s developmental challenges. This research investigated whether foreign aid is procyclical or countercyclical. The research also tried to confirm whether aid is growth promoting or growth retarding with the most recent data. Focusing on Ghana and Zambia, data on foreign aid and real GDP was obtained from the World Bank, the OECD and the IMF from 1960 to 2015, a 56-year period. The diagrammatic and correlational analysis revealed that multilateral aid is countercyclical for Ghana and Zambia, while there exists almost no relationship between bilateral aid and real GDP for Ghana and Zambia. When real GDP is lagged and lead one year, the result suggested that a poor performance in the previous year influences more aid in both countries, nevertheless, this makes them worse the following year. Again, the multiple regression output revealed a negative and statistically insignificant relationship between multilateral aid and real GDP for both countries. Since the results suggest that foreign aid is transferred to Ghana and Zambia when they are struggling, but the receipt of the aid stagnates growth, it is recommended that these two countries focus less on aid as a means for growth. In support of Akuffo Addo’s “Ghana Beyond Aid” agenda, Ghana and Zambia must look to control their own destiny and rely on other means other than aid, such as trade, for improving their economies.Ashesi Universit