The Effect of Aid on Growth in the Presence of Economic Regime Change

Abstract

The empirical literature on aid effectiveness is mired in controversy. In this regard, the paper aims to investigate the effect of aid on economic growth in Ghana. Using Auto-Regressive Distributed Lagged Models as the main estimation strategy, the study concludes that aid has a positive and statistically significant effect on economic growth. The effect of aid on economic growth is more pronounced taking into account the marginal effect of a shift in economic policy from a controlled economic regime to an open market system. The result is robust when the data is triangulated with other estimation methods. Following the key findings, the study recommends that government pursues economic policies that promote more private-sector participation. Also, alternative financing that focuses on the domestic market should be encouraged to avoid the negative impact of dwindling aid inflows.