Abstract:
In this paper, we examine the causal relationship between aid inflows and economic growth for
Ghana during the period from 1970-2013, taking into account structural breaks. To better reflect
causality, corruption and trade are included as control variables. To test for causality in the face of
cointegration, a vector error correction model (VECM) is used in place of a vector autoregressive
(VAR) model. This approach is complemented with Toda and Yamamoto’s method to indicate the
causal direction. Our estimation results suggest GDP growth has one cointegrating vector relation ship with corruption, EU aid inflows and trade in both the short and long runs. There is a long-run
unidirectional causal relationship from EU aid inflows to GDP growth and a short-run unidirectional
causal relationship from trade to GDP growth. Corruption (which is a governance issue) was ineffec tive in inducing GDP growth. The error correction terms are the source of causation in the long run.
The results indeed confirm the popular conjecture that corruption in Ghana is endemic and stifles
development. Therefore, the decision by the government to launch a national anti-corruption cam paign in 2011, though long overdue, was justifiable. We urge all stakeholders to work together to
deepen good governance to promote sustainable growth and serve as inducement for continued
aid inflows from multilateral donors to sustain efforts at achieving the national development thrust
of poverty reduction and sustainable development in Ghana
Ghana; Corruption; EU Aid Inflows; Economic Growth; Governance; Multivariate Cointegration
