Examining Foreign Aid
What Does It Take To Graduate From Aid? A Comparative Study Of Sri Lanka, Ghana, And Uganda On Determinants Of Transition From Aid Dependence To Economic Independence
Nitesh Pant
GOVT
March 7, 2022
Abstract:
Why are some countries able to transition from aid dependence to economic independence while others struggle to do so? This paper presents a political economy analysis of how Sri Lanka and to a lesser extent Ghana reduced their reliance on aid and grew their economies and why Uganda did not. The transition from aid dependence to economic independence is more likely in recipient countries with good economic policies that reduce inflation, liberalize trade, and promote good institutions, with moderate levels of aid dependence, with higher levels of political freedom and democracy, get aid as grants rather than loans, and where aid doesn’t come with specific conditionalities that the government is reluctant to accept; while the transition is less likely in recipient countries with negative external factors such as climate, terms of trade and major exports. I find that Sri Lanka had all these conditions, Ghana had four but had unfavorable external factors, and Uganda had none. The implications of this study have far-reaching consequences on how aid is conditioned, how countries approach democracy and political freedom, and what economic policies a country follows. By targeting these determinants, a nation can move away from aid dependency and leap into economic independence. Donors need to be wary of the amount of aid they give, the conditionalities they attach with aid, while the type of aid should primarily be grants, not loans. Good fiscal and monetary policy must be encouraged along with political freedom and democracy.
1. Introduction
In 2019, the US granted $1.1 million in aid to Bolivia and $374 million in aid to Zambia (USAID 2021). In the same year, Bolivia had a GDP per capita of $3,552 (current US$), while Zambia’s stood at $1305 (World Bank 2020). However, in 1990, Bolivia’s GDP per capita was $709 and Zambia’s was at $408, while in the same year, Bolivia received $485 million in aid while Zambia received $474 million. In 30 years, Bolivia has moved away from aid dependency while Zambia is still reliant on aid. Why are some countries like Bolivia able to transition from aid dependence to economic independence while others like Zambia continue to depend on aid and struggle to grow their economies? In this paper, I ask what it takes for a country to graduate from aid. Specifically, I look at the cases of three similar countries-Ghana, Sri Lanka and Uganda-and examine what policies worked in their transition from aid dependence to economic independence. Sri Lanka transitioned from a low-income, aid-dependent country in 1989 to an upper-middle-income, economically independent country by 2019. In the same period, Ghana has shown satisfactory performance and progressed from a low-income to a lower-middle-income country while Uganda has not been able to graduate from a low-income country and aid dependency. This paper presents a political economy analysis of how Sri Lanka and to a lesser extent Ghana reduced their reliance on aid and grew their economies and why Uganda did not.
Scholars disagree on what causes countries to graduate from aid. I define aid graduation as achieving enough socio-economic growth that a country can no longer be an International Development Assistance (IDA) recipient (Hecht 2018). Almost all literature published since the World Bank’s landmark report on aid, aptly titled Assessing Aid: What Works, What Doesn’t and Why, agree that absent aid, “growth would be lower” in most poor countries (McGillivray et al. 2006). Nonetheless, debate on if aid works or not is not settled, a fierce debate over the “context in which aid works” is ongoing (McGillivray et al. 2006). Existing literature suggests that transition from aid dependence to economic independence is more likely in recipient countries with good economic policies that reduce inflation, liberalize trade, and promote good institutions, with moderate levels of aid dependence, with higher levels of political freedom and democracy, get aid as grants rather than loans, and where aid doesn’t come with specific conditionalities that the government is reluctant to accept, while the transition is less likely in recipient countries with negative external factors such as climate, terms of trade and major exports. However, I find that scholars disagree on which of these factors constitutes the most important determinant of aid graduation.
In this paper, I qualitatively assess the impact of the hypothesized factors presented above through in-depth case studies of each country’s path and the domestic political choices, aid structures, and international contexts that shaped their path. A cross-country comparison is chosen over individually comparing success and failure cases to minimize the risk of omitting key facts or drawing faculty conclusions based only on success cases. As the three countries started relatively similar, I can control for significant factors that could determine growth such as petroleum reserves, colonial legacies, unequal starting positions, and external third factors.
I find that a country needs to meet all the required conditions mentioned in the hypotheses to graduate from aid. Sri Lanka met all conditions; Ghana was faced with negative external factors but was able to meet other conditions while Uganda struggled to meet any. Good economic policies and low levels of aid help a country move away from aid dependency. Strict donor conditionalities and lack of political freedom and democracy impede the transition to economic independence. A country has little control over the external factor that determines growth such as climate and international commodity prices, these factors do play a role in determining a country’s growth trajectory
This study has significant value for scholars, government, citizens, and policymakers in both the donor and recipient countries. By analyzing what policies, levels of aid, regime type, donor conditionalities, and external factors worked, policymakers will be better informed to draft policies. These policies will aid the recipient nations in maximally utilizing their limited resources’ and subsequently transitioning into a healthy economy that isn’t reliant on aid. Similarly, donor countries face limitations on the amount of aid that they can grant. By knowing what does and does not work, limited aid can be maximally utilized to produce the most efficient outcomes. Limited literature exists on qualitative, cross-country comparisons on the determinants of growth and aid. This paper adds to this field by analyzing the cases of three similar countries while attempting to recommend general policies for use in other countries.
The remainder of this paper is organized as follows: Section 2 examines the current literature on the role of aid in economic development. I construct five hypotheses to explain the possible differences in aid outcomes. In section 3, I present the countries selected for the comparison. Section 4 analyses the findings, and section 5 concludes with the possible implications for donor and recipient governments.
Role of aid in economic development
The effectiveness of aid’s impact on economic development is highly debated. Some question aid’s ability to promote growth (Radelet 2017, Easterly 2003). Others argue that aid can work, but not always (Dollar and Easterly 1999). Some argue that the probability of aid working is conditioned on the policies of the recipient (Burnside and Dollar 2000). As such, a debate exists on the causal relationship between aid and growth and the determinants of aid graduation. This paper, building from this debate, looks at Sri Lanka, Ghana, and Uganda’s development path so far and how the specific political economy in each country influenced the outcomes of aid. Here, I attempt to identify why aid worked in Sri Lanka, partially worked in Ghana, and didn’t work in Uganda. I develop 5 possible hypotheses that might explain the variation in growth trajectories and the determinants of aid graduation.
A systematic literature review of the 50 most influential papers on foreign aid and development was unable to find any commonly agreed upon conclusion as to aid’s impact (Asatullaeva et al. 2021). Out of the 50 papers examined, 19 papers (42% ) examined economic growth as the” outcome area [of aid]” (Asatullaeva et al. 2021). Among these 19 papers, 11 found that “aid effectiveness is conditional” and is “dependent upon the implementation of macro policies, climate-related circumstances or type of aid.” Among the same 19 papers, only 9 find that “aid is effective,” thereby indicating the debate among scholars on the casual mechanism of aid and a country’s growth. Even as aid is often thought to work, scholars disagree on the mechanism of how aid works. Limited literature exists on qualitative, cross-country comparisons on the determinants of growth and aid. This paper adds to the literature on what did and did not work in each of these countries and attempts to recommend policies that can be replicated in other countries.
2.1 Aid outcome is dependent on good economic policies
Several authors claim that aid’s ability to promote growth depends on the economic policies of the recipient nations. Burnside and Dollar (2000) find, in what has been called “the biggest turning point in the literature on aid effectiveness,” that foreign aid is only effective in countries with “good fiscal, monetary, and trade policies” (Asatullaeva et al. 2021, pg 737). Aid was shown to have positive effects on countries with trade openness, sound monetary and fiscal policies that control inflation, and good institutions (Burnside and Dollar 2000). Overall, they find that “on average aid has little impact on growth” but aid has “more positive impact on growth in good policy environments” (Burnside and Dollar 2000). Furthermore, the World Bank’s Assessing Aid, assumes that aid becomes more effective in a good policy environment (World Bank 1998). The World Bank report goes further to claim that in a country with sound economic policies, “1 percent of GDP in translates into a 1 percent decline in poverty and a similar decline in infant mortality” (World Bank 1998). These findings indicate a clear expectation that recipient countries with good economic policies that reduce inflation, liberalize trade, and promote good institutions have higher chances of transitioning from aid dependence to economic independence[1].
2.2 Higher levels of aid negatively impact growth
Many authors question the linkage between aid effectiveness and good policies and instead argue that the levels of aid given to determine the growth path of the recipient nations. When the models used in Burnside and Dollar’s landmark paper to control for economic policies were revised, aid was shown to fuel growth even in countries with poor policies (C.-J. Dalgaard and Hansen 2001). If growth from aid isn’t reliant on sound policies, is it possible that levels of aid determine growth? The so-called aid Laffer curve shows how high levels of aid lead to negative growth. The existence of an aid Laffer curve is highly debated but generally, negative returns to aid is considered to be plausible (Islam 2005, Lensink and White 1999, Nkusu 2004). As there is a limit to how much the institutions of a country can absorb aid, higher levels of aid can lead to interference in the government’s functioning as valuable resources are diverted to manage “the burgeoning aid program” which ensures that “no aid is used effectively so that the return on aid falls” (Lensink and White 2001). However, what constitutes high levels of aid is debated much more than the existence of the Laffer curve. Lensink and White (2001) show that there are negative returns to aid when aid exceeds 50% of GDP. The same authors also suggest that the actual threshold value of damaging aid to GNP ratio might be between 41% to 58% (Lensink and White 1999). Therefore, it follows that while an aid Laffer curve is highly plausible, the threshold might differ for each country, thus indicating that a transition from aid dependence to economic independence is more likely at initially moderate levels of aid dependence.
2.3 Democracy and political freedom spur growth
Democracy and growth have often been linked with one another, and “a core tenet of contemporary aid is that development, democracy, and security reinforce each other” (Marriage 2016). As such, several authors have looked at the linkages between aid, democracy, and growth (Arvin and Barillas 2002, Kosack 2003, Svensson 1999). Svensson (1999) looks at the relationship between aid effectiveness, democracy, and political freedom and finds that the “growth impact of aid is conditional on the degree of political and civil liberties in the recipient country.” In countries with democratic institutions to provide an “institutionalized check on governmental power,” aid had a positive impact, and the “long-run growth impact of aid is conditional on the level of democracy/political accountability” (Svensson 1999). Although the reverse causation–aid can lead to democracy –is also possible, Knack (Knack 2004) shows that aid does not appear to reliably promote democracy, even when looking at the post-Cold War period. In cases where aid conditionality was successful in transitioning a country to multiparty democracy, the country hardly became a healthy democracy with competitive elections (Dietrich and Wright 2015). Furthermore, it is not the sheer presence of democracy, but of liberal values, freedom, and civil liberties that Sevensson (1999) argues affect the growth trajectory of aid. So, countries with higher levels of political freedom and democracy should see more growth from aid and thus be able to transition away from aid.
2.4 Donor conditionalities and aid type affect growth outcomes
The impact of aid can be driven by not just the recipient’s policies, but also donors. Kim’s (Kim 2015) study of South Korea and Ghana finds that the presence of aid alone does not explain economic success. The aid agencies’ intervention strategies, local government engagement in aid management, and aid type (grant as opposed to loans) were instrumental in the rapid development of South Korea. By contrast, in Ghana aid failed to develop an effective state and delayed political reform by “consolidating the existing power structure and features of African politics” (Kim 2015). Similarly, other scholars have argued that aid alone does not explain growth but differences in aid conditionality of donors explain the differences in economic growth (Dollar and Easterly 1999). An analysis of eight countries showed that donor conditionality is only effective when the demands are “specific and of less significance[2]” (Dijkstra 2002). When donors demand extensive reforms without understanding the political economy of the recipient country and the effects of the reforms, aid can be less effective as recipient governments are reluctant to accept such aid or be able to carry out far-reaching reforms. Furthermore, if aid is conditioned on specified reforms that are to be implemented in a short period by an unwilling government, such conditionalities often fail (Morrissey 2004). Aid effectiveness also depends on the type of donor; the more “liberal” a donor is, the greater the growth impact and vice versa (Tingley 2010). The type of aid granted by donors also matters. Development aid, defined as “aid expended in a manner that is anticipated to promote development, whether achieved through economic growth or other means” has a positive, large and robust effect on growth, while non-development aid, defined as “aid of all other kind” is mostly growth neutral and occasionally negatively associated with economic growth (Minoiu and Reddy 2010). This evidence leads to the hypothesis that transitioning from aid dependence to economic independence depends on the donor conditionalities and aid type. Aid is effective when presented as grants rather than loans and doesn’t come with specific conditionalities that the government is reluctant to accept.
2.5 External factors explain aid’s impact on growth
External third factors besides aid type, donor conditionalities, recipient characteristics, and policies can affect aid effectiveness. Guillaumont and Chauvet (2001) re-run Burnside and Dollar’s estimates of aid, good policy, and growth by controlling for environmental factors. They show that environmental and vulnerability factors such as terms of trade trends, the real value of exports, “stability of agricultural added value,” and climatic shocks explain aid’s contribution to growth, but good policies don’t (Guillaumont and Chauvet 2001). Thus, they “endorse the idea that aid effects on growth … depend on specific conditions in each recipient country” but find no evidence that “aid effectiveness (in growth terms) has been increased by improved policy” (Guillaumont and Chauvet 2001). This is in line with Lensink and White (2001), who find little evidence that aid becomes more effective when given to countries with good policies, contrary to the results of Burnside and Dollar ( Lensink and White 2001). In addition to external factors, the “deep structural characteristics” of countries can also affect growth (C. Dalgaard, Hansen, and Tarp 2004). Dalgaard et al. (2004) show that while aid did have positive impacts on growth overall, the impact was much stronger for countries outside tropical regions compared to countries inside the tropics. Therefore, countries with negative external factors such as climate, terms of trade and lower should see lower growth from aid and thus have difficulty in transitioning from aid dependence to economic independence
2.6 Hypotheses for the transition from aid dependence to economic independence
Scholars seem to agree that aid has some positive effects, and that the growth rate would have been slower in many countries without aid. However, the discussion above shows that the exact determinants of aid graduation are debated. Studies have reached different conclusions on the major factors that determine whether a country transitions from aid dependency to economic independence. The discussion seems to be centered on the five major elements outlined above. This paper, building off on this debate looks at the determinants of aid graduation based on the hypotheses that transition from aid dependence to economic independence is more likely in recipient countries (H1) with good economic policies that reduce inflation, liberalize trade, and promote good institutions, (H2) with moderate levels of aid dependence, (H3) with higher levels of political freedom and democracy, (H4) get aid as grants rather than loans, and where aid doesn’t come with specific conditionalities that the government is reluctant to accept, while the transition is less likely in recipient countries with (H5) with negative external factors such as climate, terms of trade.
[1] Defining what constitutes as good fiscal policy is very arbitrary. Instead, this paper sticks to Burnside and Dollar’s original three indicators to judge good economic policies. The three indicators are fiscal policy as measured by inflation, monetary policy as measured by budget surplus and trade policy measured by trade openness.
[2] The eight countries studied were Bangladesh, Cape Verde, Mozambique, Nicaragua, Tanzania, Uganda, Vietnam and Zambia. Dijkstra concluded that “donors should focus on some simple policy outcomes (ex post) instead of extensive policy conditions (ex ante).”
Case selection
The three countries selected, Sri Lanka, Ghana and Uganda started at similar levels of socio-economic development and natural resource endowment. These countries started as low-income, former British colonies in the early 1970s that relied on aid. Table 3.1 shows the progression of these countries in terms of economic indicators. The International Development Association (IDA), a part of the World Bank, aims to provide “zero to low-interest rates” loans and grants to the “world’s poorest countries” (World Bank 2022a). Being an IDA recipient or not is often considered as being aid-dependent (Hecht 2018). All countries started as IDA recipients. Today, both Ghana and Uganda are still part of it while Sri Lanka graduated from IDA in 2017. Ghana, being more economically developed than Uganda, receives so-called “blend” lending terms, with interest rates slightly higher (2.82%) than that of Uganda (1.45%) (World Bank 2022a). Sri Lanka has followed an exponential growth trajectory; Ghana is on route to economic independence, while Uganda is struggling to graduate from aid.
Despite starting at similar economic levels, the growth trajectory of these countries differs widely. In 2019, the net ODA received as a percentage of its GNI for Sri Lanka was 0.2%. Similarly, this value was 1.4% for Ghana and 6.1% for Uganda. In 1989, the same value was 7.8% for Sri Lanka, 13.9% for Ghana, and 9.9% for Uganda. In other words, all three countries were reliant on aid in the 1990s. Ghana and Uganda still rely on aid while Sri Lanka does not. Furthermore, Ghana is becoming less reliant on aid, unlike Uganda. In 1989, each of these countries was classified as a low-income country by the World Bank (World Bank 2022b). In 1997, Sri Lanka transitioned into a lower middle-income country, followed by Ghana in 2010. But, Uganda was still classified as a low-income country in 2020 while Sri Lanka was an upper-middle-income country, a change that occurred in 2018 (World Bank 2022b).
Figure 3.1: Economic indicators of selected countries include
1989 | 2019 | |||||
Country | GDP/Capita | World Bank Category | ODA/GNI | GDP/Capita | World Bank Category | ODA/GNI |
Sri Lanka | $ 408 | L | 7.8% | $ 3680 | UM | 0.2% |
Ghana | $ 365 | L | 13.9% | $ 2205 | LM | 1.4% |
Uganda | $ 314 | L | 9.9% | $ 822 | L | 6.1% |
World Bank Classification: Low income (L), Lower middle income (LM), Upper middle income (UM) | ||||||
Source: World Bank Indicators | ||||||
GDP per capita in current $ | ||||||
In addition to similar economic levels in the 1980s-1990s, all three countries had roughly the same human development indicators, as shown in figure 3.2. The three countries had high levels of poverty, with Uganda having 81% of its population under the poverty line of $3.20 a day. Sri Lanka started with higher human development indicators than others but nevertheless had 44.5% of its population under the poverty line and a life expectancy of 69.4 years. In terms of the Human Development Index (HDI), Sri Lanka in 1985 had an HDI of 0.36, Ghana’s was 0.21, and Uganda’s was 0.17. By 2015, Sri Lanka had increased its HDI to 0.51, Ghana to 0.33, and Uganda to 0.28 (Roser 2014). The difference between Ghana and Uganda suggests that growth isn’t just driven by initially high HID, as a single focus on Sri Lanka might suggest.
Figure 3.2: Human development indicators of selected countries
1981-1991 | 2016-2018 | |||||
Country | 1989 Life Expectancy | Literacy Rate | Poverty Levels | 2018 Life Expectancy | Literacy Rate (2018) | Poverty Levels (’16) |
Sri Lanka | 69.4 | 87% (’81) | 44.5% (’90) | 76.8 | 91.7% | 11% |
Ghana | 56.3 | 53.2% (’88) | 73.1% (’88) | 63.78 | 79% | 29.3% |
Uganda | 46.5 | 56.1% (’91) | 81% (’89) | 62.9 | 76.5% | 69.6% |
Year of available data shown in parathesis | ||||||
Source: World Bank Indicators, (Quist 1994) | ||||||
Poverty level showing poverty headcount ratio at $3.20 a day (2011 PPP) (% of the population) | ||||||
All three countries have gone through a period of internal conflict and except for Sri Lanka, non-democratic rule. As noted in the hypotheses, this difference in regime type for Sri Lanka may have some impact on growth outcomes, an issue explored in section 4.1 below. None of the countries have relied on petroleum resources to fuel development. Even though Ghana and Uganda have recently discovered proven reserves of oil, Uganda has yet to exploit them commercially while Ghana’s economy isn’t entirely reliant on oil like that of Middle East countries. Ghana only discovered oil in 2007, and is keen on avoiding the “resource curse,” Ghana has been diligent in not relying entirely on its oil to fuel development (Graham et al. 2020). While oil income might confound some of our results post 2007 in Ghana, oil production only started in the late 2000s, and oil rents as a percentage of GDP are at 4.68%, compared to 25.1% for Angola–a country often used as an example for having fallen into the “resource curse” (Graham et al. 2020, World Bank 2020).
The three nations selected here offer political insights into the determinants of transition from aid dependence to economic independence. As all three started with similar socio-economic backgrounds but had different growth trajectories, a structured comparison using the hypotheses developed in section 2 will provide us with a cross-country analysis of the factors that determine growth and graduation from aid.
Analysis
This section looks at the case studies of Sri Lanka, Ghana, and Uganda, followed by a discussion of the explanation of their growth trajectories following the hypotheses formed above.
4.1 Sri Lanka
Sri Lanka is an island country lying just off the southeastern tip of the Indian subcontinent. A population of about 22 million inhabit the 65,610 sq km island. Sinhala and Tamil are the official languages, and English is widely spoken (Hubert and Sinnappah 2022). Sri Lanka achieved independence from the British on February 5, 1948, after about 150 years of British Rule. Sri Lanka’s location in the Indian ocean is of strategic interest, and the island has potential for agriculture and export-oriented industries (Central Intelligence Agency 2022a). The country has hydropower potential and is a major producer of tea, rubber, coconut, and tobacco-all of which are cash crops. The climate is tropical and the geography, despite being mostly hilly is composed of forests and arable land.
From 1948 to 1971, Sri Lanka, known then as Ceylon, was s dominion of the Commonwealth. In 1971, an uprising led to a new constitution, and Sri Lanka became a republic. However, it was a socialist republic. In 1977, the United National Party (UNP) came into power as voters became tired of socialist policies and an unemployment rate that had reached 15 percent (Hubert and Sinnappah 2022). With the UNP in power, a new constitution was promulgated and Sri Lanka started to economically liberalize in 1977–one of the earliest in the region to do so (Balakrishnan 1980). The reforms were aimed at “rejuvenating the agricultural sector, boosting industrial production, increasing employment, raising domestic saving and investment, and strengthening the balance of payments in the medium term” (Karlik et al. 1996). State-controlled economic policies and import substitution trade policies were replaced with free-market economic policies and export-orientated trade. Heavy emphasis was placed on exports, as a result of which Sri Lanka has enjoyed healthy growth in its terms of trade (TOT)[1] since 1989 (World Bank 2020).
Sri Lanka never received large amounts of aid. Between 1960 and 2019, aid as a percentage of GNI peaked at 11.9% in 1978 and has since been on a steady downfall. However, a study of foreign aid and debt in Sri Lanka found that aid in Sri Lanka failed to raise income, but raised price levels and the interest rate (Maitra 2019). Sri Lanka never relied on aid to fuel development, but rather on foreign debt, as evident by its high debt to GDP ratio. In addition to this, Inflation, after rising to a high of 25% in 1980, has remained under 10% since 2009 and only gone above 10% in 16 out of the 40 years between 1980 and 2020. Like most emerging economies, Sri Lanka has been a net borrower, and the debt to GDP ratio has fallen from a high of 96.5% in 1990 to 77.65% in 2015. It appears that the Sri Lankan economy, one of the earliest to embrace free markets in the South Asian region had generally good policies that led to growth, despite setbacks from the civil war.
A civil war between the minority Tamil insurgents and the majority Sinhalese government broke out in 1983 and lasted until 2009. This war did considerable damage to the Sri Lankan economy and society. The liberalization efforts that led to a healthy private sector made the economy resilient during the war era (Athukorala and Jayasuriya 2013). The war led to a reduction in political rights (PR) and civil rights (CR) for Sri Lanka. In 1985, Sri Lanka scored 3 in PR and 4 in CL[2]. As the war worsened, the ratings fell 4 for PR and 5 for CL in 1995. The scores have hovered around 4-5 for PR and CL, before coming down to the 3-4 range starting the late 2010s. Sri Lanka is rated partly free by the Freedom House in 2021, scoring 51 out of 100 points. Chinese military aid was influential in helping the Sri Lankan government fight the war. Since the end of the war in 2009, traditional development partners’ finances has decreased while non-traditional development partner and “quasi-governmental and sovereign bond sales” have increased (Amarasinghe and Rebert 2013).
Instead of traditional donors like the EU and multinational agencies, Sri Lanka has been favoring non-traditional donors such as China, whose aid comes with little strings attached (Kalegama 2014). In addition to China, India has also long been a development partner and has funded infrastructure development such as railroads (McPhillips 2017). India and China’s fight for influence in the country have resulted in little conditionalities being attached with aid from these two countries. Similarly, the US, EU, and Japan have also been major donors for Sri Lanka. In addition to this, Sri Lanka has also insisted that “ foreign aid aligns with its own development policies and strategies, and requires that donor agencies fall in line with government policies” (Amarasinghe and Rebert 2013).
4.2 Ghana
Ghana is located in West Africa and covers an area of 238,535 sq km. It is home to some 31 million people. Ghana’s climate is warm and tropical with a coast on the south. As Ghana lies close to the equator, it mostly has evergreen forests. Ghana was first colonized by the Portuguese in the 15th century, after which numerous European colonizers contested for the country until the British finally established control in the late 19th century. On March 6, 1957, five different dominions (Gold Coast, Ashanti, the Northern Territories, and British Togoland) were unified under one country named Ghana and declared independence from the British(Maier et al. 2021). After independence, Ghana’s government was relatively unstable with several coups happening until 1981 when Lt. Jerry Rawlings took power and banned political parties (Central Intelligence Agency 2022b). Rawlings, faced with a declining economy, enacted economic reforms such as removing subsidies and price controls to reduce inflation, privatizing state-owned enterprises, and devaluating the Ghanaian Cedi to stimulate exports. He did this to secure IMF funding. Rawlings soon became a “darling of the West” and was able to get $5 billion as a result of these policy changes(BBC News 2000). While Ghana never received very high levels of aid (above the threshold suggested in section 2.2), aid inflows peaked under Rawlings. Net ODA received as a percentage of GNI went from staying below 5% until 1984 to 13.9% in 1989. Rawlings restored multiparty politics in 1992 but won the presidential elections in 1992 and 1996. Ghana has had a stable democracy since 1992, and the elections have been deemed “free and fair” (Mulholland 2012). Despite having several coups and some violence up until 1981, today Ghana is one of the most stable and democratic countries in West Africa. Ghana was deemed Not Free by the Freedom House up until 1991 (except a few years when Ghana became Partially Free). PR and CL scores were consistently above 5 until 1991, and below 5 after 1991. Ghana is seen as a Free country since 2000 and has had PR and CL scores hovering in the 1-2 range since the year 2000.
Ghana has had a market-based economy with few policy barriers to trade and investment. However, this hasn’t led to favorable market outcomes. Inflation has been high and frequently hovers around the 15% mark and reached a high of 59.462% in 1995. Frequent government changes, erratic economic policies, and improper fiscal management during the 1960s-1980s led to high external debt and a devaluation of the Cedi (Jedwab and Osei 2012). In the 1980s, the World Bank sponsored a restructuring program, which further liberalized the economy (along with Rawlings’ programs). This restructuring, however, did not stop the devaluation of the Cedi. The Cedi fell from 1.02 cedi for 1 USD in 1970 to 9145 cedi to 1 USD in 2006. Ghana’s export is comprised of three major–Gold, Crude Petroleum, and Cocoa Beans–which today together make up 80% of the export (Simoes and Hidalgo n.d.). A devalued currency has supported the export industry but gave way to inflation inside the country and the inability to pay off external debt. As Ghana’s economy is quite reliant on the export of cocoa beans, minerals, and crude oil, the country is quite vulnerable to external shocks. The drop in cocoa prices worldwide in the 1960s caused the Ghanaian economy to become economically unstable, which subsequently led to political instability. This was made worse by falling production in the 1970s caused by aging trees, drought, bush fires, and diseases (Maier et al. 2021). Economic woes caused by poor fiscal management, dropping cocoa production and global prices, devaluation of the cedi was the primary reason why Rawlings came into power in 1981. These economic problems were also one of the main reasons why Rawlings accepted reforms led by IMF and the World Bank. The Ghanaian economy began to stabilize in the mid-1990s. Ghana began pumping oil in 2010, and since 2011, oil has been one of Ghana’s major exports (BBC News 2010).
Ghana has been received aid from traditional donors like the United States, the UK, the EU, and the Netherlands in addition to multinational aid agencies like the World Bank and the African Development Bank (Hearn 2010). Ghana has received aid from the US that aimed to promote its civil societies (Hearn 2010). Debt has constantly been a major concern for Ghana. Almost 1/3rd of the government revenue is spent for servicing external debt (Jubilee Debt Campaign 2016). Ghana’s debt fell from $6.6 billion in 2003 to $2.3 billion in 2006 after the IMF agreed upon debt relief programs in 2002 (IMF 2002).
4.3 Uganda
Uganda is a landlocked country located in East-Central Africa. Uganda covers an area of 241,038 sq km and is home to some 42 million people. The country has a tropical climate and is mostly plateau with a rim of mountains (Central Intelligence Agency 2022). Being close to the equator, it generally rains with two dry seasons (December to February, June to August) and is semiarid in the northeast. Uganda received independence from the UK on 9 October 1962. Buganda is Uganda’s biggest regional kingdom, essentially a state within a state(Lyons et al. n.d.). Uganda is home to many ethnicities, and the relationship between them hasn’t always been smooth. The new Republic of Uganda failed within just 4 years when the constitution was suspended. A conflict broke out between the Ugandan government and the regional kingdom of Buganda. A military coup in 1971 transferred power from the first President, Milton Obote to the Ugandan military, led by General Idi Amin. Amin carried out mass killings of an estimated 50,000 to 500,000 to maintain his tyranny. In 1972 Amin then declared an “Economic War” against “imperialist” forces and the large Asian community in Uganda (Sejjaaka 2004 pg 101). He also ordered all Asians to leave the country in 1972. Asians owned many commercial enterprises, the ownership of which was transferred to military officers. Businesses began to collapse under these officers, and the country had a major economic crisis. The entire country’s economy suffered as a result; debt rose, export decreased, the manufacturing sector collapsed and the GDP per capita fell from USD225 in 1970 to USD 148 in 1979 (Sejjaaka 2004). This economic downturn ultimately led to the downfall of Amin’s regime. Obote became the president again for a few years but was unable to govern given the inflation and economic crisis and was soon ousted by Yoweri Museveni and his forces, the National Resistance Movement (NRM), in 1986. Museveni has since been the president of Uganda. While elections do happen inside the country, UN officials doubt the fairness of these elections (Schlein 2021).
During his second presidency, Obote attempted to restore international confidence in the economy by agreeing to donor demands, primarily from the IMF and the World Bank (Sejjaaka 2004). He floated the Uganda shilling, removed price controls, and set limits on government expenditures. This proved to be somewhat successful, but this first attempt to stabilize the economy is seen as a failure (Dijkstra 2002). Exports fell, inflation, which had initially been restrained by foreign aid shot from 47.4 percent to 156 percent between 1983 and 1985 (Sejjaaka 2004). When the NRM came into power, they initially opposed IMF programs. However, the worsening economic crisis forced the NRM government to accept an economic reform program sponsored by the World Bank, the IMF, and EU aid agencies. For the second, but under NRM leadership Uganda aimed to liberalize and stabilize the economy under the conditionalities of foreign aid. The country removed price controls, instituted a free exchange rate mechanism, allowed laissez-faire interest rates and foreign-exchange transactions, imposed tight fiscal and monetary management policies on public-sector borrowing, promoted trade, reformed the regulatory framework, and privatized public enterprises (Sejjaaka 2004). Inflation fell from 200 percent in 1987 to 48.5 percent in 1992. Prudent budget control along with good fiscal and monetary policies led to the restoration of macroeconomic stability. The Ugandan government removed barriers to export, especially for agricultural products. However, Uganda’s main exports are primary products such as coffee, tea, and cotton that have little value added to them, resulting in Uganda suffering from unfavorable TOT (Hausmann et al. 2014). The collapse of commodity prices worldwide severely impacted Uganda’s economy (Kitabire 2005). While TOT has been reduced significantly from its peak in the 1980s, imports constitute about 26% of GDP while exports are just 10% (World Bank 2020).
Uganda has been showing some signs of progress recently. Since 1995, inflation hovered around the 10-15% range, and starting from 2013, has been below 6%. Foreign aid accounted for two-thirds of public expenditure in 1994, dropped to about 50% in the early 2000s, and has remained around the 50% mark since then (World Bank 2020). Debt remains a huge concern for the country, which is a Heavily Indebted Poor Country (World Bank 2018). The World Bank, IMF, and African Development Bank are the biggest creditor to the country (Hearn 2010). Uganda spends around 6-10% of government revenue on service debt. While the country is constitutionally democratic, the citizens enjoy little political freedom and civil liberties. The country went from Partially Free to Not Free in 2014 (Freedom House n.d.). Since the 1990s, PF has mostly hovered in the 6-5 range and CL in the 4-6 range.
4.4 Discussion
After looking at the hypotheses for each country, I find that a country needs to meet all the required conditions to graduate from aid. Overall, I find that Sri Lanka had good economic policies that fostered growth, did not have high levels of aid to sustain its government expenditure, was always democratic and had partial levels of freedom for its people, never faced major conditionalities from traditional donors as it could look towards non-traditional donors, and had favorable external factors to promote growth. While commodities like tea, rubber, and coffee remain significant exports, most exports are garments and other manufactured products. Under the assumptions used by Dalgaard et al. (2004), Sri Lanka doesn’t have “deep structural characteristics” that would prevent it from graduating from aid. Sri Lanka’s growth is effectively explained by hypotheses H1-H5.
Ghana’s growth trajectory is explained by the instability during its early post-independence era that coincided with poor economic policies and governance. Once Rawlings took power, he implemented a good fiscal policy. Overall, Ghana’s development started once good economic policies were followed, thus confirming hypothesis H1. Ghana never had high aid dependence to start with, which is in line with hypothesis H2. Ghana remains one of the most democratic and free countries in West Africa. Ghana was the only Free country among the three selected. The growth that followed the introduction of political freedom and democracy is harmonious with hypothesis H3. Ghana was subject to economic liberalization policies, however, the government under Rawlings was willing to accept these. Most of the aid to Ghana came in form of loans, which subsequently were effectively converted to grants by the relief programs in the early 2000s. These findings agree with hypothesis H4; the slow growth (relative to Sri Lanka) can be explained by loans and donor conditionalities imposed in the 1990s. Ghana also has had bad economic outcomes that were partly due to external shocks such as falling commodity prices. As Ghana’s main export is primary products like cocoa beans, minerals, oil, and gold, Ghana remains vulnerable to external shocks that affect commodity prices. Ghana’s slow growth can be explained by hypothesis H5, the presence of negative external factors.
Uganda’s lack of development can also be explained using the framework developed in the literature review. Uganda has tried to implement good fiscal policy, however, until recently these policies did little to stabilize the economy. Once the policies started working, growth started happening too. Hypothesis H1 concurs with this growth path. Unlike Ghana and Sri Lanka, Uganda has never achieved high levels of political freedom and democracy for its citizens, which hypothesis H3 suggests explains the lack of growth. Uganda has had a high debt to GDP ratio of about 50%, only falling because of IMF’s debt relief in the early 2000s, then continuing to rise again in the late 2010s (IMF 2022). Aid as a percentage of government expenditure frequently exceeded the threshold of 41-58%. Hypothesis H2 proposes that growth is possible only with moderate levels of aid dependence, which is consonant with Uganda’s economic history. Most of the aid to Uganda has been loans and has come with strict donor conditionality that the NRM government was reluctant to accept. Hypothesis H4 insinuates that the sluggish growth is partly due to the type of aid received by Uganda. As in the case of Ghana, Uganda’s economy is highly reliant on the export of primary products of agriculture such as coffee, tea, and cotton which makes it highly suspectable to external shocks. Like Ghana, Uganda’s slow growth can also be explained by hypothesis H5.
[1] Terms of trade refers to the ratio between a country’s export prices and its import prices. When more capital is leaving the country that it is entering, TOT is less than 100. A TOT over 100 indicated that a country is accumulating capital (i.e., earning foreign reserves) from exports.
[2] Freedom House gauges a country’s freedom on three indicators: Political Right (PR), Civil Liberties (CL) and Freedom Status. PR and CL are measured on a 1-7 scale, with 1 being the highest degree of freedom. Freedom Status is measured as Free, Partly Free and Not Free
Conclusion
In this paper, I looked at why are some countries able to transition from aid dependence to economic independence while others continue to struggle to grow their economies. I did a comparative case study of Sri Lanka, Ghana, and Uganda to examine the determinants of aid graduation. As the debate over conditions in which aid works intensifies, this paper adds to the literature on what did and did not work in each of these countries and attempts to recommend policies that can be replicated in other countries. The findings can help guide better policies for aid implementation.