The term foreign aid originated from the Development Assistance Committee of the which defines foreign aid as financial flows, technical assistance, and commodities that are designed to promote economic development and welfare as their main objective. These are either grants or subsidized loans. Foreign aid is distinguished from humanitarian aid by its focus on a long term rather than a short term response (OECD, 2006).
In 2003, aid officials and representatives of donor and recipient countries gathered in Rome for the High Level Forum on Harmonization. At this meeting, convened by the (OECD), donor agencies committed to work with developing countries to better coordinate and streamline their activities at country level. They agreed to take stock of concrete progress before meeting again in Paris in early 2005. In Paris, countries from around the world endorsed the Paris Declaration on Aid Effectiveness, a more comprehensive attempt to change the way donor and developing countries do business together, based on principles of partnership. Three years on, in 2008, the Third High Level Forum in Accra, Ghana took stock of progress and built on the Paris Declaration to accelerate the pace of change. The principles agreed upon in the declarations are however still not always practiced by donors and multilateral bodies. In the case of Cambodia, two experts have assessed donor misbehavior (Hildegard et al, 2009).
Despite the fact that the international community addressed the effectiveness issue through the Paris Declaration and the subsequent Accra Agenda for Action, the implementation of this agenda has been difficult. Governments and aid agencies have made commitments at the leadership level, but for the moment have done little more than pursuing top-down, aggregate targets. Decades of development have shown that if countries are to become less dependent on aid, they must follow a bottom-up approach, where they determine their own priorities and rely on their own systems to deliver that aid. (Deutscher et al, 2008).
Poverty profile of Ghana
Poverty is defined relative to the standards of living in a society at a specific time. People live in poverty when they are denied sufficient income for their material needs and when these circumstances exclude them from taking part in activities which are accepted part of life in that society. It is not just about physical deprivation; it is also about lack of opportunity and loss of hope. (UNDP, 2006).
Ghana is described by the World Bank as a lower middle income country with a poverty head count ratio of 28.5 percent in 2006, down from 39.5 percent in 1998 and 51.7 percent in 1992. This means that Ghana has now a per capita income of over $ 1000. (The World Bank, 2011). While many donor agencies, particularly the World Bank, describe Ghana's growth over the past ï¬fthteen years as pro-poor in the sense that it has reduced poverty and done so more equitably in the last ï¬ve years, Ghanaians are not quite as optimistic. The government poverty report shows that although the incidence of poverty has been falling since 1991/92, the depth of poverty for those still classiï¬ed as poor has not changed. The emerging middle class registered large gains, and the richest quintile became even richer. While all regions gained from recent growth, the reduction in poverty was lower for the poorer areas of the country, and thus the gaps between the various regions and localities have widened. (Whitfield, 2009). Therefore there is no doubt that poverty in Ghana is mostly rural.
Ghana Poverty Reduction Strategy Paper I (GPRS I)
Poverty Reduction Strategy Papers (PRSPs) are prepared by member countries in broad consultation with stakeholders and development partners, including the staffs of the World Bank and the IMF. Updated every three years with annual progress reports, they describe the country's macroeconomic, structural, and social policies in support of growth and poverty reduction, as well as associated external financing needs and major sources of financing
The Ghana Poverty Reduction Strategy Paper I (GPRS I) was implemented between the year 2003 to 2005 with an emphasis on poverty reduction through wealth creation and assisting poor groups to engage in income generating activities.(Whitfield, 2009). Medium term priorities highlighted in this paper include;
1. Microeconomic stability
2. Economic transformation such as modernization of agriculture and promoting agro-processing.
3. Strengthening the private sector such as access to long term credit
4. Infrastructure such as roads and energy
5. Education and skill training
6. Health such as a model health center in each district
7. Others were measures on environment, gender issues, water and sanitation.
(Source: DIIS Working Paper 2009:15).
In sum, the GPRS I was implemented to achieve microeconomic stability mainly to access debt relief and to increase inflows of foreign aid to the country. As such it was a declaration of intentions by the Ghanaian government to use debt relief and foreign aid for poverty reduction. (Whitfield, 2009).
Ghana Poverty Reduction Strategy Paper II (GPRSII)
GPRS II was rolled out and implemented by the government between the year 2006 to 2009 with the goal of doubling the size of the economy within the next decade and bringing the average per capita income of Ghanaians to a middle-income country by 2015. (IDA/IMF Report, 2008).
Having achieved microeconomic stability and debt relieve by 2005, the GPRS II declared a need to focus more on growth-inducing policies and programs that have the potential to support wealth creation and sustainable poverty reduction. The Growth and Poverty Reduction Strategy (GPRS II) declared a need to focus more on the productive sector, so that the costs of social sector spending could be sustained. GPRS II was an agricultural-led strategy which seeks to diversify the economy's structure away from dependence on cocoa to cereals and other cash crops for export markets and increase agro-processing and light industry based on textiles and garments and value added minerals. (Whitfield, 2009).
In sum, the GPRS II seeks to aggregate existing sector strategies and international commitments, and integrate disparate development agenda's and sartorial commitments that compete for inclusion in the annual national budget into one comprehensive development policy framework. (Adutwum, 2007).
Poverty Reduction and Foreign Aid
When it comes to the question of foreign aid and its impact on poverty reduction, two principal disagreements have shaped scholarly debates; the first is the extent to which foreign aid is simply an instrument of foreign policy and therefore not intended to improve lives. Secondly, what type of foreign aid is most beneficial in combating poverty, regardless of the motivation? Jeffery Sachs (2009) in the paper "Can foreign aid reduce poverty" advocates large increases in developmental aid in combating poverty. He argues that discussions on aid are clouded by confusion and simple misunderstandings. Sachs points out that many studies try to find a correlation between overall aid and economic growth, but find little positive correlation; they declare it a failure. He argued that aid is directed towards countries in violence, famine or deep economic crises and therefore aid often will correlate with economic failure. He was quick to retort that aid did not cause the failure but it responded to it.
The weaknesses in the aid insufficiency argument are several. First, the developing countries that have enjoyed the fastest growth over the past two or three decades such as Botswana, China, India, Mauritius, and Vietnam have enjoyed rapid poverty reduction without any significant inflow of foreign aid. Rather, the real engine was a sharp, new commitment to homegrown reforms to get institutions, infrastructure and incentives for private investment right. These countries made key, strategic investments in public goods and services to "crowd in" private investment, including foreign direct and portfolio investment that ultimately dwarfed aid flows. (Barrett, 2008). Second, aid has always been and will always be tiny relative to overall income, to external trade and, in recent years, to private commercial financial flows. Most developing countries receive aid amounting to only about 3 percent of their GNI (Tarp 2006). It would take more than $200 billion annually, in order to bring every sub-Saharan African up just to a modest $2/day per person standard of living, a sum more than ten times the present aid flows to the continent (Barrett et al. 2007). Plainly, aid cannot close the gap on its own; it must crowd in private investment in capital accumulation and job creation.
George Ayittey (2009) in the paper "Can foreign aid reduce poverty" however was resolute that foreign aid cannot reduce poverty. He argues that that provision of foreign aid to Africa will make little difference unless it is coupled with meaningful reforming of political and economic systems. He reiterated that the entire foreign aid business has become a massive fraud and attributed this to monumental leadership failures in Africa. He reiterated that the entire foreign aid program needs to be critically evaluated not by Western or African government officials, but by people outside government before more money is wasted. He further argued that foreign aid can only be put to good use with "Smart Aid". With Smart Aid, civil society and community based groups monitor aid and instigate reforms from within.
There are other arguments that have been advanced to explain aid and poverty reduction; aid is misallocated (donors give aid for strategic reasons to the wrong recipients), aid is misused (recipient governments pursue non-developmental agendas) and GDP growth is not the right measure of aid effectiveness. First, while all aid effectiveness papers implicitly define the donors' objective as solely the promotion of economic growth or the reduction of poverty in the recipient countries, a parallel strand of literature on aid allocation has shown that most donors often pursue a different underlying agenda and allocate aid according to their own strategic interest. If a significant part of aid is allocated for strategic purposes, no positive impact in terms of growth or poverty alleviation should be expected. (Masud and Yontcheva, 2005). Second, most studies on aid effectiveness on poverty assume that the recipient government shares the donor's officially altruistic objective. As argued by Svensson (2000) and Murshed and Sen (1995), a recipient government and a perfectly altruistic donor can have conflicting objectives, as the former represents a variety of stakeholders, including wealthy individuals who might influence the aid distribution. If foreign aid is misallocated and misused, then it cannot be expected to have a significant impact on growth.
Conclusion
For the purposes of this paper, I have reviewed aid effectiveness and ways to improve on it. Furthermore, I looked at poverty in Ghana, the strategies Ghana has put in place from the year 2000 to combat poverty and to sustain gains made in poverty reduction. In the last part of the section I looked at the various arguments on how these two have played out, the failures and success stories and what needs to be put in place for foreign aid to have the intended effect on poverty reduction.
