How Aid Tying Can Impose Additional Cost on Aid Recipients: Evidence on Ghana

Abstract

Abstract: This study investigates the prices of tied foreign aid imports by estimating the price differentials between tied aid imports and non-aid imports from bilateral sources to Ghana. The study finds a significant mark-up on the prices of tied aid imports relative to non-aid imports, which translates into substantial cost to Ghana. Several reasons, both in Ghana and in the donor countries, could be found for the estimated price differentials. Ghana needs to take steps to improve its investment climate, as a way of reducing investment risk, which in turn will enhance the confidence of export financiers to reduce the incentive to mark up prices of tied commodities. On the part of donor countries, there may be need to examine the market for the supply of aided commodities towards the liberalization of such markets. It is suggested that although the higher costs on tied imports may be a necessary price Ghana had to pay to obtain aid, the associated cost provides a case for the cancellation of the bilateral aid debt to Ghana.

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