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Ghana: 2000 and Beyond

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1993
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GHANA, one of the first African countries to gain independence, was the first to pursue intensive economic adjustment. Can it now become the first to accelerate growth and, at the same time, reduce poverty? The dynamic growth in East Asia provides some lessons for Ghana and for countries in sub-Saharan Africa on what needs to be done to remove the pervasive pessimism.

The Ghanaian economy stands at a crossroads. Its adjustment program is one of the most successful in sub-Saharan Africa. Since 1983, a decade of stabilizing policies has yielded broad budget balance, strong export growth, a reasonable external position, and substantial structural reforms, including some privatization and closures of loss-making publicly owned companies. Even so, real growth has remained at only about 5 percent a year. And although per capita income rose at about 2 percent a year to end the 1980s at $390, Ghana is still among the world’s poorest countries. At this growth rate, the average poor Ghanaian would not cross the poverty line for another 50 years. This is clearly not good enough.

What would it take for Ghana to become a middle-income country by the year 2007, the 50th anniversary of Ghanaian independence? What would be needed to ensure that the average poor Ghanaian would have crossed over the poverty line by then? In recent years, Ghana’s policymakers have begun to refocus their attention from short-term issues to longer-term growth and development issues.

The recent dynamic growth in East Asia shows that such efforts can succeed. Fast-growing East Asian economies, such as Indonesia, Malaysia, and Thailand, which were poorer than Ghana in the 1960s (Chart 1), have doubled their per capita income and achieved a dramatic reduction in poverty in roughly ten years. East Asia shows what can be achieved with pragmatic and sensible government policies and a disciplined, hardworking population that responds to the right incentives. The methods the Asian economies used in the 1960s and 1970s to lay the foundation for faster growth in the 1980s could serve as important lessons for Ghana.

Chart 1The costs of slow growth

Source: International Financial Statistics, IMF.

Much of Ghana’s growth in the medium term (up to the year 2000) would need to come from agriculture, mining, and services. Industrial growth will follow with a time lag, but the basis for such growth—education, infrastructure, telecommunications, market development, and technological innovation—must be laid now. Ghana starts from a strong position (Chart 2). Its growth rates since 1983 are close to those enjoyed by Thailand and Malaysia a generation ago, except in agriculture, where performance has been weak. Even if growth does not reach the level anticipated, the effort itself may provide a common national purpose and a unifying force during this period of political transition to a more democratic form of government. Aiming high and trying harder appears to be a low-risk and high-gain option, provided that expenditures are kept within limits.

Chart 2Development diamonds for Ghana

In this connection, it should be noted at the outset that Ghana made considerable progress in stabilizing the economy between 1983–91, laying the basis for the recovery in economic activity. However, serious slippages developed in the 1992 election year, largely as a result of civil service wage increases. In response, the Government has adopted tough corrective measures designed to bring economic performance back on track. It would be essential to maintain the stability as a prerequisite for accelerated growth.

East Asia’s success

What specific domestic actions accounted for East Asia’s successes, and what is their relevance for Ghana? Three areas stand out—education, literacy, and health; openness in international markets; and public sector discipline and private investment.

Emphasis on human development. Most successful economies achieve near universal literacy as a precondition to rapid growth. Ghana’s tertiary and secondary education systems compare favorably with those of fast-growing economies that are beginning the push toward rapid growth. The same is not true, however, in primary education (Chart 3) and literacy. Ghana’s literacy rate is about 55 percent, its functional literacy rate about 35 to 40 percent—much lower than in many other African countries. Ghana needs to focus the bulk of its education spending on literacy programs and primary education and rely more heavily on private resources to finance its growing secondary and tertiary education programs.

Chart 3Primary enrollment rate

Source: World Bank data

Similar issues must be addressed in the area of health. Currently, the country’s resources tend to be skewed toward urban areas. More emphasis needs to be placed on providing equitable primary health and preventative care, rather than on hospitals and curative care. Other key issues include developing a national drug policy to strengthen drug regulation and enforcement and crafting consistent national strategies to address malnutrition problems.

Openness. Ghana needs a more aggressive export drive focusing especially on agriculture, agro-processed products, and light manufacturing. Ghana introduced sweeping trade liberalization in the early stages of its adjustment program. This is appropriate, since the import liberalization led to greater reduction in the anti-export bias. However, some would argue that import liberalization proceeded too fast, leading to severe adjustment problems for industry, especially for protected, noncompetitive companies. More time should have been given to allow firms to shift from noncompetitive activities to competitive, export-oriented ones. Many firms went bankrupt, and those that remain cannot access new credit to go into new lines of activity, as they are tarred by their past bad debts. Some are clamoring for restoration of protection (e.g., textiles). These cries should and are being resisted by the Government. Still, there remains the question of the companies’ financial distress and how to help them invest in potentially competitive activities with financial and other support.

Ghana’s trade ratios (exports to GDP and imports to GDP), which have risen in recent years, could increase even more. At 15 percent of GDP, the country’s export ratio is low because noncocoa, nonminerals exports are small. What can Ghana do to push export growth? First, it should continue its appropriate exchange rate policies to provide nondiscriminating export incentives, as well as offer government support in finance and infrastructure to exporting firms. Second, because labor costs are an important factor in determining the competitiveness of Ghana’s exports, it can work to link wage bargaining more closely to labor productivity. Third, it can oversee the changes in rules and regulations needed to facilitate the entry of foreign companies and improve tariff levels, export finance, and quality control. Finally, it can actively promote a better export infrastructure in areas such as telecommunications, warehousing, and refrigeration.

Foreign companies and Ghanaians abroad can play a key role in Ghana’s drive toward a more open export-oriented economy. Foreign direct investment is important for two other reasons. First, official development assistance to Ghana may come down from its current level of about 8 percent of GDP today, which is high by international standards. Commercial borrowing on a large scale is not a viable or wise option, so that foreign direct investment can play an important role in filling the gap. Second, foreign partners can also play a key role in technology transfer and in Ghana’s export drive, as they did in East Asia and Latin America. This can happen only if greater emphasis is placed on forming partnerships with foreign businesses.

Working with business. A striking difference between Ghana and the East Asian success stories lies in the interaction between the public and private sectors. Ideally, governments should have a clearly defined role and a proactive complementary relationship with the private sector. Moreover, East Asian governments have been fiscally prudent. In East Asia, government spending was not small, but it was geared to promoting and not competing with the private sector. Moreover, because of vigorous revenue mobilization, the public sector has been a net saver since the 1960s, rarely crowding out the private sector.

In Ghana, fiscal policy has improved considerably, but there is scope to do far better. The public sector deficit could be reduced by cutting transfers to state enterprises, reducing unfunded liabilities, such as end-of-service benefits; reducing uneconomic subsidies on water, electricity, and transport; and improving revenue mobilization through a value-added tax.

Lower fiscal deficits need not imply less government involvement, however. In fact, a strategy for accelerating growth implies a larger role for government in some areas. There is a case for greater government involvement in, among other things, primary education and health, transport infrastructure, and research and extension, as well as operations and maintenance of its existing facilities. At the same time, the government could leverage its outlays in energy, telecommunications, mining, and manufacturing by encouraging greater private sector participation through leasing, joint ventures, and management contracts. The government can contribute more to the economy with the same resources by improving its financial management, speeding up implementation of development projects, reorienting its expenditure pattern, and raising the quality of its services.

Public sector discipline and private investment promotion go beyond expenditure allocation and fiscal issues, however. Lack of clarity in the limits to public sector activity in Ghana remains a major impediment to private sector confidence and investment response. This confusion is due to a cobweb of old controls and regulations, a lack of transparency in the enforcement of laws and regulations, and continued government ownership of production activities, despite the government’s stated intention of leaving these areas to the private sector. Greater government transparency, due process, and speedy divestiture are necessary to rebuild confidence. Efforts are underway to improve the climate for investment through the formulation of the Private Sector Advisory Group (PSAG). A revised investment code is currently under discussion to improve the business climate and clarify business procedures.

The degree and nature of government intervention in promoting growth has been the subject of considerable debate in Ghana. Across-the-board, market-friendly reforms were the key to East Asia’s success. These included macroeconomic stability, fiscal prudence, competitiveness through appropriate exchange rate and labor market policies, and appropriate expenditures in social and physical infrastructure. Much of the thrust of Ghana’s reform program has been along these lines and should continue. Some would argue that governments should go further and target specific sectors and, as Korea did, certain businesses (especially export) for special assistance, including privileged access to credit and foreign exchange, as well as tax incentives.

This path is risky because of the potential for “picking losers rather than winners.” But if Ghana does follow this second path, a few simple rules would help. First, only export industries should receive assistance. Second, only industries that already exist in the private sector should be targeted—fledgling companies trying to break into the export market—rather than projects with no apparent private sector interest. Third, subsectors in general but not particular firms should benefit in order to avoid the charge of “crony capitalism.” An informal body such as the PSAG, which has provided sensible options on deregulation, could continue as a useful forum for discussion on the issues of developing a business-government partnership to foster growth.

Helping the poor

Even if growth were to occur, there is concern that it may not benefit the poor because of rising inequity—as is alleged for some countries in Latin America. If the accelerated growth envisioned here is distributed at least proportionately to the poor, a sustained and significant reduction in poverty can be achieved by 2007. What is needed to ensure such a development?

International experience suggests that well-functioning factor markets, particularly labor markets, are crucial in allowing income increases to spread throughout the economy. But factor market mobility is not automatically pro-poor. Care must be taken to understand the unique characteristics of Ghanaian society, which can either encourage or impede the poor from benefiting. For example, while both rural and urban informal labor markets work well and respond to economic stimuli, the urban formal sector is characterized by rigidities and distortions that need to be addressed. At the same time, informal (especially urban) labor markets are often inefficient, with underemployment—and hence low income—the rule rather than the exception.

Diminishing the distortions and rigidities in factor and product markets is the most efficient way to increase the poor’s productive assets and raise the return on these assets through changes in relative prices. The key public policy challenge is, therefore, to assist poor and vulnerable groups without distorting economic mechanisms, since any seemingly “pro-poor” distortions could hurt economic growth and, ultimately, the poor themselves.

Broad-based public expenditure in basic education, health, family planning, and other social and economic infrastructure has also been important in translating high growth into effective poverty reduction. It is especially important to raise the school enrollment of girls. Ghana’s current public spending is considerably biased toward urban areas and against primary education and health care. Even if spending were distributed more equitably geographically, care must be taken to ensure that powerful local groups do not gain preferential access to resources and services.

The East Asian countries—Indonesia, Malaysia, and Thailand—demonstrate the benefits of an appropriate balance between policies that spur growth and policies that enable the poor to participate in growth. All three achieved and sustained annual GDP growth rates of more than 6 percent. This growth—relatively labor intensive, with agriculture to the fore—generated demand for the factors of production owned by the poor. These countries also provided for adequate social spending. As a result, they have achieved universal primary education, and their infant mortality rates are lower than those of many countries with similar incomes. The improvement in skills and quality of the labor force enabled the poor to seize the opportunities provided by economic growth.

In Malaysia, the strong economic growth in the 1970s and 1980s was accompanied by significant achievements in poverty reduction. The development of a labor-intensive manufacturing sector, an open trade and price regime, and a flexible labor market enabled the poor to expand into all branches of economic activity. Increased public spending on social services, especially public health and education, promoted equity and endowed the poor with the human capital needed to benefit from the new employment opportunities and participate in the economic growth.

Better management

Ghana has benefited from strong and able economic management in its difficult period of adjustment since 1983. Continuity and pragmatism have contributed immeasurably to this success. Strong centralized management was a hallmark of the successful East Asian economies. There, a small group of economic managers, backed by “think tanks” for long-term policy formulation, had a relatively free hand. Ghana has able policymakers but lacks a body like Taiwan’s Council for Economic Planning and Development or Korea’s Economic Planning Board. Ghana could also benefit from independent policy and research institutes similar to the Thailand Development Research Institute and the Korea Development Institute, which provide essential inputs into public debates on policy issues. An organization along these lines called the Centre for Economic Policy Analysis has been established recently in Ghana.

While a case can be made for greater centralization in Ghana’s strategic planning and macroeconomic policy, a need clearly exists for greater devolution of responsibilities in other areas. District assemblies, city councils, and community organizations have better access to information about local preferences and are more responsive to local constituencies than the central government. With the exception of a few major cities, however, devolution will have to be gradual because of the weaker capacity at the local level to manage and execute projects.

Ghana is currently facing difficulties coping with the backlog of infrastructure rehabilitation that has resulted from years of neglect. For the near future, the ability to produce and transport agricultural products and minerals will remain critical. Placing a higher priority on public investments in underdeveloped areas with high growth potential, such as the western region, can enhance growth. Local authorities can be given a greater role in project design, selection, and maintenance. Major changes in procedures for contracting, procurement, and planning are needed, and the role of the public sector in infrastructure-related activities also needs re-examination. Greater reliance on small private contractors would be one way to overcome the maintenance backlog.

As far as basic infrastructure is concerned, the issue is not ownership, but management and execution. The government can own the ports—sea and air—the railway stock, and the road network but should consider transferring operations and management to the private sector. Power and telecommunications are industries where private participation is being encouraged the world over, and Ghana should draw lessons from this.

Finally, Ghana must find a Ghanaian way to increase growth with equity, as did Korea, Taiwan, and now increasingly, Malaysia and Thailand. This does not mean that Ghana should try to look for a new set of economic policies or ignore the important messages from international experience. There is by now ample evidence on the necessary set of economic measures needed to establish the basis for faster growth. But in the timing and sequencing of policies and in the management of the process of change, Ghana would obviously need to bring about a judicious blend of new methods with indigenous management practices. This process of marrying the new to the old is important because economic transformation will involve a comingling of the traditional society (mostly rural) with the modern (generally urban) for at least another two to three decades.

This piece is based on the World Bank report “Ghana 2000 and Beyond—Setting the Stage for Accelerated Growth and Poverty Reduction,” Washington, DC, February 1993.

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