Ghana: Selected Issues

This Selected Issues paper reviews trends in GDP and their impact on poverty reduction in Ghana. It highlights structural constraints that are believed to have affected output growth, along with potential sources of increases in output in future years. The paper analyzes trends in the main production sectors, and presents an assessment of the underlying determinants of growth and poverty reduction. It also explores the key elements of the authorities’ strategy to raise GDP per capita growth as set out in the Ghana Poverty Reduction Strategy.

Abstract

This Selected Issues paper reviews trends in GDP and their impact on poverty reduction in Ghana. It highlights structural constraints that are believed to have affected output growth, along with potential sources of increases in output in future years. The paper analyzes trends in the main production sectors, and presents an assessment of the underlying determinants of growth and poverty reduction. It also explores the key elements of the authorities’ strategy to raise GDP per capita growth as set out in the Ghana Poverty Reduction Strategy.

I. Determinants of Growth and Poverty Reduction in Ghana1

1. Compared with other sub-Saharan African countries, in which per capita GDP fell by 0.3 percent per year during the past two decades, growth in Ghana has been largely positive (averaging 0.7 percent per year) and has contributed to a reduction in the level of poverty overall. Arguably, the most important factor contributing to growth has been a shift, from 1983 onward, away from an administrative system of economic management to one more reliant on market forces. Policy reforms over the period helped to reduce fiscal deficits and inflation, improve infrastructure services, and shift relative prices and incentives toward tradables, exports in particular Progress in policy implementation has not been even over the period, however, and at times has been marked by fiscal slippages, particularly during elections cycles, and occasional exogenous shocks.

2. The incidence of poverty in Ghana has fallen from the late 1980s onward, as growth contributed to poverty reduction through overall increased income and consumption levels that were only slightly offset by a modest rise in income inequality. Gains have not been shared by all regions, however, and have been smaller for the poorest segments of society, in particular the rural poor.

3. In July 2000, the authorities commenced preparation of the Ghana Poverty Reduction Strategy (GPRS), which builds on Ghana’s interim poverty reduction strategy paper. The GPRS was finalized in February 2003, and is now the guiding framework for government policies, external support from donors and the IMF, and for the use of resources released under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative).

4. This section reviews trends in GDP and their impact on poverty reduction. It highlights the structural constraints that are believed to have affected output growth, along with potential sources of increases in output in future years. The section begins with a discussion of trends in the main production sectors, and is followed by an assessment of the underlying determinants of growth and poverty reduction. Finally, it explores the key elements of the authorities’ strategy to raise GDP per capita growth as set out in the GPRS.

A. Sectoral Composition and Measurement of GDP Growth

5. Sustained real income growth in Ghana largely reflects progress on structural and macroeconomic reforms that increased private sector activity and investment and raised income levels per capita. The introduction of major policy reforms began in earnest in 1983, prior to which real growth had been sharply negative (Table I.1). Reforms were accompanied by a political evolution to a firmly democratic form of government in 1992, although developments were periodically interrupted by episodes of weak macroeconomic management during elections.

Table I.1.

Ghana: Composition and Growth of Gross Domestic Product by Category, 1980–2001 1/

(Calculated from data in constant 1993 prices)

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Source: Quarterly Digest of Statistics, Fund estimates.

GNFS denotes “goods and nonfactor services”

Excludes fourth sectoral component, namely, indirect taxes

6. Nevertheless, real growth has been continuously positive since 1984, rising somewhat faster in the first half of the period (5.4 percent per year on average during 1984–91) than in the second half (4.4 percent per annum in 1992–2002; Table I.1). By expenditure category, growth has been consistently strongest for exports and imports, which, in turn, have stimulated growth in the services sector in Ghana. A substantial surge in spending on gross domestic capital formation appears to have followed on the heels of the 1983 reforms, as this category rose from 4 percent of real GDP in 1984 (based on 1993 prices) to 20 percent by 2001. Current account trade deficits over the period (averaging about 15 percent of GDP in real terms) were financed by a combination of grants and a ratcheting up of external official debt. Meanwhile, per capita growth was consistently positive, averaging 2.1 percent over the 1984-2001 period. Although per capita growth appears modest, it has been sufficient to result in a broad-based reduction in poverty over the past decade and a half.

7. Ghana’s national accounts are in need of upgrading, in particular because surveys that form the basis for the estimations are outdated and may be underestimating the contributions to GDP of services, private investment, and the informal sector; see Box I.1. Real sector surveys are expected to be gradually replaced and updated, along with a rebasing of the national accounts, using 2000 (a census year) as the new base year. Work will need to proceed first, however, on a reestimation of the consumer price index—thought to substantially underestimate the growth and level of domestic prices, particularly after end-1999—along with a recalculation of related nominal GDP. Real sector national accounts, upon which this study is based, are, therefore, subject to some uncertainties as a consequence of the associated weaknesses in data.

Agriculture

8. The economy of Ghana is largely agrarian, as evidenced by the size of the agriculture sector, comprising just over one-third of GDP, and the significant share of workers employed in agriculture (more than half of the active labor force; see Table I.2). Meanwhile, the incidence of poverty is highest among agricultural workers. The agriculture sector of Ghana is composed of crops (excluding cocoa) and livestock, which together account for 63 percent of the value of agricultural production, cocoa (comprising 13 percent), offshore and inland fishing (13 percent), and forestry (11 percent). The principal food crops of Ghana are cassava and yam, corn (maize), and millet and sorghum, while cocoa is by far the most important cash crop and second-largest export commodity. Wood is harvested for export, both in sawn wood and finished form, but there are questions as to the sustainability of the current high rate of logging.

Table I.2.

Ghana: Labor Force Status by Employment Category, 1987/88–1998/99 1/

(In percent of total labor force, unless otherwise specified)

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Source: Ghana Living Standard Surveys (GLSS) 1–4

Figures adjusted to ensure maximum degree of comparability across surveys.

Ghana’s National Accounts

Ghana’s national accounts are prepared using the production, or value-added approach. Under this approach, the gross volume or sales (including those for exports) of goods and services produced by the private and public enterprises, by the government sector, and by private households, arc estimated (including net increases in inventories). These volumes are multiplied by market prices to get the gross value of production. Purchases of all intermediate goods used during the production process (including imported ones) are then subtracted to obtain the total domestic value added. No separate surveys are currently compiled by income or by final expenditure. In their absence, the Fund staff estimates these national accounts using total GDP by productive sector, fiscal and balance of payments information, and estimates for gross capital formation, holding private sector consumption as the residual.

National accounts composition. The current set of national accounts uses 1993 as the base year and is based on information collected from the third Ghana Living Standards Survey (GLSS). As a share of total production in 2001, Ghana’s national accounts are composed of agriculture (35.9 percent); industry (24.9 percent); services (29.9 percent); and indirect taxes (9.3 percent).

Data sources. The Ghana Statistical Service (GSS) is (lie agency responsible for compiling national accounts statistics. Data sources include statistical reports and surveys prepared by the Ministry of Food and Agriculture (MOFA), Animal Health and Production Department, Ghana Cocoa Board, Forestry and Fisheries Departments, Ghana Statistical Service, and Mining Department, and annual reports of the various parastatals and government agencies.

Compilation methodology. Gross value added at current prices is calculated by subtracting input costs from the value of gross output, while output at constant prices is calculated by multiplying the constant 1993 producer price by the actual quantities produced each year. This method is applied to all agricultural activities—cocoa, other crops, plantation output, livestock, and hunting and gathering—although the basket of inputs netted off differs by activity. Data compilation for “distributive trade” activities, encapsulating wholesale and retail trade, is based on the “commodity (low approach.” This approach assesses all products entering the distributive trade (from local production to imports), less commodity taxes (sales, purchases, and other nondeductible taxes), to arrive at gross output at market price. Gross output is further adjusted downward by the costs of intermediate consumption to avoid double counting.

Data weaknesses. Ghana’s national accounts are in need of revision, as the existing sector surveys that form the basis for the estimations are outdated, in particular relating to services, private investment, and the informal sector, hi addition, national accounts series have not been revised backwards before 1993, resulting in a discontinuity between the 1975-based series and the current one (as a result, staff have computed benchmarked estimates for earlier years) Specific shortcomings of die data are demonstrated by

- gross fixed investment, which m consultation with Fund staff, was revised downward in March 2001, resulting in a decrease in the investment-to-GDP ratio in the range of 20 to 25 percent during the second half of the 1990s;

- omission of data compiled by the Ghana Investment Promotion Centre on foreign direct investment, which show a declining trend during 1999–2001. at odds with trends in gross fixed investment; and

- construction sector data, which are highly unreliable, as the deflator for deriving value at constant prices exhibits large fluctuations from year to year, and movements do not reflect developments in the overall economy, either in price terms or as measured by construction activity.

9. Growth in agricultural production during the past two decades has been slower than in the industry and services subsectors, and, as a result, agriculture’s share in GDP fell from an average of nearly 50 percent in 1980–83 to 36 percent in 2001. All of the decline is attributable to negative or declining growth in farming and livestock production (see Figure I.1), which has been constrained in part by the rudimentary farming methods employed—hoes and cutlasses are the standard implements of the farmer—and a considerable underutilization of arable land: only 22 percent of the total surface area, or about 40 percent of land suitable for agriculture, is under cultivation. As a result, one independent study estimates that Ghanaian agriculture is operating at only 20 percent of its maximum potential.2

Figure I.1.
Figure I.1.

Sectoral Growth Rates, 1980–2001

(Annual percentage change)

Citation: IMF Staff Country Reports 2003, 134; 10.5089/9781451814866.002.A001

10. Consistent with the important role agriculture plays in growth and its consequent impact on poverty reduction, the authorities launched a series of initiatives to stimulate agricultural development and production. In the 1990s, policies and programs were guided by the Medium-Term Agricultural Development Program, a framework aimed at improving the allocation of public and private resources, and institutions, so as to fully realize Ghana’s agricultural potential, while addressing the major constraints on growth in agriculture. These constraints are thought to include:

  • a lack of appropriate technology, both in the form of inputs (fertilizer and seeds) and farm machinery and implements,

  • inadequate and poorly maintained rural infrastructure, in particular, limited road access to domestic, regional and international markets, and, a lack of adequate post-harvest handling, storage, and processing facilities;

  • an underdeveloped rural finance system, high real interest rates, and the virtual withdrawal of commercial banks from agricultural credit following liberalization of the banking sector;

  • generally weak rural institutions (farmers’ organizations and cooperatives) exacerbated by a low level of education and extensive illiteracy among farmers; and,

  • excessive reliance on rainfed crops in the presence of a low and erratic rainfall, and other environmental problems (principally degradation caused by surface mining).

11. By 2000, the strategy to address these shortcomings was absorbed into “Vision 2020,” which set out fairly ambitious growth targets for industry and agriculture. Although some progress was made under both initiatives, growth did not reach the levels targeted in Vision 2020, in part owing to a lack of integration of the strategy into mainstream fiscal policies and budgeted spending, and to a lack of monitoring and evaluation of progress in agricultural reform. Accordingly, more recently a sector-wide approach has been adopted, with the aim of accelerating agricultural development, food and raw material security, and poverty reduction under the GPRS (see below).

Industry

12. In line with the overall trend, growth in the industry subsector fell sharply during the 1980-83 period, rebounded during 1984-91, and performed roughly the same as the rest of the economy after that The removal of high levels of protection, combined with substantial real devaluations, improved the environment in which Ghanaian industry operated, and, in particular stimulated construction, which rose from 4.8 percent of GDP in 1984 to 8.8 percent of GDP in 2001. A strong privatization program provided the backdrop for the partial sale of Ashanti Goldfields, Ltd. in 1994 (the single largest foreign investment for the country in 30 years), which, in turn, stimulated gold mining for export, as well as the development of the Ghana Stock Exchange. Development of bauxite mining was aided by a special agreement with a private U.S.-based company, and by enactment of the Mining Code in 1986, and Investment Code in 1994 (considered to be the best in Africa at the time). However, both codes are in need of updating, as evidence by a net foreign disinvestment from Ghana’s mining sector in recent years.

13. Manufacturing, meanwhile, has remained stable at about 9 percent of GDP since 1985. Much of its growth was sustained by a substantial rise in nontraditional exports, which grew from US$220 million in 1995 (accounting for 15 percent of total exports) to US$626 million in 2000 (or 30 percent of exports).3 Positive factors contributing to manufacturing growth (in addition to improvements in the overall investment climate) are thought to include:

  • the 1994 Ghana Investment Promotion Centre (GIPC) Act, which simplified the administrative steps for the start-up of a foreign-owned company), protected firms from expropriation, and provided corporate tax and duty incentives (especially for nontraditional exports),

  • the relatively high proportion of foreign direct investment (FDI) directed to food, aluminum, and plastic products, and nontraditional agribusiness export industries, as well as secondary effects from FDI (including improved technology, products, and managerial skills); and,

  • Ghana’s general comparative advantages, which comprise ample supply of low-cost labor, fertile soils and climate, and experience with garment manufacturing.

14. However, there have also been missed opportunities for manufacturing and nontraditional exports. Ghana’s free trade zone (FTZ) has not taken off as envisaged, with a substantial portion of its developed land still unsold, while industrial property in Ghana remains relatively scarce.4 In addition, FDI levels have been lower in Ghana than in other countries and have been concentrated in investment in the greater Accra area. As a result, these have not led to upstream and downstream development, growth in small and medium-sized enterprises, or a resolution of key sector bottlenecks. Examples of the latter are the paucity of cold storage facilities and fast-turnaround marketing and transport systems, which currently impede the export overseas of pineapples, bananas, and freshly caught fish, as well as transit trade with neighboring countries.

Services

15. In comparison to agriculture and manufacturing, growth was highest in the services sector during the 1990s (6.2 percent per annum; Table I.1), with higher-than-average growth in wholesale and retail trade (6.8 percent), transport, storage, and communications (5.8 percent), and finance and other business services (4.8 percent). Services grew principally on account of their complementarity with exports and imports, which, in turn, grew more rapidly than GDP during the period. Underlying factors contributing to growth in trade relate to Ghana’s strategic location in west Africa, which stimulated transit trade; liberalization of the cocoa sector, which promoted a recovery in cocoa production for export, the continuing positive effects of earlier public investments in roads, rail, and ports; and Ghana’s divestiture program, which emphasized banking and telecommunications.

16. Developments in the services sector are consistent with trends in foreign direct investment and household survey data. Information collected by the GIPC suggests that 60 percent of investment in wholly owned or foreign/Ghanaian joint ventures between 1995 and 2001 was directed at non-tradable services (with the remaining share invested in tradables). Furthermore, data on income and individual employment from a series of household surveys indicate that while nonfarm self-employment activities cut across all real sectors, they are essentially services-based, and thus explain the contribution of growth in services to poverty reduction.

B. Public Policy Reforms and Underlying Determinants of Growth

17. With the introduction of the Economic Reform Program (ERP) in 19835 and the ongoing structural reforms since then (see Box I.2), Ghana has made a successful transition from an administered economy to an open market one. Gross domestic production grew at an average annual rate of 5.4 percent between 1984 and 1991, and gross fixed capital formation quadrupled (from 5.8 to 24.4 percent) as a share of GDP.

18. One channel of transmission of public policies to growth was through the encouragement of FDI as a means of financing private investment. In the case of many African economies, FDI has been found to be linked to the exploitation of natural resources (petroleum and mining in particular); locational advantages; specific investment policies designed to attract FDI (e.g., export processing zones); or broad-based economic policy reforms, including the privatization of state-owned enterprises or other nonequity arrangements, such as management or licensing agreements.6 Ghana falls under the latter category, with FDI highly correlated with the sale of state-owned enterprises, which, in turn, has encouraged the acquisition of new technologies into the country. Ghana has not recently benefited from investment in mining or agriculture (both of which are relatively risky in the current climate) and, compared with other countries, FDI in Ghana is rather low (Ghana was ranked 15th out of 47 sub-Saharan African countries in 2002, with South Africa, Nigeria, and Angola accounting for 62 percent of all FDI in the group).7 Also, FDI flows arc small in level terms—accounting for about 1 percent of GDP and about 10 percent of private investment—and, hence, are not yet a determining indicator of growth in Ghana.

Ghana: Major Structural Reforms—1986–2002

Exchange rate regime. Fully flexible exchange rate introduced (1992); liberalization of the current account and capital inflows (1994).

Trade and investment policies. Tariff regime progressively lowered top rate to 20 percent (with few exemptions) and simplified to four lines; majority of import and price controls relaxed (by 1986); adoption of new Mining Code (1986); trade in coffee and domestic marketing of cocoa liberalized (1992); enactment of new Investment Code (1994) and free trade zone program (1995); cocoa export trade partially opened to private firms (2001); and special import tax rescinded (2002).

Privatization and reform of state-owed enterprises. Partial or full privatization of 255 state-owned enterprises (SOEs) authorized by end-2000; state enterprise law enacted and performance contracting initiated in 1992, and accelerated divestiture program launched in 1995, targeting economically significant SOEs, including the Ghana Ports and Harbours Authority and Ashanti Goldfields, Ltd. (1994).

Fiscal reforms. Civil service reforms (1987 and 1995, although not yet complete); Value-Added Tax introduced and partial implementation of universal Taxpayer Identification Numbers (1999); price subsidies on agricultural inputs removed; independent utilities regulatory commission established (1998); and Medium-Term Expenditure Framework introduced for budget (1999), though not yet fully effective.

Financial sector reforms. Private banks authorized to operate (1988); removal of credit controls and liberalization of interest rates and bank charges (1990); sale of government shares in large, state-owned banks (1996); modern prudential regulations enacted (1992); privatization of remaining state-owned banks launched (1998, although three banks remain); closure of three insolvent banks (2000) and transfer of guaranteed deposits; and creation of an Apex Bank to oversee all rural banks.

Decentralization. Creation of District Assemblies (local government) in 1988, and District Assemblies Common Fund established with statutory contribution of 5 percent of revenues (1992).

19. Public policies appear to have an effect on growth through their impact on overall macroeconomic stability and their secondary impact on the investment environment. Regression analysis over the period 1980–2001 (Table I.3) indicates that real GDP growth per capita8 in Ghana is positively correlated with the level of private sector investment (lagged one year), rate of growth in public sector investment, and, to a lesser extent, improvements in the terms of trade. At the same time, per capita growth is reduced during bouts of inflation, when budget deficits are growing or the currency is appreciating, when the stock of external public debt rises substantially, and, of course, when the population grows. Factors accounting for the largest variations in real per capita GDP growth comprise: government and private sector investment, the rate of inflation, and the size of the central government deficit9 All factors taken together explain 97 percent of the variation in Ghana’s real per capita growth (93 percent, when computed as an adjusted R square).

Table I.3.

Ghana:Determinants of Real Growth Per Capita

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Sample Period (adjusted): 1982–2001R-squared =0.970221Adjusted R-squared = 0.929274Durbin-Watson = 3.056
A01ufig04

Fitted Results Real Growth Per Capita

(Annual percent change)

Citation: IMF Staff Country Reports 2003, 134; 10.5089/9781451814866.002.A001

C. Role of the Private Sector

20. Despite multiple initiatives commencing with the 1983 ERP, the private sector in Ghana has yet to achieve its full potential. A survey by the UN Conference on Trade and Development (UNCTAD) of firms in Ghana indicated areas where businesses expressed general dissatisfaction with the prevailing business environment. Responding to an open questionnaire, firms cited (in order of importance) bottlenecks relating to a lack of finance (40 percent of responses), lack of adequate trade infrastructure, high taxes/import duties, paucity of skilled labor, marketing difficulties, high cost of utilities, problems relating to land acquisition, lack of fiscal incentives, and lack, or low quality, of local materials.10 An analysis of four nontraditional export sectors representative of Ghana’s spectrum of export opportunities highlighted similar problem areas.11 In addition, the latter study cited an inefficient import/export regime, comprising: arbitrary changes in tariffs, failure to implement the “fast-track” system to clear goods, as envisaged under the Gateway Project,12 and. failure to implement the Economic Community of West African States (ECOWAS) trade agreements (in particular regarding duty drawbacks), which slowed the growth of trade with neighboring countries.

21. Weaknesses in the financial sector that restrict financing opportunities for productive private investment are a particular impediment to business expansion in Ghana. Some fifteen years after the beginning of financial sector reforms in 1988, Ghana’s financial system remains shallow. Broad money (M2) was equivalent to 27 percent of GDP in 2001, compared with 107 percent in Malaysia, 57 percent in Indonesia, 44 percent in Kenya, and 59 percent in South Africa. The low level of intermediation in Ghana is associated with a lack of confidence in the financial system, weak financial infrastructure, and significant crowding out of private sector credit owing to high levels of government and parastatal borrowing from the banking system. The latter borrowings, in turn, have resulted in high nominal and real interest rates, a preference by commercial banks to hold lucrative, relatively risk-free treasury bills, rather than extend riskier credit to the private sector, and a correspondingly small share of private sector investment as a percentage of GDP.13 Two important keys to promoting financial intermediation will be the preservation of a stable macroeconomic environment and a reduction in the stock of government domestic debt

22. To better focus government policy on improving the business environment, in May 2002 the authorities created a Ghana Investors’ Advisory Council (GIAC), a consultative group made up of representatives from domestic and internationally based private companies, government ministries, and observers from multilateral organizations and private foundations. The GIAC has established a permanent secretariat and established a matrix of priority issues that it will strive to address, comprising:

  • security and political stability,

  • macroeconomic stability,

  • public sector sensitivity to private sector needs,

  • improvement in infrastructure (especially telecommunications and energy),

  • efficiency of customs and ports, and

  • reform of laws affecting the business environment.

The GIAC will help guide the choice of concrete policy actions in these areas by relevant government ministries and will monitor their implementation.

D. The Incidence of Poverty and Links to Economic Growth

23. Poverty is predominantly a rural phenomenon in Ghana. Rural areas are home to two-thirds of the population but account for 84 percent of alt of Ghana’s poor (Table I.4). For the poor and nonpoor alike, farm income is the dominant but declining source of income, with well over half of the working population employed in subsistence or paid farming (Table I.2). Poverty reduction has been slowest in food crop farming and nonfarm self-employment. During the 1980s, nearly 90 percent of the rural, self-employed population was engaged in farming, while the remaining 10 percent switched increasingly into wholesale and retail trade.

Table I.4.

Incidence of Poverty and Poverty Reduction, 1991/92–1998/99

(Percent of population in poverty, unless otherwise indicated)

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Source: Ghana Statistical Service (2000).

Percent of the population falling below the poverty line, defined as the level at which consumption levels are met. in Ghana’s case, poverty fine - 900,000 cedts (US$363) per annum in January 1999 Accra prices.

24. Since measurement first began with the launch of the GLSS, Ghana’s incidence of poverty has consistently fallen, by 8 percentage points from 1987/88 to 1991/92 and, using a redefined poverty line, by 12 percentage points from 1991/92 to 1998/99. Across regions, poverty fell the most in urban Accra and in the rural forest area where cocoa and timber are produced By economic activity, poverty fell markedly in export farming, and in public and private formal and informal employment. Poverty gains have not been shared by all regions and groups, however, as evidenced by an increase in poverty in the urban savannah region (and an increase in extreme poverty in the rural savannah region) and by smaller average gains for the very poor overall.

25. Experience in other countries suggests that economic growth is a necessary, but not a sufficient, condition for poverty reduction. When countries put in place incentive structures and complementary investments to ensure better health and education that lead to higher incomes, the poor will benefit doubly, through increased current consumption and higher future incomes. Growth contributes the most to poverty reduction when it expands employment, productivity, and wages of poor people, and when public resources are spent on human development and physical infrastructure (and contributes the least when spent on servicing public debt or maintaining a large public bureaucracy).14

26. In Ghana’s case, almost all of the reduction in poverty can be traced to economic growth in general (Table I.3), and to a shifting of employment out of farming and into nonfarm self-employment in particular (Table I.2). As noted above, growth in private sector services, especially wholesale and retail trade, is highly associated with the increasing trends in non-farm self-employment. Additionally, overall growth has been largely neutral with respect to income distribution, and therefore has not significantly offset the positive effect of growth on poverty reduction.15 At the same time, the nonagricultural self-employed have not benefited from rising education levels in Ghana, which would otherwise lead to underlying technical progress and rising incomes. Rather, such benefits went principally to male wage workers (not ranked among the poor), whose underlying incomes rose.16

27. The data for the period 1991/92–1998/99 thus imply a growth elasticity with respect to poverty of −0.34 for Ghana. That is, for every 1 percent rise in real GDP growth, the incidence of poverty is reduced by 0.34 percent (0.28 percent for extreme poverty). This result is thought to be fairly low compared to cross-section data for a group of countries that measure an average income elasticity of the poorest quintile with respect to GDP growth of 0.94 (after controlling for factors contributing to growth);17 compared with these countries, Ghana will need to grow faster in order to bring its incidence of poverty down.

E. Growth and Poverty Reduction Ambitions in the GPRS

28. The Ghana Poverty Reduction Strategy (GPRS) represents a comprehensive set of policies, strategies, and programs designed to support growth and reduce poverty over a three-year period (2003–05). The five main components of the GPRS comprise:

  • macroeconomic stability,

  • production, employment, and infrastructure development,

  • human resource development,

  • special programs to protect the vulnerable and excluded, and

  • governance.

Supply-side measures to stimulate pro-poor growth, including a stable macroeconomic environment that supports business, are expected to raise total GDP growth from 4.2 percent in 2001 to 5.0 percent by 2005 (and, within that, to raise agriculture growth from 4.0 to 5.0 percent; see Table I.1 for GPRS period-average objectives).

29. A principle aim of the GPRS, therefore, is to refocus efforts in Ghana’s core economic sector, agriculture, by developing linkages with agro-industry aimed at the promotion of select agricultural products for enhanced food security (e.g., livestock and rice) and export (cassava starch, cashews, and timber). Accordingly, the strategy18 specifically targets:

  • greater access to inputs, including fertilizers, high-yield seeds and livestock, irrigation capacity, and fish hatchlings, for sustainable natural resource management, especially in the timber sector,

  • individual land ownership, as collateral for loans to acquire inputs and take forward positions for the prefinancing of crops;

  • greater access to private sector capital for crop financing and marketing;

  • improved infrastructure, including paved feeder and market-linking trunk roads, rural electrification, irrigation systems, and storage facilities;

  • deregulation of cocoa marketing, with the retention of provisions for price stabilization;

  • an improved marketing and distribution network for other product; and,

  • enhancement of human resources and institutional capacity.

30. In order to improve on the most recent experience with agricultural reform, which achieved only limited success, the current approach will focus more on the process of implementation and follow-through to the farm and private sector operator level. For example, commodity coordinators, appointed to promote each selected commodity, will be responsible for articulation of a commodity development plan, formation of farmer-based commodity organizations, collection and evaluation of data on input suppliers, price and market trends, storage, processing, and marketing of their commodity, and identification of farmer or private sector operating training needs. A National Advisory Committee (of ministers, to be supported by technical and district-level groups) will be responsible for evaluating the success of the agriculture reform plan, while an Agriculture Commission (assisted by foreign missions) will lead in obtaining information on investment opportunities in agri-business and act as a one-stop window for the agricultural entrepreneur.

31. It is expected that the financing of agricultural development in the short term will rely predominantly on public sector provision of credit through donor-funded projects, such as the Cashew Project or the Upper West Agricultural Development Program. Credit for longer-term activities (such as acquisition of technology or projects with a long gestation period) will come in part through a recently established Export Development and Investment Fund (EDIF). The first tranche of the US$40 million credit facility has been placed directly with four local commercial banks, and is to be used for private sector purchase of equipment and materials from the United States for salt production and agri-business.19 The GPRS, meanwhile, proposes spending about US$92 million over three years to promote farm mechanization, irrigation, rehabilitation of fish hatcheries, inputs for livestock and crop production, and cluster development of small-scale agri-processing industries. These efforts will be supported by significant infrastructure spending to provide trunk and feeder roads, including for the purpose of moving farm goods to processing centers and to market, and to promote rural electrification. The selection of sites for infrastructure development (roads in particular) will be based on a full social impact analysis designed to maximize poverty reduction and agri-business development.

32. Programs for human resource development and the provision of basic services, meanwhile, are aimed at enhancing access to education; reducing gender disparities in education; improving vocational and technical skills through training; enhancing access to, and delivery of, health services; enhancing access by women to reproductive health services; and increasing access to potable drinking water and improving sanitation. The education program, in particular, will aim to ensure uninterrupted education from preschool to age 17 as a means of reducing poverty and creating conditions for human development. Access and equity issues, especially in the deprived areas of the country, and female enrollments will receive primary considerations Efforts to advance health care—including a phasing out of the “cash and carry’’ system by increasing the fee exemption coverage and introducing a national health insurance scheme—will also provide positive gender equality and poverty-reducing effects.

F. Medium-Term Prospects

33. Having established a sound macroeconomic framework and more-focused poverty reduction plan, Ghana is poised for more rapid economic growth and poverty reduction in 2003–05. The country should continue to benefit from the positive effects of exchange and trade liberalization, as well as fiscal and monetary sector reforms, which raised the openness of the economy and stimulated growth in exports and the services sector from 1984 onward. Looking forward, the establishment of strengthened policies designed to ensure a stable macroeconomic environment, with moderate inflation and a falling level of government domestic debt, should free up resources and reduce the cost of financing for private sector-led growth. This growth, in turn, will be the main engine for reducing the incidence of poverty, particularly if accompanied by development of the agriculture sector.

34. The above assessment is supported by quantitative analysis. Ghana-specific coefficients based on 1980-2001 sample data, and corresponding forecasts of explanatory variables taken from Ghana’s updated medium-term framework, suggest that per capita growth should be at least as high as that implicitly targeted in the GPRS for the medium term (see forecast plot contained in Table I.3). Of these variables, the factors contributing the most to the expected higher-than-historical per capita growth include: new revenue measures making room for planned increases in public sector investment; greater private sector investment made possible by lower recourse to domestic borrowing by government, and associated lower real interest rates; firm monetary policy, contributing to lower inflation, and a reduction in domestic and external public sector debt. Outside the sample covered by the regression, growth could also be spurred by the debt reduction that Ghana will receive under the enhanced HJPC Initiative.20

35. Planned structural policies and trade arrangements have the scope to raise growth further. Reforms currently ongoing, or slated for near-term implementation, aim at improving the efficiency of the public sector and reducing rigidities faced by private sector firms. These center on improving the environment for doing business through an updating of labor and corporate laws, improvements to customs and ports procedures, reform of the civil service, and a strengthening of the banking sector and provision of private sector credit. In addition, recently conferred trade privileges offered by the Cotonou Framework Agreement (conveying preferential access to European markets) and the U.S. African Growth and Opportunity Act (AGO A, for a period of seven years) hold the potential to spur export-led growth and productivity gains in the economy.

36. Major challenges for Ghana’s growth and poverty reduction strategy relate to the need to maintain strict fiscal and monetary discipline while reallocating budgetary spending to achieve the five basic objectives of Ghana’s poverty reduction strategy. This will entail reorienting budgetary resources toward infrastructure development and education and health, while improving the management of budgetary execution, particularly in connection with election cycles. Key areas here include the need to improve public expenditure management, to better track fiscal developments and make midcourse corrections when needed, and to reduce the size of the wage bill through civil service reform, while redirecting the efforts of civil servants to priority areas.

37. The authorities will need to pay particular attention to development of the agriculture sector, given its importance in the economy and as a means of improving the livelihood of the poor. The authorities’ plan calls for promotion of integrated development of agri-based industry through construction of supporting infrastructure, improved extension services, and incentives to expand private sector participation. In order to avoid creating market distortions and economic activity fueled by government subsidies, however, it will be important to encourage the use of equipment and inputs that reflect their true costs (including through the provision of rural credit and microfinance at market rates of interest) while avoiding protectionist changes in the trade regime. Also, a concerted effort will be needed to ensure balance and coordination in the design of policies to construct large infrastructure projects (roads and electricity-generating facilities) on the one hand, and to promote agri-based projects and private participation, including at the rural level, on the other.

38. Based on current trends, Ghana is likely to realize most of its Millennium Development Goals (MDGs).21 Ghana is a signatory to these global targets - set by world leaders at the Millennium Summit in September 2000 - which strive to reduce poverty and its causes, as measured by the attainment of eight goals and thirty-nine indicators with time-bound targets, by the year 2015 (Figure I.2). Ghana’s overarching goal of achieving growth to ensure the virtual disappearance of poverty by 2020, originally set out in Vision 2020, is consistent with the MDGs. Based on a simple extrapolation of the decline in extreme poverty from 1991 to 1999, Ghana could reduce the proportion of people living in extreme poverty to 10 percent by 2015, thus more than meeting the 18.5 percent objective under Millennium Development Goal 1 (of halving the 1991 rate of extreme poverty). Should the 5.0 percent growth objective be realized in the medium term (as opposed the average historical growth of 4.4 percent), then based on the current elasticity, the proportion in extreme poverty could be lower still, reaching about 9 percent by 2015.

Figure I.2.
Figure I.2.

Ghana: Progress in Achieving Millennium Development Goals. 1990–2015

Citation: IMF Staff Country Reports 2003, 134; 10.5089/9781451814866.002.A001

Source: Ghana Millennium Development Goals Report (2002).

39. Improvements in other MDG indicators are very likely to occur in tandem with each other, because the attributes of poverty and human development underpinning them are interrelated. For example, deaths in under-five children are largely associated with: maternal and child malnutrition (45 percent), malaria (22 percent), lack of access to safe water, low immunization, and a generally low level of education among mothers, all of which are MDG indicators in their own right. Thus efforts and associated spending aimed at improving health delivery, raising educational attainment, and empowering women (including through agricultural extension services to women farmers) will create externalities leading to improvements in poverty indicators overall. In recognition of the linkages, the National Development Planning Commission - responsible for implementation and tracking of the GPRS - will report annually on the 27 (out of 39) indicators covered under the GPRS.

40. Although Ghana’s poverty reduction elasticity with respect to growth is low in comparison to other countries, there is policy discretion for raising it, should Ghana aggressively pursue “super-poor” policies in connection with its implementation of the GPRS. These are found in other countries to include policies that lower inflation, shrink government, promote financial development, and raise educational achievement.22 Should efforts be stepped up in these areas, a double benefit will accrue—through stronger economic growth and a raised elasticity for poverty reduction—leading to faster poverty reduction overall.

References

  • Addison, Doug, 2002, “Ghana: a Preliminary Growth Accounting” (unpublished).

  • Basu, Anupam, and Krishna Srinivasan, 2002, “Foreign Direct Investment in Africa: Some Case Studies” IMF Working Paper 02/61 (Washington: IMF).

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  • Ghana Poverty Reduction Strategy 2003-2005: An Agenda for Growth and Prosperity, February 2003.

  • Ghana Millennium Development Goals Report, October 2002.

  • Ghana Statistical Service, 2000, Poverty Trends in Ghana in the 1990s (Accra: GSS).

  • Ghura, Dhaneshwar, Carlos A. Leite, and Charalambos Tsangarides, July 2002, “Is Growth Enough? Macroeconomic Policy and Poverty Reduction,IMF Working Paper 02/118 (Washington: IMF).

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  • Global Coalition for Africa, 2001, “Ghana Agricultural Development Strategy,paper presented in Pretoria, South Africa, May 2-3.

  • Khan, Mahmood Hasan, 2002, “When is Economic Growth Pro-Poor? Experiences in Malaysia and Pakistan,IMF Working Paper 02/85 (Washington: IMF).

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  • Leite, Sérgio, Anthony Pellechio, Luisa Zanforlin, Girma Begashaw, Stefania Fabrizio, and Joachim Harnack, 2000. Ghana: Economic Development in a Democratic Environment, IMF Occasional Paper No. 199 (Washington: IMF).

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  • Pattillo, Catherine, Hélène Poirson, and Luca Ricci, 2002, “External Debt and Growth,IMF Working Paper 02/69 (Washington: IMF).

  • Teal, Francis, 2001, “Education, Incomes, Poverty and Inequality in Ghana in the 1990s,” WPS/2001-21 (University of Oxford: Centre for the Study of African Economies).

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  • United Nations Conference on Trade and Development, 2002, 2002 World Investment Report (New York: United Nations).

  • United Nations Conference on Trade and Development, 2002, 2002, “Ghana, Investment Policy Review,” UNCTAD/ITE/IPC/Misc. 14 (New York: United Nations).

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  • World Bank, 2001.Ghana: International Competitiveness, Opportunities and Challenges Facing Non-Traditional Exports,” Report No. 22421-GH (Washington: World Bank).

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1

Prepared by Alphecca Muttardy.

2

Global Coalition for Africa (2001).

3

Under Ghana’s official definition adopted in 1995, nontraditional exports comprise all merchandise exports except cocoa beans, logs and sawn timber, and mining products.

4

Principal reasons for underdevelopment of the FTZ include, lower land prices available outside the zone, lack of world-class infrastructure, and failure to work closely with private sector developers to develop cluster and supporting industries inside the zone (see UNCTAD (2002)).

5

See Leilc and others (2000) for a description of reforms under the ERP.

6

Basu and Srinivasan (2002).

7

UNCTAD (2002).

8

Population growth, which accounts for the difference between real and real per capita income growth, averaged 2.6 percent per year between the 1984 and 2000 Census years.

9

Several specifications of the model were run, including with wrong-sign variables that were removed. Strong correlation among remaining independent variables explains the presence of some variables that appear to be statistically insignificant, but if removed would cause specification bias (while their inclusion does not substantially lower the adjusted R square).

10

UNCTAD (2002).

12

The ongoing Gateway project aims to enhance Ghana’s competitiveness through legislative, regulatory, and incentive reforms, capacity building (especially customs); and financing of infrastructure development.

13

Addison, 2002 indicates that the extremely small share of private sector investment in GDP is the single most important determinant explaining differences in growth rates in Ghana and other African countries.

14

Khan (1985).

15

Ghana Statistical Service (2000).

16

Tcal (2001).

17

Ghura and others (2002), a comparable elasticity for Ghana measured by regression analysis is not available.

18

The GPRS strategy for agriculture is also referred to as the “Food and Agriculture Sector Development Program” (FASDEP).

19

Loans under the credit facility are guaranteed by the Export-Import Bank of the United States, carry a six-month to one-year grace period, an average interest rate of 8.5 percent per annum, and are repayable over five years. Exposure to loan risk will be borne by the commercial banks.

20

Pattillo and others (WP/02/69) estimate that for countries benefiting from debt reduction under the HIPC Initiative, per capita growth might increase by an additional 1 percentage point per year (unless constrained by other macroeconomic and/or structural distortions).

21

“Ghana Millennium Development Goals Report” (2002).

22

Ghura and others, WP/02/118.

Ghana: Selected Issues
Author: International Monetary Fund
  • View in gallery

    Sectoral Growth Rates, 1980–2001

    (Annual percentage change)

  • View in gallery

    Fitted Results Real Growth Per Capita

    (Annual percent change)

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    Ghana: Progress in Achieving Millennium Development Goals. 1990–2015