Abstract
Selected Issues Paper
Growth Strategy for Ghana1
Ghana has achieved impressive development gains over the last decades, with rising incomes, lower poverty, and better health, education, and gender outcomes. However, growth has recently become less inclusive, with high inequality and slower poverty reduction. To address these challenges, the authorities are pursuing a “Ghana beyond Aid” development strategy centered around agricultural modernization and export-led industrialization. Accelerating productivity growth calls for fostering competition, improving the business environment, strengthening human capital, taking advantage of growing regional markets and industrial policies that prioritize sectors that can export and innovate and where Ghana could achieve economies of scale. Consistent and predictable government policies can help increase long-term investment and improve public spending effectiveness.
A. Introduction
1. Ghana has significantly improved living standards in recent decades. Incomes per capita more than doubled between 1992 and 2018, with average annual per capita growth of 3.2 percent. Poverty was reduced dramatically, with the poverty headcount at US$1.90 a day (2011 PPP) declining from 50 percent of the population in 1991 to 12 percent in 2012. This was accompanied by major improvements in life expectancy, health and education, and a reduction in gender disparities, which resulted in Ghana’s Human Development Index (HDI) increasing from 0.46 to 0.59.
2. Ghana has been one of the top performers in SSA, although economic convergence with advanced economies has remained slow. Looking at the past three decades, Ghana’s per capita income growth scored in the top quintile among Sub-Saharan Africa countries. The country also saw progress in income convergence with advanced economies, with Ghana’s per capita income as a share of US per capita income increasing from 5.2 percent in 1990 to 7.6 percent in 2018, in PPP terms. This represents a marked improvement compared to previous decades when there had been no meaningful convergence. However, it remains a slow catching up—for example, if income convergence were to continue at this rate in the future, it would still take almost 200 years to fully converge with US income levels.
3. Economic growth has become less inclusive in recent years with growth relying more on extractive industries such as gold mining and oil and gas extraction. These industries tend to be largely foreign-owned and capital intensive, and thus generate relatively few jobs in the local economy. After the steady decline observed in previous decades, this period also saw slower poverty reduction, with the poverty headcount at US$1.90 a day increasing from 12 to 13.3 percent between 2012 and 2016. In addition, inequality continued to rise gradually, with the income Gini coefficient increasing from 38.4 to 43.5 between 1991 and 2016, and the ratio of average income earned by the top 10 percent of people in the income distribution relative to the bottom 10 percent increasing from 11.6 to 20.1 over the same period
Ghana: Economic Growth and Living Standards, 1990–2017
Citation: IMF Staff Country Reports 2019, 368; 10.5089/9781513523385.002.A001
4. The authorities’ “Ghana beyond Aid” strategy addresses these challenges by targeting a rapid growth acceleration. The strategy aims to bring the country from lower- to upper-middle income status within the next decade and draws inspiration from countries such as Thailand and Malaysia, which followed high growth trajectories beginning in the early 1960s while departing from similar initial conditions as Ghana (such as a large agricultural sector or being a commodity exporter).
5. Rapid growth would be achieved through agricultural modernization and export-led industrialization. The “Ghana beyond Aid” objective is to deliver large productivity gains by developing manufacturing, modernizing agriculture, improving human capital and technological capacity, investing in public infrastructure, and ultimately exporting higher value-added products such as processed agricultural and mineral products. The government also intends to double oil and gas production over the coming years, mainly through the exploration of new oil fields such as the Deepwater Tano Cape Three Points block (DWT/CTP), as well as to continue expanding the mining sector, which would involve sustaining Ghana’s recently acquired status as Africa’s top gold producer and ramping up production of other minerals such as bauxite, iron ore and manganese.
B. Historical Drivers of Growth in Ghana
6. The main contributors to economic growth in Ghana in recent decades have been labor supply increases and productivity improvements. Using the growth accounting methodology developed in Klenow and Rodriguez-Clare (1997) and Hall and Jones (1999), it is possible to decompose real GDP growth into the contributions of employment, human capital, physical capital and (unobserved) total factor productivity.2 This analysis suggests that an expansion in effective labor supply, due to increases in employed population and human capital, explains roughly half of GDP growth since 1990. Another third of GDP growth is accounted for by increases in total factor productivity, while the remainder can be attributed to the accumulation of physical capital.
Ghana: Growth Accounting
(percent)
Citation: IMF Staff Country Reports 2019, 368; 10.5089/9781513523385.002.A001
Sources: Penn World Tables 9.1 and IMF staff calculations.Ghana: Employment Shares and Productivity Growth by Sector
Citation: IMF Staff Country Reports 2019, 368; 10.5089/9781513523385.002.A001
7. Productivity growth appears to have been due primarily to structural transformation and rising agricultural productivity, while productivity in manufacturing and services has remained stagnant (Figure 2). To understand the forces behind productivity growth, we follow McMillan et al. (2014) and Timmer et al. (2015) and further decompose labor productivity growth into components due to within-industry productivity growth and structural change.3 The former reflects increases in labor productivity in specific industries, while the latter reflects the reallocation of labor from less to more productive industries. In the case of Ghana, we find that since the early 1990s aggregate labor productivity increased because of labor shifting from agriculture into services, which had relatively higher productivity levels on average, a phenomenon that is closely associated with urban migration. There were also large increases in value added per worker in agriculture. However, like other fast-growing African economies, Ghana’s manufacturing sector remained underdeveloped, accounting for just 11 percent of employment. Moreover, labor productivity in manufacturing and services is still very low compared to the rest of the world and remained stagnant over the past decades (Osei and Jedwab, 2017).4
Drivers of Growth; Ghana vs. Thailand
(percent)
Citation: IMF Staff Country Reports 2019, 368; 10.5089/9781513523385.002.A001
Sources: Timmer et al. (2015), Ghana Living Standards Survey III, Ghana Labor Force Survey 2015, and IMF staff calculations.8. Extractive industries have also been a major driver of growth. Ghana is endowed with significant mineral resources such as gold, bauxite, manganese, diamonds, and oil and gas. The country holds an estimated 3.1 percent of the world’s gold reserves according to the Extractive Industries Transparency Initiative (EITI), and output has grown in recent years, with Ghana overtaking South Africa as Africa’s largest gold producer in 2018. Ghana has also significant offshore oil and gas reserves. The Jubilee Field, discovered in 2007, is among the largest offshore oil discoveries in West Africa in recent decades, and is estimated to hold between 0.6 and 1.5 billion barrels. Exploration of new oil fields, such as the Pecan field which was discovered in 2012 and estimated to hold up to 334 million barrels, will likely contribute to sustain oil production over the next years. Extractive industries have grown rapidly in recent years, driven by high international prices and the start of oil production in 2010, and now account for about two-thirds of merchandise exports.
Ghana: Commodity Exports
(Billions of constant 2012 USD)
Citation: IMF Staff Country Reports 2019, 368; 10.5089/9781513523385.002.A001
Sources: Ghanaian authorities and IMF staff calculations.C. Policies to Increase Medium-Term Growth
Context
9. The “Ghana beyond Aid” objective is to accelerate growth by significantly increasing productivity. The strategy takes inspiration from growth “miracles” in East and South East Asian countries, which managed to sustain rapid growth over several decades. Their strong performance relied on export-led industrialization models that combined structural change with large within-industry productivity increases (Timmer et al, 2015). As observed in the previous section, this stands in contrast with Ghana’s experience in recent decades, with an under-developed manufacturing sector and stagnant productivity in manufacturing and services, a dynamic that is also observed across the region (Osei and Jedwab, 2017; Diao et al., 2017). Increasing productivity in Ghana will depend on reversing this trend going forward.
10. Replicating the East and Southeast Asian models of manufacturing-led growth could be challenging. Many of these countries specialized in narrow ranges of manufactures at early stages of their growth acceleration. These manufactures, often low-skill and labor-intensive, were used as a springboard for rapid economic growth, and were later followed by gradual efforts towards export diversification. However, attempts across Sub-Saharan Africa to follow the same route have had mixed success (e.g., Rodrik, 2016a). For example, nascent efforts to establish textiles and garment industries, often premised on inexpensive wages, have not taken off as fast as originally envisaged and still face strong competition from higher-wage Asian economies, often as a result of already established economies of scale (e.g., Barrett and Baumann-Pauly, 2019). In addition, trends towards automation and pressures to respond to rapidly shifting consumer demand may be creating incentives to bring some manufacturing activities closer to consumers in advanced and emerging economies (e.g., McKinsey, 2018).
Relative Share of Manufactured Exports
(Percent)
Citation: IMF Staff Country Reports 2019, 368; 10.5089/9781513523385.002.A001
Sources: WTO, Lim (1987), Fosu (1999), Simon (1996) and IMF staff calculations.11. Sustaining rapid growth in Ghana is likely to require innovating from established growth models. Manufacturing played a key role in Asian growth “miracles” in part because it allowed countries export to large consumer markets without compromising their terms-of-trade advantage (Rodrik, 2005). Knowledge and technology transfer were relatively easier in manufacturing, and countries could achieve economies of scale and become competitive in narrow industries without necessarily becoming as productive in other sectors. In addition, manufacturing tended to be labor-intensive, and was thus capable of absorbing and lifting out of poverty large swaths of the population. These factors suggest that the “Ghana beyond Aid” focus on export-oriented manufacturing remains essential to achieve a growth acceleration in Ghana. However, it is likely that this strategy will have to be complemented by efforts to simultaneously increase productivity in other sectors such as agriculture and services (Rodrik, 2016b).
Pursuing Export-Oriented Industrialization
12. The “Ghana beyond Aid” agenda envisions a significant increase in manufacturing output and exports. The authorities’ 10-point plan for industrial transformation designates several strategic anchor industries including agroprocessing, pharmaceuticals, integrated aluminum and steel industries, vehicle assembly, textiles, petrochemicals, industrial salt, industrial starch and oil palm processing. The plan also includes a stimulus package to support distressed but viable firms by providing financing, technical assistance and facilitating access to markets, as well as the government’s flagship One District, One Factory (1D1F) program, which offers similar support with the aim of establishing at least one factory in each of the 216 districts in Ghana.
13. Export diversification has been associated with stronger economic growth. An extensive academic literature finds a link between diversification and growth (e.g., Frankel and Romer 1999; Hausmann et al., 2007; IMF, 2017). Korea, where an early focus on labor-intensive manufacturing exports including textiles and assembly later gave way to more high-value added exports in equipment, cars and IT, is a case in point (e.g., Dornbush and Park, 1987). The prices of Ghana’s three largest commodity exports (cocoa, gold and oil) are somewhat uncorrelated in international markets, which mitigates the effect of commodity price volatility on the economy. Further diversifying the export base to include more manufactured products could contribute to a more resilient and inclusive economy.
Ghana: Correlation of Key Export Prices
(1991–2019)
Ghana: Correlation of Key Export Prices
(1991–2019)
| Gold | Oil | Cocoa | |
|---|---|---|---|
| Gold | 1 | ||
| Oil | 0.41 | 1 | |
| Cocoa | 0.19 | -0.08 | 1 |
Ghana: Correlation of Key Export Prices
(1991–2019)
| Gold | Oil | Cocoa | |
|---|---|---|---|
| Gold | 1 | ||
| Oil | 0.41 | 1 | |
| Cocoa | 0.19 | -0.08 | 1 |
14. Tapping a growing regional market can contribute to industrialization efforts. The Asian growth “miracles” benefitted from a largely benign global environment, and access to markets, capital and technology from advanced economies was a major ingredient in their export-led development strategies (Rodrik, 2005). The existence of regional powerhouses – first Japan, then China – that were open to trade also helped spur the development of regional value chains. In the case of Ghana, while intraregional trade remains relatively low, regional markets in ECOWAS and across Sub-Saharan Africa are developing fast, owing to rapid population growth and rising incomes (IMF, 2019a). Ongoing policy efforts to decrease trade barriers like the African Continental Free Trade Area (AfCFTA) create unique opportunities to expand trade across the region, especially with its secretariat located in Ghana.
15. Investments in education systems and teaching are also crucial to a successful industrialization strategy. Human capital accumulation is widely seen as significant driver of growth, helping to create a skilled workforce and increase the supply of entrepreneurs who can run more productive firms (e.g., Banerjee and Duflo, 2005; Gennaioli et al, 2013). It is also a dimension where Ghana has made remarkable progress in recent decades. Enrolment rates have increased across all education levels, and gender disparities in access to education have been greatly reduced. Public spending on education has been a government priority, as exemplified by the authorities’ commitment to universal high school enrolment through the Free SHS flagship program. However, despite higher enrolment, learning outcomes remain subpar, with Ghana comparing poorly in the region on student performance and the 2015 Early Grade Reading Assessment finding that half of 2nd grade students could not read a single word, regardless of language (Ghana Education Service et al., 2015). Improving learning outcomes will be important going ahead, for example by reforming education systems and making teaching more effective (World Bank, 2018a).
Harmonized Student Test Scores Across Countries
(300 is minimal attainment, 625 is advanced attainment)
Citation: IMF Staff Country Reports 2019, 368; 10.5089/9781513523385.002.A001
Sources: Wadd Bank Human Capital Index and IMF staff calculations.16. Countries that experienced growth accelerations also often used industrial policies to support nascent manufacturing sectors. The rationale for industrial policy is that some industries with high growth potential should be protected when they are subject to externalities that prevent them from taking off, such as market imperfections or economies of scale (e.g., Dornbush and Park, 1987; Greenwald and Stiglitz, 2006; IMF, 2019c). A related argument is that certain activities require government investments to facilitate entry by individual entrepreneurs, for example because they are excessively risky or require coordinated policy actions across multiple dimensions (e.g., Murphy et al., 1989; Rodrik, 1995; Mazzucato, 2015). These policies shelter infant industries as they develop and can take different forms depending on the local context and institutions, including production subsidies, tariffs and licensing requirements that create sheltered domestic markets, export subsidies, tax incentives, local-content rules, subsidized or targeted credit, special investment zones, wage repression, and exchange rate policy.
17. Cross-country experience suggest that industrial policy should prioritize sectors with potential to export and innovate and where Ghana has a comparative advantage. It is important to prioritize sectors with most room for continued innovation and expansion, in particular by encouraging competition between firms within each sector (IADB, 2014; Aghion et al., 2015; Cherif and Hasanov, 2019). Given budgetary constraints, it is necessary to limit financial support (including via tax incentives) to select industries and focus on structural reforms that eliminate barriers to manufacturing growth, such as access to land, ease of doing business, improving power supply reliability and increasing competition in the banking sector (e.g. IMF, 2019b). In general, sectors where Ghana has a clear comparative advantage and that can eventually be competitive without government support should be prioritized.
Modernizing Agriculture
18. Agriculture remains a key driver of the Ghanaian economy. Although its relative share of employment has been steadily declining, agriculture still represents 20 percent of Ghana’s GDP and about 35 percent of total employment. Moreover, rising agricultural productivity also contributes to higher agricultural wages, and thus to poverty reduction, especially in rural regions.
19. There is still a large, untapped potential to increase agricultural productivity. Despite improvements over the years, agricultural productivity remains low in Ghana (and in SSA in general) compared to non-SSA countries, and there are large gaps between actual and potential yields (MOFA, 2017). These gaps are caused by several factors including low uptake of fertilizer and improved seed varieties; a reliance on rain-fed agriculture; low level of mechanization and challenges in access to finance, especially for long-term, “patient” capital investments; and low farmer human capital, especially among smallholder farmers who represent the majority of farm holdings across the country (90 percent of farm holdings are less than 2 Ha in size). Catching-up to world productivity levels would transform agriculture in Ghana, and significantly boost inclusive growth (World Bank, 2018b). Increasing returns in the agriculture sector in a sustainable way can also strengthen incentives to prevent farmers from shifting towards small scale gold mining, which often has detrimental effects on the environment.
Maize Yields
Citation: IMF Staff Country Reports 2019, 368; 10.5089/9781513523385.002.A001
20. Opportunities in agriculture are present in both traditional (e.g., cocoa) and non-traditional (e.g., cashew nuts, palm oil) crops in Ghana. Cocoa production remains a major activity in Ghana. Despite being one of the largest producers in the world, most of the chocolate value chain is located outside the country and closer to consumer markets such as the EU and US. This is unlikely to change over the medium-term despite fast population growth in the region, because chocolate is perceived as a luxury good and its consumption is nonlinearly related to income. Nevertheless, there could still be significant growth opportunities in the sector by increasing cocoa yields and first-stage cocoa bean processing in Ghana, and improving certification (e.g., for fair trade and high-quality beans). These steps are already being pursued by the COCOBOD, the government controlled cocoa board, in partnership with the African Development Bank.5 Ghana also has strong potential to increase production in other crops such as rice, cashew nuts, rubber and palm oil, where yields remain low by international standards, and strong regional and global demand is more likely to pick up over the next decades (e.g., World Bank, 2013). Proximity to the large EU market and favorable weather seasonality also suggest opportunities to export fruit and vegetable-based products, as well as to substitute food imports.
Chocolate consumption and Income per capita
Citation: IMF Staff Country Reports 2019, 368; 10.5089/9781513523385.002.A001
Sources; International Cocoa Organization, World Bank and IMF staff calculations21. Targeted government support can complement private-sector investment to modernize agriculture. High-productivity agriculture is capital- and resource-intensive (especially water and energy), so ensuring these factors exist in abundant and cheap supply is crucial. In addition to ongoing energy and financial sector reforms, government efforts have included investing in infrastructure and targeted agriculture subsidies, of which the Planting for Food and Jobs (PFJ) initiative is one example (MOFA, 2017; IMANI, 2017). The program provides inputs such as fertilizer and improved seed varieties through a private sector-led market network at subsidized prices and raises awareness among farmers on how to use them. Beneficiaries have the option to pay half of input costs upfront and the remaining half at the end of the harvest, and the program is targeted at smallholder farmers only, with a limit on the volume of subsidized fertilizers to a maximum of 2 Ha land. Ideally, these subsidies would be gradually scaled down over time without affecting input take-up rates, so it is important to combine them with other reforms that reduce input price markups and ensure steady and timely input supply (Houssou et al., 2018; World Bank, 2018).
22. Regional markets offer huge potential for agriculture and agro-processing industries in Ghana. In addition to traditional markets in the EU and the US, a growing urban, middle-class population in the region will create rising demand for higher value-added foods like meat, dairy, fish and processed foods (e.g., Tschirley et al., 2015). However, for local production to compete with foreign brands it will be necessary to develop the local food value chain so that it can deliver high food-quality standards. This will require investments in storage, transport, distribution and retail networks, improvements in marketing and branding, and better risk management practices. It is also important to integrate smallholders into the value chain, given the prevalence of small-scale farming, which could be done through farmer cooperatives and contract farming, for example, as well as by facilitating a gradual shift to medium-scale farms (e.g., World Bank, 2018).
Improving the Business Environment
23. Continuing efforts to improve the ease of doing business in Ghana will contribute to increasing growth. Market-based allocations, predictable legal and policy frameworks, and low corruption are widely seen as pre-conditions for growth (e.g., Rodrik 2005, Acemoglu and Robinson 2013). A favorable and improving business climate in Ghana has certainly contributed to growth over the past decades, although there are still areas where it could do better. For example, in the recent 2020 Doing Business Report, Ghana compares favorably against the Sub-Saharan African average.6 When compared to upper-middle income countries, Ghana scores well in dimensions like starting a business, access to credit, access to electricity and protecting minority investors, but is behind on other categories such as resolving insolvency, trading across borders, and paying taxes.
Ghana: Doing Business 2020
(Higher values represent better scores)
Citation: IMF Staff Country Reports 2019, 368; 10.5089/9781513523385.002.A001
Sources: 2020 Doing Business Report and IMF staff calculations.24. Ongoing structural reforms to encourage formalization and digitalization can also help improve the business environment. Streamlined customs procedures at the revamped Tema port may facilitate cross-border trade by reducing the cost and time requirements of documentary compliance, a contributing factor to Ghana’s lower score in this dimension. In addition, the introduction of unique digital addresses for every location across the country through the National Digital Property Addressing System (NDPAS), which was launched in 2017 and is expected to be completed in 2020, could contribute significantly to increasing the size of the formal economy. Unique addresses will allow businesses to locate clients more easily, which in turn can support growth in online and financial services. Linking these addresses to property and credit registries could also help improve land tenure and reduce property title disputes. Finally, digital addresses may increase tax collection by improving information on business location and registration. Ongoing plans to digitize tax and judicial procedures and health records, introduce national ID cards and expand mobile banking could also have a significant positive impact on the ease of doing business.
25. Reducing the public sector’s gross financing needs would also help re-orient domestic savings and foreign capital towards local entrepreneurs. Business surveys consistently identify the high cost of capital and limited access to “patient”, long-term credit as two main bottlenecks to the growth of local manufacturing firms. This contrasts with the large capital inflows to Ghana in recent years, in line with the pattern observed across the broader Sub-Saharan Africa region (IMF, 2018). These inflows have largely been absorbed by the extractive sector, including mining and oil and gas, and by large fiscal deficits, with only limited foreign capital targeting domestic manufacturing. The problem is compounded by the large domestic financing needs of the public sector which crowd out private-sector growth, which remains anemic despite a sweeping clean-up of the financial sector.
D. Conclusion
26. Achieving rapid and inclusive growth is important for Ghana. Many young Ghanaians are entering or will enter the labor market in the coming years. This is a unique growth opportunity for Ghana, but also poses a challenge of creating an economy that generates enough well-paying jobs to accommodate this growing labor force. The authorities are also seeking to diversify away from commodities to reduce Ghana’s exposure to the commodity cycle and make its economy more resilient and inclusive.
27. A key lesson from growth accelerations in other countries is that it is crucial to achieve economies of scale. In most cases, rapid economic growth required achieving export success in specific sectors. This was dependent on gaining economies of scale, which allowed those sectors to become competitive in world markets, driving exports and employment expansion in the domestic economy.
28. Consistent and predictable government strategy increases investment and fosters a more efficient use of public resources. Ghana’s political stability and democratic credentials are now firmly established, and the authorities rightly view them as leading factors in attracting foreign investment. However, in the past the country has been associated with a low rate of project completion once governments change. Long-term planning and consistent implementation can increase policy predictability and contribute to higher investment and more effective use of available resources.
29. Government support should focus on sectors with potential to export and innovate. Supporting sectors instead of individual firms encourages competition between firms, which can contribute to a stronger, innovative and more dynamic private-sector. It is important that performing firms be rewarded, and nonperforming firms eventually be weaned of government support, to preserve scarce fiscal resources. This can be done through transparent and objective targets, some of which may be set as a function of export performance.
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Prepared by Frederico Lima (AFR).
The growth accounting analysis assumes a Cobb-Douglas aggregate production function. Taking logs and differencing over time:
Δ ln Yt = Δ ln At + αΔ ln Kt + (1 – α)(Δ ln Ht + Δ ln Lt)
where Yt represents aggregate output, Lt is employment, Ht is average human capital per worker, Kt is the stock physical capital and At is (unobserved) total factor productivity (TFP). We use data from the Penn World Tables v9.0 (Feenstra et al., 2015), and calibrate the capital share α to equal 0.4 as in Geiger et al. (2019).
We decompose the percent change in aggregate labor productivity y between periods t and 0 using the equation:
where yt,j is labor productivity in industry j in period t, and wt,j is the employment share in industry j in period t. The first component inside the square brackets reflects the increase in aggregate labor productivity due to within-industry productivity improvements, while the second reflects structural transformation. The third component can be thought of as a residual that captures whether labor is on average moving to rising productivity sectors. We use employment data from the Ghana Living Standards Survey III for 1992 and the Ghana Labor Force Survey 2015, and we take value added data from the national accounts, measured at constant 2013 prices. Mining employment data comes from Amponsah-Tawiah and Dartey-Baah (2011) and refers to the year 1995.
The literature finds somewhat different roles for structural change in Ghana, depending on data sources, methodology and the time period under analysis. Similar to us, Osei and Jedwab (2013) find that structural change contributed half of labor productivity growth between 1992 and 2010, mostly from the employment shift from agriculture into services. However, Geiger et al. (2019) find a smaller role for structural change over the same period (about 30 percent), reflecting a slightly higher estimate for manufacturing productivity growth in their dataset.
Survey-based indicators reflect investors’ perceptions on the business environment.
