Saturday, 7 April 2012

Why Ghana’s economy is not growing as fast as it should

Until this year when Ghana has been identified as the fastest growing economy (20.146 percent GDP growth by the Economy Watch) in the world largely due to the oil exploitation, the economy has not seen much improvement in its growth over the years. A major question that has eluded the nation and its political leaders over the years is as to why the country’s economy is not growing as fast as anticipated. This analysis assumes the production function of the economy as:
                        Y = f (N, K)
Where Y is the national output, N is the level of employment and K is the stock of capital assumed fixed in the short-run and variable in the long-run. From the production function, increase in output in the short-run would largely depend on an increase in labour productivity and also on the expansion in capital stock and technological improvement in the long-run.

In Ghana, labour productivity is very low, largely due to lack of skills and inadequate capital inputs. Skills which are very integral to labour productivity are acquired through education and training. Unfortunately, the standards of education have rather been deteriorating as the population of the country increases. More than 50 percent of basic school students are not able to enrol in Senior High Schools due to poor academic performance. So the nation annually produces school drop-outs virtually with no employable skills and training. They therefore lack the capacity to contribute meaningfully to the production process. Any country that does not develop its human resource and tap their skills for maximum productivity cannot experience much progress in its growth process.

The nation is endowed with abundant arable agricultural land which when fully exploited would culminate into the growth of the agricultural sector and ultimately growth in the economy at large. However, the vast agricultural land Ghana has been lying idle from time immemorial. Subsequent governments over the years succeeded largely by paying lip service to the cultivation of the idle land. The Accra plains irrigation project still remains in the political pipeline, pending to see the light of the day. The case is the same for all the other natural resource endowments on the nation. Even those that are exploited are in the firm grasps of expatriates who enrich their nations with gains from the exploitation. No economy under the sun would develop as expected when the bulk of its endowment of natural resources is lying idle and foreigners exploit the others to enrich their home countries.
Low level of consumption, i.e. insufficient demand is another explanation for the slow growth of the economy over the years. Income levels in Ghana are generally low. The PPP adjusted GDP per capita in 2010 was $2,200 compared to $8,288.818 for China. This means that the market for local production is very small, so the benefit from large scale production also eludes the nation. The problem is compounded by the insatiable taste for foreign goods by most Ghanaians, especially the higher income earners. This means that the meagre income generated in the country is handed over to foreign producers, leading to an increase in employment for their labour force as well as an expansion in their production sector to the detriment of domestic production.

Low level of investment cannot be excluded from the low growth equation of Ghana’s economy. Investment generates employment and promotes production that finally results in growth. The level of investment is highly dependent on the level of interest rates. Interest rates in Ghana continue to remain very high over the years, discouraging investment in production activities. The Bank of Ghana over few years now tries to avert the phenomenon by reducing the prime rate to 12.5 percent but that yielded no much success. The commercial banks still keep their lending rates between 25 and 30 percent. These high interest rates compared to profits margins from production offers no economic incentive for productive investment. Economic growth would therefore persist at its low levels since the level of production is low as a result of low levels of investments culminating from productively unfriendly high interest rates.

What can be done to boost the supply side of the economy.
The supply side of the economy consists of the level of employment and capital accumulation which invariably determine the output level of the economy. An improvement in the determinants of output would propel output growth and result in a boost in the supply side of the economy. The production function is given as:
                        Y = f (N, K), where N is the level of employment and K is the stock of capital assumed fixed.
Increase in labour productivity is very crucial in any attempt to boost the supply side of the economy. An increase in the productivity of labour would lead to high output level. The productivity of labour highly depends on the skills and health of the labour force as well as the efficiency of capital available to labour. The skills of the labour force is determined by their level education and training. Investment in human capital is therefore necessary for output growth. All over the world, the investment in human resource has been of tremendous boost to many economies like the United States, China, Singapore and others. A healthy and well-trained labour force would produce more than an unhealthy and untrained labour force. In that regard a well coordinated educational policy based on mutual consensus of all stakeholders in the educational sector should be implemented. Also, the quality of teaching should be pursued through quality teacher training and supervision. The National Health Insurance Policy and the Health Service of the country should also be invigorated to meet the health needs of the labour force. Infrastructural development, especially the expansion of the road networks in the country should be a major priority. That would reduce to a large extent, the heavy post harvest losses in the rural agricultural sector and as well minimise the number of productive hours wasted by urban dwellers in traffic daily. All these would culminate into a massive expansion in national output and subsequently boost the supply side of the economy.

Exploitation of natural resources is also paramount in the bid to boost the supply side of the economy. Every nation is endowed with unique natural resources for the survival and economic sustenance of its people. The share of Ghana in the natural resource base of the world is not insignificant. These range from a vast arable agricultural land to abundant mineral and water resources. There should a major investment in the agriculture through the granting of concessionary loans to farmers, irrigational schemes, subsidising domestic agriculture production and protecting domestic agriculture producers from dumping by foreign countries. The proposed Accra Plains Irrigation Project should be implemented on schedule to boost employment and productivity in the sector. The vast water resources should also be harnessed for irrigation, fish farming and other aqua culture agricultural practices. The exploitation of mineral resources has not been of much gain to the economy over the years. Much of the mineral resources of Ghana have been looted by sophisticated foreign exploiters since the colonial era. They exploit the minerals, make huge economic gains, and leave the devastated polluted land for our people to suffer the health and economic consequences.
A new mining law should be promulgated to ensure that the nation economically gains at least 70 percent from the mineral resources in the land. The country should also increase its stake in the jubilee oil fields in order to gain a higher command over the wealth from its oil endowment. All these would result in expansion in output and ultimately a boost in the sully side of the economy.
Investment in technology through innovation and research is paramount to output growth hence boost in the supply side of the economy.  Economic growth refers to the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. It is enabled by increases in productivity through innovation and research which minimises the cost of production for a given amount of output. Lower costs would further increase the demand for commodities, leading to further expansion in production. The United States and Japan are country role models in research and development. Government therefore should invest funds in practical research work in the research and educational institutions. A special attention should be paid to research in the agricultural, engineering and the economic sectors. This is because the economic power of most of the world’s giant economies has always been an edge in technology, and Ghana in its attempt to expand its supply side output should not do less.

A very essential factor that determines the growth of an economy is its citizenry, i.e. the population. After all, an economy cannot exist without people. Since economies evolve with people, the population of an economy becomes a major determining factor for its success or otherwise. The country’s population engage actively in both the demand side (consumers) and the supply side (labour force) of the economy. Most of the world’s economic super powers like China, United States and others have very large population sizes; largely because a larger population provides a vast market and labour force for large scale production. Ghana should also aspire for growth in its population coupled with quality skills training, since an illiterate population is not economically active in terms of consumption and production.

In summary, boost in the supply side of the economy would emanate from improvement in the productivity (quality) of the labour force, economic exploitation of natural resources, investment in technology, and quantitative together with qualitative growth in the population. Exploitation of natural resources and investment in technology would shift the production function of the economy outwards, implying an increase in output at given level of employment as shown in the figure 1 below. An increase in the marginal productivity of labour and growth in the quantity as well as the quality of the population would lead to an increase in the level of employment leading to an increase in output.
                                                                                                                     16TH DECEMBER, 2011

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