Xinshen Diao, Peter Hazell, Shashidhara Kolavalli, and Danielle Resnick

Print publication date: 2019

Print ISBN-13: 9780198845348

Published to Oxford Scholarship Online: October 2019

DOI: 10.1093/oso/9780198845348.001.0001

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Ghana’s Economy-wide Transformation

Past Patterns and Future Prospects

Chapter:
(p.19) 2 Ghana’s Economy-wide Transformation
Source:
Ghana's Economic and Agricultural Transformation
Publisher:
Oxford University Press
DOI:10.1093/oso/9780198845348.003.0002

Abstract and Keywords

This chapter relies on a conceptual framework development by Dani Rodrik (2014, 2018) that identifies three sources of growth: accumulation of fundamental capabilities (e.g., better institutions, enabling policies, and healthy, educated workers), catching-up growth through expansion of modern manufacturing, and structural change due to the movement of workers from low- to high-productivity sectors. The chapter argues that Ghana has invested in fundamentals rather than in transformative policies, resulting in slow but persistently stable growth and limited industrialization. This is illustrated through a rigorous analysis of sector-wise relative labor productivity and employment shares from 1984–2011. The chapter concludes by claiming that accelerating, and even just sustaining the country’s average annual GDP/capita growth rate of 2.8 percent, requires modernizing larger shares of the agricultural, manufacturing, and services sectors. Growing national demand offers new market opportunities in these sectors as do opportunities for increased exports into the West African regional market.

2.1 Introduction

Ghana has experienced a successful economic and political transformation since its Structural Adjustment Program (SAP) of the 1980s, and is one of the few African countries to have attained lower-middle-income status, or to have achieved the Millennium Development Goal (MDG) of halving poverty by 2015. This chapter describes the economy-wide transformation that has occurred, and uses a growth decomposition framework to identify the main sources of economic growth. It is found that while Ghana has benefited from significant growth in labor productivity within important sectors, and there have been structural changes in the sense that agriculture has shrunk as a share of national GDP and employment while other sectors have grown faster, still there has been relatively little progress in moving workers out of low-productivity sectors like traditional agriculture into more productive sectors like manufacturing or modern services. We question whether this pattern of transformation is sustainable in the future, and explore alternative options that may be needed. Chapter 3 provides a complementary analysis of the political transformation that has occurred in Ghana, and thence the political and governance challenges facing the country as it seeks to adopt a more sustainable type of transformation.

The chapter is structured as follows. Section 2.2 describes the patterns of growth that have occurred in Ghana since the country launched its SAP in 1983, including the growth in national and per capita incomes, the changing sector composition of the economy, and the changes in employment. In Section 2.3 we present a conceptual framework developed by Rodrik (2014, 2018) and use it to decompose the sources of growth in labor productivity and identify the relative importance of within-sector productivity growth compared to the structural shifting of workers from low to higher productivity (p.20) sectors. This leads in Section 2.4 to a discussion of the sustainability of the past pattern of growth, and of future growth opportunities and challenges. Finally, Section 2.5 concludes.

2.2 Ghana’s Economic Transformation since the 1980s

2.2.1 Growth in National Per Capita Income

Ghana started its SAP1 in 1983 (see Chapter 3 for further details), earlier than most other African countries that eventually went through a similar IMF- and World Bank-guided reform process. GDP per capita has grown modestly but steadily since the mid-1980s. In fact, over the thirty-four years 1984 to 2017, Ghana experienced positive per capita GDP growth every single year, and this despite population growth of 2.5 to 2.8 percent per annum, and rainfall-induced fluctuations in the output of its largest sector—agriculture. Only five other developing countries in the world have managed to achieve uninterrupted growth in per capita GDP over thirty or more years since 1960. These five countries include two in Africa and three in Asia (Table 2.1). If we also consider countries with just one year’s interruption over thirty years, then there are three other Asian countries that can be included: two are past Asian growth miracles, Korea and Singapore, plus India (Table 2.1).

Table 2.1. Countries with uninterrupted per capita GDP growth for thirty years

Growth period

Number of growth years uninterrupted

With one year growth interruption

Average annual per capita GDP growth rate within the growth periodb

Ghana

1984–2017

37

2.8

Botswana

1961–92

32

7.7

Mauritius

1984–2016

33

4.3

China

1977–2017

41

8.5

Thailand

1961–96

36

5.4

Vietnama

1985–2017

33

4.9

India

1980–2017

38

4.5

Korea

1961–97

37

7.5

Singapore

1965–97

33

6.7

Note: a Vietnam’s data available since 1985.

b Based on simple average.

Source: Authors’ calculation using data of World Development Indicators (WDI), World Bank (2017).

(p.21) Another remarkable feature of Ghana’s experience is that the economy began to grow almost immediately after it implemented its SAP, whereas many other countries that adopted similar reform programs went through painful adjustment periods, sometimes characterized as “lost decades,” before their economies bounced back.

2.2.2 Structural Change

Ghana differs in one important respect from the other countries in Table 2.1 that have experienced uninterrupted growth over many years, and that is Ghana’s average annual growth in per capita GDP has been slowest. An important reason for this is that the other countries have experienced more rapid industrialization, often leading to periods of very rapid growth (Rodrik 2014). In Ghana, however, despite achieving low-middle-income country by 2008,2 there has been very little industrialization while services have grown rapidly (Figure 2.1).

Figure 2.1. Sector shares of GDP

Source: Authors’ calculation using World Development Indicators, World Bank (2017).

Ghana rebased its national accounts in 2007–10, which makes comparisons of the structure of GDP at different periods more difficult. When the national accounts were revised in 2006, significant adjustments were made to both the (p.22) level and structure of GDP compared to prior 2006 estimates based on a 1993 reference year. GDP in the newly rebased national account was 60 percent higher than that in the old estimate, and about 70 percent of this increase was due to the inclusion of service activities that were simply not covered under the old system (GSS 2010). The sudden jump in the service share in 2006 from about 30 percent of GDP to nearly 50 percent reflects this rebasing result (Figure 2.1).

Despite the complications arising from this rebasing, it is clear from Figure 2.1 that the structure of Ghanaian economy changed significantly over 1965–2016. Table 2.2 provides some additional details for the period 1975–2016. The period from 1975 to 1983 shows how badly Ghana’s economy suffered prior to the SAP that began in 1983. Measured in constant US dollars, GDP in 1983 was only 79 percent of the level attained in 1975 (Table 2.2). Moreover, while all sectors were producing less in 1983 than in 1975, some sectors had suffered far more than others. Industry, which includes manufacturing, tumbled the most, and industrial GDP in 1983 was only about half its 1975 value. Agriculture contracted by about 19 percent in this period, while services fell the least, declining by only 6 percent (Table 2.2).

Table 2.2. Changes in sector GDPs and sector shares over 1975–2016, selected years

2.4.2.3 What is holding back manufacturing?

Much has been written about the constraints on the manufacturing sector in Ghana. These include the business environment (see Chapter 3), high transport costs, inadequate and costly port facilities, unreliable power supplies, inadequate access to finance, difficulties in obtaining land rights, high labor costs, weak or ineffective industrial policies, and state–business relations, etc. (World Bank 2014; Owoo and Page 2017). These constraints appear to be more binding on the formal than informal sector, making it difficult for formal manufacturing firms to achieve a competitive edge against international competitors. On the other hand, the informal sector faces a more binding market constraint, because it produces mostly nontradables, the demand for which is constrained by growth in national demand. Demand for the products of the (p.44) informal manufacturing sector has grown rapidly with rising per capita incomes and urbanization, which explains why informal manufacturing employment grew by 12 percent per annum over 2000–10 (Table 2.7). The downside is that the jobs being created are still low-productivity jobs, so more attention needs to be given to improving the efficiency and productivity of some of the small and medium-sized units in this subsector.

The discovery and development of oil offers new opportunities for diversifying the economy into upstream and downstream industries, but this would require a coherent longer-term industrialization policy, key public investments, and effective management of the “resource-curse” or “Dutch disease” risks associated with oil revenues (Owoo and Page 2017). The agricultural processing sector would also seem to offer good prospects for growth, particularly given rapid growth in demand for processed and pre-cooked foods in urban areas. There is also some scope for expansion into the West African regional market as trade barriers are brought down. This sector is still dominated by many small and medium-sized firms, and has the potential to grow lots of reasonably productive jobs. However, firms face many of the same constraints as manufacturing firms in general, as well as challenges in obtaining reliable supplies of raw materials of the right qualities from farmers. These issues are explored in more detail in Chapter 8.

2.4.3 Services

As we have seen, services have been the fastest growing sector in Ghana since the SAP, and by 2016 they had become the largest sector in national GDP (Table 2.3). Most of this growth has been in trade and personal services, both of which are dominated by small informal enterprises. Services are predominantly nontradables, and their demand has grown with GDP per capita, but also with the rapid urbanization of the country. For example, trade services have grown with a greater need to move more agricultural commodities from rural to urban areas. However, not all the growth in services has arisen in the cities, and much has occurred in small and medium-sized towns, where it has created new off-farm income-earning opportunities for farm households (see Chapter 5).

The difficulty with the services sector is that it has low labor productivity, in some cases like trade and personal services, even lower than agriculture. Although there may be some opportunities for developing pockets of modern services that have higher labor productivity, it is unlikely that these (p.45) can substitute for the development of more productive manufacturing and agricultural activities if Ghana is to benefit more from structural change.

2.5 Conclusions

Ghana’s economic growth since the SAP reforms of the 1980s has been driven primarily by improvements in “fundamentals,” which led to steady but modest growth in within-sector labor productivities, and thence steady but modest growth in national GDP per capita. Structural change has played only a modest role in raising labor productivity. While many workers have left agriculture, many of them have moved to sectors with similar or even lower labor productivity, so this has contributed little to raising the average labor productivity.

Ghana can expect to continue to gain from the longer-term impacts of past and ongoing improvements in its fundamentals, but these promise at best a modest if steady contribution to growth in GDP per capita. Their contribution may also slow as some important past sources of productivity growth run out of steam as, for example, the possibilities for further land expansion for agriculture. If Ghana is to sustain or even accelerate its average annual GDP per capita growth rate of 2.8 percent, then the country will need to do a better job of tapping into the benefits of structural change, and this requires policies that can generate more rapid growth of sectors that can achieve a) high levels of labor productivity relative to traditional agriculture, and b) absorb lots of workers from lower productivity sectors like traditional agriculture. While the oil and mining sectors will provide an important, if volatile, source of GDP growth, and they have high labor productivities, they are not likely to create much additional employment on their own. Although with the right industrial policies and investments, there is scope to use these sectors to help diversify the economy into more upstream and downstream industries. Other promising possibilities for creating productive employment lie in expanding and improving the more productive parts of the agricultural, manufacturing, and services sectors. Not only is there a growing national demand that offers new market opportunities in these sectors, but with increasing regional economic cooperation, Ghana should be able to increase its exports into the West African regional market.

In Rodrik’s scheme of things, structural change led by improving such sectors requires a more proactive development state approach to drive it, and not just a focus on fundamentals. Ghana’s earlier attempts to develop specific sectors through government-led initiatives like the ISI industrialization (p.46) program failed badly. The relevant questions now are: a) whether there are better policies available today that might successfully drive lead sectors, and b) if so, does the government have the inclination or capacity to deliver on such an agenda? These questions are addressed in subsequent chapters, with special emphasis on the agricultural and food sectors.

References

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Notes:

(1) Also known as the Economic Reform Program (ERP).

(2) As measured by the gross national income (GNI) per capita at current US\$, using the World Bank Atlas method.

(3) Value-added for the total economy was obtained from Gronigen Growth and Development Centre (GGDC), University of Gronigen (Timmer et al. 2015).

(4) The fluctuations in the gap between the two trends are mainly due to fluctuations in net indirect tax revenue as a proportion of the GDP but not in the economy’s total value-added.

(5) The Conference Board Total Economy Database, January 2014, http://www.conference-board.org/data/economydatabase/.

(6) Isaksson (2007). “World Productivity Database: A Technical Description,” Staff Working Paper No. 10/2007, Research and Statistics Branch, UNIDO.

(7) Rodrick’s framework draws on the neoclassical growth theories of Solow (1956), Grossman and Helpman (1991), and Aghion and Howitt (1992), which essentially focus on the growth process within modern sectors, and the dual-economy theory initially formalized by Lewis (1954) and expanded upon by Ranis and Fei (1961) that focuses on relationships and flows among sectors. McMillan, Rodrik, and Sepúlveda (2016) further discuss the inter-connection of these two schools of economic theories in detail (see page 5 of McMillan et al. (2016)).

(8) Many workers in the small firms are not regular employees. For example, the regular employees accounted for 21 percent of total employment in the small firm group with employees 1–9. Thus, when all workers are treated equal, as we did in Table 2.11, it could significantly underestimate the labor productivity for small firms. Keeping this caveat in mind, the labor productivity gaps between small firms and large firms should still be significant.

(9) According to 2003 NIC, value of fixed capital assets at the beginning the survey year include values of land, buildings, machinery and equipment (GSS 2006).