09.07.2003 Feature Article

Why The Economy Is Not Growing

Why The Economy Is Not Growing
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Last year, the Ghanaian economy expanded at an inflation-adjusted rate of only 4.5 per cent. This implied an average annual income (or GNP per capita) of ¢2.3 million in 2002, about ¢195,000 per month, which is a far cry from what is needed for a successful assault on poverty.

Averages, of course, can hide a lot of information. For the 10 per cent of the population lucky enough to have 43 per cent of the nation's income, an average monthly income of about ¢200,000 is simply unimaginable.

For the bottom 40 per cent of the population that survives on just 7.2 per cent of national income, however, ¢200,000 a month is not only imaginable but considerably more than what most actually earn.

Despite its limitations, average annual income over time offers useful insights into how well the nation is doing in its development efforts. And the record of the past 40 years is a dismal and disturbing one.

In 1965, for example, the average annual income was ¢186.00, or the equivalent of ¢4.4 million in 2002 prices. This means average annual income in 2002 was only half that of 1965. (See graph).

Indeed, between 1965 and 1975, annual income measured in 2002 prices averaged ¢3.9 million; from 1976 to 1982 (the eve of structural adjustment), it averaged ¢2.2 million; and between 1983 and 2002, the average was ¢1.9 million. Clearly, ours is a country moving forward in reverse.

To change the situation and make an appreciable impact on poverty, the economy will have to grow in excess of 8 per cent per annum. Apart from 1984, when a strong recovery in agriculture contributed to a growth rate of 8.8 per cent, such high-digit growth rates have remained illusive. Between 1985 and 2002, the economy grew a measly 4.5 per cent on average per year.

There are many reasons for the persistent sluggishness in economic growth, notable among them being inappropriate fiscal and monetary policies.

Despite the current government's claims to being "pro-business", most of its policies have, in fact, proven to be harmful to Ghanaian business, constricting both private and public investments and impeding overall economic growth.

A biased notion of "investment" that primarily focuses on "foreign investment" has meant that a disproportionate amount of time and resources are devoted to pursuing "foreign investors," while indigenous investors are reduced to footnotes in national economic policy. The result is not only malignant policy neglect but also financial paralysis in key sectors of the economy.

Last year, inflation-adjusted credit to the manufacturing sector, for example, fell by 10.0 per cent. Similarly, credit to agriculture, forestry and fisheries fell by 11.7 per cent, while that of the export trade sector shrank by 3.1 per cent.

By contrast, credit for import trade rose by 23.0 per cent, while that of services, including retail trade, increased by 17.2 per cent. (In 2001, real credit to manufacturing declined by 28.7 per cent and that of export trade and agriculture fell by 27.5 per cent and 12.7 per cent, respectively).

Even foreign investment, the preoccupation of economic policy, has fared poorly. The Ghana Investment Promotion Centre reports that in 2000, 2001, and 2002, foreign investment followed a declining trend of $132.06 million, $97.3 million, and $65.13 million respectively.

The fate of business credit in particular has been the result of an incongruous policy of "tight monetary policy" that raises the cost of credit at a time when we need loose monetary policy to make credit available and affordable to Ghanaian businesses.

Tight monetary policy has also raised the cost of government borrowing, contributing to a dramatic drop in public investment in infrastructure that is needed for growth and development. In 2002, total government spending on capital projects fell by an inflation-adjusted rate of 57.1 per cent.

Without modern and efficient infrastructure, along with a strong and vibrant Ghanaian business community, economic growth will continue to be sluggish and foreign investment will continue to lag behind.

In addition to the above woes, the tax burden for Ghanaian businesses also keeps rising. The Association of Ghana Industries reports widespread closure of businesses around the country amidst a rising assortment of fees, levies, tariffs, and national and local taxes.

The decision by government to extend the National Reconstruction Levy by another three years is perhaps the most dramatic manifestation of the increasing difficulty of doing business in Ghana today.

As if all that wasn't enough, the government, in a memo to the IMF on April 24, 2003, promised more "tightening of monetary conditions" by the Bank of Ghana, which has already raised its prime lending rate to commercial banks by 3.0 percentage points and promised to "withdraw [more] liquidity from the banking system."

The memo also promises to scale back growth in inflation-adjusted credit to the private sector in 2003 from the previously announced 20 per cent to 16 per cent.

The sum effect of these policies is that instead of a "Golden Age of Business," Ghanaian firms find themselves trapped in a "bronze age of business", if not worse. There is now a dangerous circle of declining business credit, rising corporate taxes, slow economic growth, shrinking business profits, a diminishing business tax base, and still higher taxes to make up for the lower government revenue caused by slow economic growth.

The social consequences of this vicious circle are also becoming increasingly apparent. As businesses fold or fail to expand because of low profits or expensive credit, the ranks of the unemployed and the working poor continue to expand. It's time to change course.

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