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10.07.2003 Feature Article

Afro-sclerosis

Afro-sclerosis
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Ghana’s economy, like those of most African countries, has been smitten by the bug of Afro-sclerosis. But then what is new? Sclerosis is a medical term used to describe the hardening of the arteries. The term is appropriated, in a parallel sense, in economics to describe markets (and economies) that are fashionably dysfunctional and have few transactions, if any. But why is such the case? Why do we continue to observe and experience stagnation of our economy year after year? It makes one wonder if our economic minds have fallen into everlasting coma. Epilogue on Growth It is no secret that the high standard of living enjoyed by the economically advanced nations of the world is the product of economic growth – these nations’ ability to produce more of things that improve material standard of living. As a segue, the natural question that comes to mind is what determines economic growth? As simple as this question may seem, it does not lend itself to an easy and simplified answer, especially so because most of the commonplace factors that are normally [and conveniently] cited fall victim to the legendary egg-chicken dilemma (because of the causal relationships between some of them). However, if one takes a cascade of snapshots through time, (at least in regards to the economically advanced world), the movie that seems to emerge is one that shows that economic growth is antecedent on productivity, which in turn hinges on high capital accumulation and technological progress. Sources of productivity One of the sources of productivity is increased availability of capital – financial capital, human capital and physical capital. Over time saving and new investments lead to the availability of more and better machines – physical capital. Axiomatically, workers in the economically advanced world today are more productive than their counterparts of yesteryears or those in the developing world because the former has access to more and better machines. To make new investments, there must be a pool of savings to tap into, whether domestically or from foreign sources. But how crucial is domestic savings? It depends! For country like the US, domestic savings have not been so crucial because the US is, ironically, the largest recipient of capital flows in the world. But in much of the “Asia Targets”, domestic savings have been relied on extensively to engineer economic growth, even though foreign direct investments have played an equally substantial role in the economic affairs of these countries. In Singapore, for example, the government has achieved a very high saving rate through budget surpluses and forced saving through pension contributions. The ability of a country to mobilize domestic savings, and thus financial capital, in general, depends largely on cultural attitudes (for example whether thrift vis-à-vis ostentatious consumption is a virtue and whether or not people are future-oriented), and the level of development of the domestic financial institutions as well as the country’s ability to attract foreign financial resources. So far, it seems that most of these conditions are not sufficiently existent in Ghana. First of all, because incomes are so low in Ghana, it makes it extremely difficult for people to have any extra income beyond their daily subsistence for saving. Secondly, financial institutions in Ghana are not well developed, and in some cases not accessible. Lastly, institutional factors such as ill-developed social and economic infrastructure, the smallness of the Ghanaian market, the overhanging political instability in West Africa caused by countries such as Liberia, Sierra Leone and Cote D’Ivoire have made it extremely difficult for Ghana to attract the desired foreign financial resources (especially foreign direct investment) despite the President’s best intentions and efforts. In addition, a country’s ability to produce more and better material goods and services, and thus ensure sustained economic growth depends on its labor force. Here two things must be taken into consideration. The first is the size of the labor force. The size of the labor force is inextricably linked with the size of the population, even though the two are not necessarily the same. Thus, the larger the size of the population the larger the size of the labor force (all things being equal - I love this economics cliché). In Ghana, this does not seem to be a problem. Even there are those who argue that the country is overpopulated (I do not subscribe to this view). The second is the quality (and health, I must add) of the labor force or what is usually referred to as human capital – the education, training and skills of the labor force. This is an area some people argue that Ghana has a problem. Not only is our educational infrastructure crumbling under the weight of resource inadequacy, but also the kamikaze of brain drain creates a knowledge (skills) gap and puts severe strains on the country’s development efforts. Obviously, there are ways the country can mobilize and take advantage of its [skilled] human resource pool resident in foreign countries, but there is a limit to it. In most sectors, the physical presence of skilled personnel is a sine qua non. Another source of growth of productivity, as shown by the economically advanced world, is the movement of resources out of low-productivity sectors into high-productivity sectors. In most of these countries, this movement has been characterized by the de-emphasis on the production of raw materials to emphasis on the production of industrialized and semi-industrialized goods and lately the production of technological goods. This raises a very fundamental economic policy question for Ghana, namely, should the country continue to devote a large chunk of its relatively scarce resources to the production of such goods as cocoa, coffee, etc? Obviously, Ghana has lost its competitive edge in cocoa production. In addition, the reliance on cocoa, for example, for decades as the mainstay of the economy has not moved the country past the line of scrimmage of economic development. I think it is about time we had a national debate on this issue. But who has the political fortitude to bring up the issue for discussion on the political landscape? Given that politicians care about re-election, I do not expect any serious-minded political leader to dabble in this issue for fear of incurring the political wrath of those whose livelihoods depend on these products. So the inertia of development continues! While all the above-mentioned imperatives are crucially important, long-run economic growth is sustained only by technological progress and thus the role of ideas. Technological progress is the product of innovation, new ideas and an entrepreneurial culture that is not afraid of experimentation and risk-taking. In order for innovation and ideas to blossom, there is the need for research and development (R&D). There is no doubt that the fertility (translation of R&D into new ideas and products) and approriability (the benefit from R&D) of R&D can have a multiplier effect on the national economy. Sadly, however, R&D has not really captured the imagination of our national consciousness. Ideas have a crucial role to play both in the discovery and production of new products in the private sector as well as the promotion of informed debate and policy directions in the public sector. Unfortunately, this crucial role of ideas has not been fully appreciated and appropriated in Ghana. For example, let us consider the role of ideas in public policy and our democratic dispensation. Until recently when few non-government Think Tanks sprang up to add their voices and sometimes provide the framework for policy debates, policy formulation and implementation have been the monopoly of the bureaucratic dirigiste, with virtually no role for the public in the policy-making process. It may not be an exaggeration to say that in Ghana, a lot of people lack the fundamental understanding of public policy and policy research. We must encourage Think Tanks. This requires that private citizens, especially, with the material and financial resources to support the development of Think Tanks must enthusiastically do so as a part of their contribution to national development. How Important is Technological Progress? To appreciate the importance of productivity in economic growth and development, consider the difference a small change in productivity can make in the long run. As an illustration, consider two countries, country X and country Y, that start out equally wealthy. Suppose country X grows at 2 percent a year and country Y at 3 percent a year. While this difference in productivity may seem negligible, after thirty years country X would be only three-fourths as wealthy as country Y. The Rule of Seventy gives economists a very good idea about the number of years needed for income of a country to double. For example, if an economy grows at 5 percent in a year, income will double in 14 years (70 divided by 5). Thus by the Rule of Seventy, it would take country X 35 years to double its income while country Y would take only 23 years to do so. The message from this analysis is that if we are serious about increasing our national income and thus becoming a middle-income country, we need to increase economic growth substantially and this requires sustained increases in productivity. If technology is so important, why don’t we import and adapt technology from the advanced world to close the technology gap? It turns out that it is not easy to just import and adapt technology. To be successful in the appropriation of borrowed technology, not only must the technology be appropriate but more important local conditions especially well-developed and functional institutions and infrastructure – well established legal infrastructure that respects property rights and the rule of law, political stability and security, a growing entrepreneurial base, well-developed financial markets, etc, - must be in place. However, the economic growth experience of Singapore and other Asian countries portends positively encouraging news: that despite the slow technological progress, Ghana can still make significant strides in its development endeavors if the political leadership can provide and articulate a vision. In Singapore, for instance, economic growth was engineered through the development of specific industries (in most cases high-productivity industries) under the auspices of systematic government targeting, implemented through large tax incentives and subsidies. Thus concerted effort was made at creating a comparative advantage in high-productivity industries instead of wallowing in the old Ricardian world where a country’s comparative advantage relied essentially on its natural resource endowments. The unfortunate thing is that Ghana and its compatriot countries in Africa seem to still be finding their Midas touch in the old Ricardian world. It about time we had an epiphany! Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.

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