27.01.2006 Feature Article

Hastening the pace of economic growth

Hastening the pace of economic growth
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What can Ghana learn from South East Asia? At a recent World Bank-sponsored meeting in Accra on “Strategic Partnership for African Development,” the need to speed up Ghana's growth in order to achieve the Millennium Development Goals (MDGs) was duly underscored. The Bank of Ghana also previously sponsored a workshop with the theme: “From Stabilization to Growth” that appropriately stressed the need for Ghana to move beyond stabilization to growth. Because of her lackluster growth performance, Ghana's per capita income increased from about $200 in 1960 to about $380 currently. [These figures are based on the World Bank Atlas Method, which we are using in this paper for purposes of consistency with figures quoted for other countries. It will be different if you use a different method, such as the Purchasing Power Parity (PPP) method]. My mathematics tells me that an average annual rate of economic growth of only about 1.4 percent would have yielded this result. This poor performance implies that Ghana has remained in the low-income country (LIC) group. Our goal is to move up the ladder to join the middle-income group of countries, whose per capita income ranges from about $800 to $8000, within the shortest possible time.

To give a sense of the effort needed to achieve this goal, let us turn once more to mathematics. If one assumes an average annual population growth rate of 2.3 percent, it can be established that if Ghana wants to double its per capita income from the current level in ten years to about $780-800, it has to grow at an annual rate of at least 9-10 percent. On the other hand, if Ghana grows at 5-6 percent (as indicated in some official documents such as the GPRS), then it will take at least 22 years to double the per capita income—which many people would probably consider to be undesirable. In fact, as the President noted at the World Bank meeting, while current growth may be considered satisfactory, at least when compared with the past, it “was not fast enough to take the nation where it wanted to be.” The importance for Ghana to achieve a faster rate of growth cannot be stressed enough, and this deserves a high position on the government's economic agenda. In that regard, it remains to implement concrete measures to change the goal into a reality.

What Ghana aims to achieve is not without precedent. Many South East Asian (SEA) countries, by sustaining high rates of growth, moved within a short space of time from low-income to middle-income economies and became the envy of the rest of the developing world. The fact is that most of these countries, at the time of their independence, had comparable per capita income and human and natural resource endowment as Ghana at the time of her independence in 1957. This comparison is quite glaring between Ghana and Malaysia, with which she had a lot in common at the time of independence. For instance, by sustaining high, stable growth, Malaysia increased its per capita income seventeen-fold from $200 to $3,400 during 1960-2000, whereas for the same period Ghana, through erratic and low growth, increased hers only1.7 times from about $200 to $340. Thus, while Malaysia moved up to join the middle-income group of countries, Ghana, as noted above, remained among the low-income countries (LICs). So, what explains the large difference in growth performance and what can Ghana learn from Malaysia and other SEA countries?

Growth is one subject that continues to baffle even economists and still attracts a lot of debate. This is because it is difficult to pin it down to a few factors since one finds quite a variation of experiences. In that sense, it is not easy to provide definitive policy prescriptions. Early attempts to explain economic growth considered land, labor, and capital as the key factors of production and, therefore, growth. Larger quantities of these factors were expected to increase production to the point when, what economists refer to as, “diminishing returns” set in. Moreover, better qualities of the factors should also enhance productivity and increase growth. With “diminishing returns” to land, labor, and capital, one would expect growth to become truncated at some point. However, in reality, we know that growth proceeded at a more rapid pace, first in the West, and then in other parts of the world. What made this possible was, in part, the influence of the human mind, which enters the growth process through various channels, including management/organization, education, and technology. However, these factors are difficult to subject to the same degree of quantitative evaluation as the more tangible factors mentioned above. Better management of production should lead to higher productivity and growth. Education ensures a more skillful and productive labor force, which fosters growth. Technology, which may be acquired through education or training, enhances the productivity of other physical factors of production and, thereby, promotes growth.

Another factor that has gained increasing recognition as a driver of growth is economic policy. This falls into two broad categories: policy directed to free markets and private enterprise, and that oriented to state-directed regulation. Countries normally employ a mix of these two broad categories to varying degrees. There appears to be a preponderance of opinion, however, that the former may be more efficient and, therefore, more pro-growth while the latter, by placing equity considerations ahead of efficiency, may be less pro-growth. What, however, seem common with almost all the SEA success stories are policies that create a stable environment conducive to savings and investment. Also critical are policies directed to capacity development and that foster acquisition of capital and technology. In addition to the foregoing, SEA countries also adopted export-oriented policies to diversify their economies away from primary activities, which are often a drag on growth. On the other hand, other countries that opted for protracted, state-led import-substitution industrialization concurrently with inflexible macroeconomic policies achieved lackluster growth performance.

Even to extend the list further, one may add the political regime, geography, demography, and culture to the determinants of growth, to mention just a few. The political process has the potential to influence growth by shaping policy and creating confidence. Political instability attended by policy reversals holds back growth to the extent of deterring potential investors, while political stability is potentially beneficial. Furthermore, a democratic political dispensation may be beneficial to growth if it supports the rulers' vision of growth and development. It may, however, hold back growth if it degenerates into a squabbling, disruptive process. On the other hand, Professor Mancur Olson has suggested that a dictator can promote growth and development in the pursuit of his “encompassing interest” that promotes peace, order, productivity, and the general good. In the same vein, another dictator who lacks vision and has the wrong “encompassing interest” may lead the country to economic stagnation and failure.

The geography of a country may be either healthy or unhealthy to growth. By its nature, tropical vegetation may be able to support a limited range of crops, which may be vulnerable to weather changes, while temperate vegetation may be more congenial and supportive of a wider variety of crops. Furthermore, tropical climates may be more energy sapping, thereby inhibiting productivity and growth, whereas temperate climates may be more conducive and work-friendly. It has also been suggested that the geographical location of a country may dispose it favorably (or unfavorably) to growth in terms of its ability to attract (or not attract) capital and technology. A country located in a developed region may be favorably influenced through contagion, whereas one in an undeveloped region may remain trapped in underdevelopment. Also, a country located in a politically or militarily strategic region may become an intended or unintended beneficiary of investment and aid through political rivalry, whereas a politically or militarily inconsequential country will be ignored and stagnate. While demography is an evolutionary process, a developing country must overcome a demography hurdle to derive favorable benefits. Not only do countries in early stages of development tend to be bogged down by large families but also the population tends to be characterized by a high youth-dependency rate, depending on the support of the smaller working adult population, which can be a drag on growth. Of course, there is potential for the youth to enter the labor market later and thereby contribute to the growth process, but this will take time. On the other hand, developed countries have to contend with an increasingly aging population that has to be supported by a diminishing youthful working population. Cultural practices, which vary from country to country, may also be favorable or detrimental to growth. Growth in developing countries may be inhibited by traditional customs and practices, which may be inimical to productivity and economic activity. These may entail practices prohibiting economic activities for traditional and customary reasons. Meanwhile, the extended family system, which requires the few successful individuals to cater for others, while socially beneficial, can be a disincentive to thrift and hard work and, therefore, a drag on productivity and growth.

How did differences in these factors between Ghana and Malaysia influence their relative growth performance? Since both countries have similar tropical weather conditions that can support cocoa, oil palm, rubber, etc., the effect of geography may be discounted. Demographic conditions may also have been similar, with both countries typically with high rates of population growth and large family sizes, although these would change as development evolved. Also, while there may be cultural differences, which may favor one country against the other, one may also assume that they were not sharply defined and may, therefore, be discounted as well. On politics, however, Ghana's experience has been probably been less helpful to growth than Malaysia's. First, Malaysia has had greater political stability, more conducive to investment and growth. Second, Malaysia's long-serving political rulers pursued a vision of growth and development in pursuit of their “encompassing interests,” which also served the broader national interest. Ghana, on the other hand, experienced political instability that deterred investment and held back its growth. Furthermore, apart from the brief period after political independence when a strong industrialization drive was pursued as a way of fostering economic independence, successive policies were less visionary and there were no properly-directed “encompassing interests.” Moreover, the frequent reversal of policy after regime changes and the consequent erosion of public and investor confidence stalled Ghana's growth.

Policy has the capacity to galvanize other factors of growth and it is in this area that Ghana fared considerably worse than Malaysia. While Malaysia may have adopted some directed policies to promote infant domestic industries, these interventions were targeted to key sectors. Moreover, they were carried out within an environment of sound macroeconomic policies that ensured a stable and competitive economic regime that allowed the industries to flourish and remain viable. At the same time, economic and social infrastructure and services were developed to support the industrialization program. As a result, Malaysia was able to increase its pace of capital and technology acquisition, which contributed to accelerated growth. Furthermore, Malaysia pursued export-oriented policies aggressively, allowing it to diversify its economic base to achieve higher rates of growth. In contrast, for the best part of its history, Ghana pursued state-led, import-substitution industrialization strategy that erected protective barriers around domestic industries in the form of high tariffs and subsidies. This created a colossally inefficient and unprofitable state-enterprise sector that became a drain on the national coffers. While we have been moving away from this system, the economy continues to reel under its legacy. Macroeconomic policies in Ghana were also characterized by inflexibilities and cost-price distortions that inhibited economic expansion and held back growth. At the same time, investment in education, health, and capacity building declined, denying the economy pivotal capacities to sustain high growth.

It is clear then that, if Ghana is to achieve a faster pace of economic and per capita income growth, it has a lot to learn from the experience of Malaysia and other successful SEA countries. While no individual country's growth performance can provide a complete blue print, there are important threads common to successful experiences. Maintaining macroeconomic stability through fiscal and monetary discipline should remain a priority to foster savings and investment and sustain high growth. It is also important to ensure appropriate alignment of costs and prices in the product and factor markets by reducing the scope of economic regulation and controls in order to foster efficiency and growth. The potential of the private sector should be fully harnessed as the engine of growth. However well-intentioned they may be, state interventions in the economy do not often produce desirable results. The business of the state should actually not be to do business but rather to facilitate private business by providing economic and social infrastructure and a framework for law and order. The state should invest in education, health, and capacity building to provide the skills to support the private sector. The experience of the SEA countries also points to the importance for the state to facilitate export development and diversification as a driver of growth, including through provision of appropriately targeted incentives and promoting access to external markets through open trade regimes and regional integration. Furthermore, a vibrant financial sector should be promoted to facilitate savings and investment and thereby foster growth. The importance of political stability in creating the necessary environment for business and investment, which are essential for growth, cannot also be stressed enough. In that regard, after a long period of instability, which has taken a toll on economic performance, Ghana has been consolidating its political democracy. This augurs well for restoring confidence in the economy and creating the necessary environment for sustained growth. Dr. J. K. Kwakye Rockville, Maryland, USA January 26, 2006 Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.

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