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Index of economic freedom 2007

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Ghana's economy is 58.1 percent free, according to our 2007 assessment, which makes it the world"s 91st freest economy. Its overall score is 1.5 percentage points higher than last year, partially reflecting new methodological detail. Ghana is ranked 11th out of 40 countries in the sub-Saharan Africa region, and its overall score is slightly higher than the regional average.

Ghana has good scores for fiscal freedom, freedom from government, and monetary freedom. The top income and corporate tax rates are fairly low, and overall tax revenue is not excessive as a percentage of GDP. The amount of revenue from government-owned businesses is likewise relatively small. Inflation is fairly high, but Ghana has made progress in reducing price subsidies and state distortions of the market.

Ghana could make significant progress in several other areas such as investment freedom, financial freedom, property rights, Labour freedom, and freedom from corruption. Commercial regulations are extensive, and the Labour market is inflexible. Ghana restricts foreign investment in several sectors, and the weak rule of law means that consistent judicial adjudication cannot be guaranteed. This inconsistency is due more to an inefficient public sector than to outright corruption.

Background:

Ghana was the first colony in sub-Saharan Africa to gain independence. Political discourse is deepening with the development of private radio and mobile telephony. Agriculture accounts for over half of employment, almost half of gross domestic product, and about one-third of total exports (predominantly cocoa and timber). The government has made improving the infrastructure a priority and has generally followed through on economic reform. Over 300 state-owned enterprises (of about 350) have been privatized. Regulatory barriers can be onerous, however, and corruption, while lower than in other African countries, remains a problem.

Business Freedom - 54.9%

Starting a business takes an average of 81 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Obtaining a business license and closing a business are difficult. Although the government has focused on streamlining regulations as part of its strategy of empowering the private sector, bureaucratic processes remain slow. The overall freedom to start, operate, and close a business is limited by the national regulatory environment.

Trade Freedom - 58.0%

Ghana's weighted average tariff rate was 11 percent in 2004. Non-tariff barriers include special import fees and taxes, cumbersome and non-transparent regulations, and import bans and restrictions. The government also supports domestic private enterprise with financial incentives and tax holidays as part of its export promotion policies. Consequently, an additional 20 percent is deducted from Ghana's trade freedom score to account for these non-tariff barriers.

Fiscal Freedom - 88.4%

Ghana has moderate tax rates. Both the top income tax rate and the top corporate tax rate are 25 percent. Other taxes include a value-added tax (VAT) and a capital gains tax. In the most recent year, overall tax revenue as a percentage of GDP was 22.3 percent.

Freedom from Government - 72.0%

Total government expenditures in Ghana, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 33.3 percent of GDP, and the government received 6.3 percent of its total revenues from state-owned enterprises and government ownership of property. Privatization has been slow in recent years, and many state owned enterprises perform poorly.

Monetary Freedom - 70.0%

Inflation in Ghana is relatively high, averaging 15.6 percent between 2003 and 2005. Relatively unstable prices explain most of the monetary freedom score. Although the government has made significant progress toward privatizing the public sector, it influences prices through the regulation of state-owned utilities and controls prices for petroleum products. Consequently, an additional 5 percent is deducted from Ghana's trade freedom score to adjust for measures that distort domestic prices.

Investment Freedom - 50.0%

The foreign investment code eliminates screening of foreign investment, guarantees capital repatriation, and does not discriminate against foreign investors. The laws restrict petty trading, taxi services, gambling and lotteries, beauty salons, and barbershops to Ghanaians.

The process to set up a business requires compliance with regulations and procedures of at least five government agencies. Residents may hold foreign exchange accounts, and non-residents may hold them subject to restrictions. Payments and current transfers are subject to restrictions. The Bank of Ghana must approve most capital transactions, and foreign direct investment faces a minimum capital requirement.

Financial Freedom - 50.0%

Ghana's financial system is small and dominated by banking. Ghana is a member of the Economic Community of West African States (ECOWAS), which promotes regional trade and economic integration. Plans to establish a West African Monetary Zone (WAMZ) with four other countries based on a second West African common currency have been delayed.

There were 18 banks as of 2005: 10 commercial banks, five merchant banks, and three development banks. Five commercial banks are foreign-owned and play a leading role in the sector. The government owns over 34 percent of the Ghana Commercial Bank (the largest domestic bank) and owns two other banks. There were 19 insurance companies in 2004, including two state-owned companies that dominate the sector. The stock exchange is small, and foreign investors face some restrictions.

Property Rights - 50.0%

Ghana's judicial system suffers from corruption, albeit less so than those of some other African countries, and the judiciary is subject to political influence. The courts are slow in disposing of cases and at times face challenges in enforcing decisions, largely because of resource constraints and institutional inefficiencies.

Freedom from Corruption - 40.0%

Corruption is perceived as significant. Ghana ranks 65th out of 158 countries in Transparency International's Corruption Perceptions Index for 2005.

Labour Freedom - 48.2%

The Labour market operates under highly restrictive employment regulations that hinder employment and productivity growth. The non-salary cost of employing a worker can be high, and dismissing a redundant employee is costly and difficult. Daily minimum wages, which were raised in recent years, are set by a tripartite commission composed of representatives of government, Labour, and employers.

Sub-Saharan Africa and Economic Freedom

Sub-Saharan Africa is well known as the poorest and most violent region of the world.

It also seems to be the one region that has been slipping further behind over the past half-century rather than advancing in terms of popular material well-being. Civil war flares sporadically from the Horn of Africa to the Atlantic Coast.

AIDS is a continuing burden. Mass unemployment is common. Average GDP per capita is only $1,984—the lowest of any region and barely one-tenth of the average incomes in Europe and the Americas. Unemployment hovers at 10.5 percent, and the 15 percent average inflation rate is twice as high as that of the next worst region. Unsurprisingly, Africa receives more absolute foreign aid, both multilateral and bilateral, than any other region even though it has just one-fifth the population of Asia.

Eight of the 20 countries ranked "repressed" around the world are located in this region. Sub-Saharan Africa is also ranked last in seven of the 10 economic freedom categories and performs especially poorly in terms of property rights, freedom from corruption, and business freedom.

Some of the gaps between sub-Saharan Africa's score and the world average score are especially striking: almost 10 points for business freedom, 10 for freedom from corruption, and six for property rights. The single factor on which the region rates higher than the world average is in terms of government expenditure.

Ironically, however, it is worse in terms of taxation. Labour freedom is perversely restricted in the region, which is odd because heavy Labour regulations are much more common among higher-income nations. It appears that the countries of sub-Saharan Africa have been saddled with the worst policies of their former European colonizers but none of the prosperity.

The signs of government failure are overwhelming in the heart of Africa and in some cases are so severe that the next few years will be inevitably bleak. Zimbabwe's rate of inflation,

for example, is 350 percent, and unemployment runs at 80 percent. With political instability rampant in the region, it is unlikely that even the liberalizing tendencies of Mauritius or Botswana can have a significant enough statistical impact to lift Africa out of its last place

status. Within the region, Botswana is freest in the most absolute categories, although Mauritius is freest overall.

Namibia scores highest in business and trade freedom, showing a strong commitment to free trade and pro-business regulations. Angola, as an oil-exporting nation, scores highest in fiscal freedom because of its low tax burden. Cape Verde has the lowest absolute inflation, giving it the highest score in monetary freedom, and Uganda has the highest Labour freedom.

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