Ghana improves on its economic freedom but still a D+ (58.1) – 96th freest in the world

The Wall Street Journal and the The Heritage Foundation (a research organization based in the U.S and made up of authors and expert analysts) recently released their “2009 Index of Economic Freedom” report which provides an assessment of economic freedom characteristics of 183 countries in the world. The report comprise of data from second half of 2007 through the first half of 2008. Economic freedom from the stand point of the analysts is a fundamental right of every human being to control his or her labor and property. Using this definition, the analysts quantified economic freedom using an Economic Freedom Index which is an overall score of ten (10) equally weighted components of economic freedom invariably preventing statistical biasness. Each of the ten component is on a grading scale of 0(minimum freedom achievable) to 100(maximum freedom achievable). The ten (10) components are Business freedom, Trade freedom, Fiscal freedom, Government size, Monetary freedom, Investment freedom, Financial freedom, Property rights, freedom from corruption and Labor freedom. The report described Economic Freedom Index as a measure of state's proclivity towards an economically free society where individuals are entitled to work, produce, consume and invest with freedom and under a rule of law such that their freedom earns the protection and respect of the state. The Economic Freedom overall score also follows a scale of 0(least free) to 100(most free). A further breakdown of the score is free (100-80.0), mostly free (79.9-70.0), moderately free (69.9-60.0), mostly unfree (59.9-50.0) and repressed (49.9-0). In addition, the analysts used index to provide a ranking of the countries in terms of Economic Freedom.

According to the report, Ghana's Economic Freedom score was 58.1 which placed it as the 96th freest in the world. The score of 58.1 also characterizes Ghana as mostly unfree in terms of economic freedom. The individual freedom scores for the ten components are Business freedom(56.7), Trade freedom(63.0), Fiscal freedom(83.2), Government size(65.7), Monetary(69.6), Investment freedom(50.0), Financial freedom(60.0), Property rights(50.0), Freedom from Corruption(37.0) and Labor freedom(45.3). The following are the details of the individual freedom scores for Ghana.

Business freedom (56.7): This type of freedom is a measure of the freedom an individual or entrepreneur has to create value and do business without interference (in the form of burdensome regulations with regards to taxes, license acquisition, bureaucracy) from the state. The report asserts that Ghana's regulatory environment hinders the freedom of doing business as it is more bureaucratic with regards to license acquisition. Starting a business takes average of 34 days compared to the world average of 38 days.

Trade Freedom (63.0): A measure of the openness of a state's economy to imports, exports of goods and services. This is also a measure of extent of state restrictions in the form of taxes, tariffs, quotas and other regulatory barriers that impedes the free flow of local and foreign commerce including advanced-technological products and services. Such restrictions plummets an individual's propensity to pursue economic goals. The report was of the view that the level of fees on imports, taxes, import bans and restrictions of certain goods, non-transparency in standards and regulations with regards to government procurements, export promotion schemes and customs in addition to corruption has been a set-back to trade freedom. Even though the report commends government support of private enterprises with financial incentives, the issue of non-tariff barriers erases this gesture.

Fiscal Freedom (83.2): A measure of the freedom of individual's or entrepreneur's or businesses to retain more of their income and wealth for their own beneficiation. This freedom is reflected in the magnitude of marginal taxes and corporate taxes which government uses to cut into people's wealth and income. The higher they are, the more they become a disincentive for individuals or firms to pursue the goal of working or investing. The high level of fiscal freedom is the result of moderate tax rate comprising income tax, corporate tax, capital gains tax and VAT.

Government Size (65.7): The effect on economic freedom and growth due to the government's aggressiveness towards private resources which is often seen in its high expenditure purported to generate revenue, tendency to control “public goods” and the market. If government funds its expenditure through borrowing locally, they compete with businesses and individuals for funds culminating in high interest rate and subsequently inflation. Such tendencies have the ability to cause market inefficiencies, bureaucracy and lower productivity. According to the report, government expenditure (consumption, transfer payments e.t.c) is comparatively moderate, that is 33.8% of GDP.

Monetary Freedom (69.6): This is the freedom associated with a stable currency and stable market-determined prices which allows individuals to create value and do business on a long-term basis without fear of inflation. Here, the relatively high inflation of Ghana averaging 10.4% (2005-2007) relapses this freedom. In addition, government control of state-owned utilities and price of petroleum products produce measures that distort domestic pricing of these products. The fact is that the market has to determine the price without maximal government intervention so Ghana lost about 10 points due to the governmental influences in the pricing.

Investment Freedom (50.0): A measure of the degree of restrictions the state imposes on investment which culminates in the lowering of entrepreneurial activity and economic growth. Less restrictions on foreign investors with regards to both inflows and outflows of capital increases investment and hence the freedom. The low mark score here by Ghana is the result of the following subjugating factors: preferential treatment of domestic investors in certain sectors of investment , laid down minimum capital requirements for foreigners for starting a business, foreign exchange accounts transactions and land ownership rights limitations for foreigners(foreign investors may lease and not a land). However, the foreign investment legislature of the country provides some privileges such as non-screening of foreign investors.

Financial Freedom (60.0): A measure of the degree of control of banks, financial services by the state through burdensome excessive regulations which limits competition, creates inefficient market and increases the cost of financing entrepreneurial activities. Ghana's financial system has experienced reformation and transformation which has led to privatization in the banking sector, upsurge of several banks, increased granting of bank credit to private institutions and expansion of stock exchange with increased foreign investments in the securities. In spite of these positive changes, there is more room for improvement.

Property rights (50.0): This is a measure of the effectiveness of the rule of law on the accumulation of private property with confidence. An effective judicial system is an incentive to encourage investment. A corrupted judicial system produces corruption, discrimination and injustice infringing on protection of private property sometimes calling for confiscation. Ghanaians witnessed the extremes of this during 1979 June 4 revolution and the PNDC era when rule of law was abated and the nation saw indiscriminate confiscation of private property. According to the report, Ghana's judicial system suffers from political influence, corruption and lack of expediency in dealing of cases by courts.

Freedom from Corruption (37.0): A measure of failure of integrity and transparency in a system with attendant social vices like bribery, extortion, nepotism, cronyism, smuggling, black-marketing, embezzlement and most importantly stealing by public officials. Corruption in Ghana is very pervasive which has led Ghana to be ranked as 68th out of 180 countries in the 2008 corruption perception index. In addition, opinion poll shows lack of public trust in the integrity of the government and institutions like the courts and police.

Labor Freedom (45.3): A measure of the freedom of people to work freely and business to contract workers freely and fire workers under legitimate reasons. Externalities like government regulations and unions influences in the form of wage controls, hiring restrictions often retard the proliferation of this freedom. Even though the initial cost of employing a worker is moderate but the firing of a lazy worker is costive and difficult due to highly restrictive labor regulations. The aftermath is a disincentive for job creation, employment and productivity growth in Ghana.

Now, the overall score of 58.1 resulted in an improvement of 1 point higher compared to the previous overall score in the Economic Freedom Index assessment. The increased score was attributed to improvements in four of the 10 economic freedom components. They are business freedom, monetary freedom, financial freedom, and freedom from corruption. The components which saw declines compared to their previous score are fiscal, government size and labor and the ones where no change occurred are Trade, Investment and Property rights. Regionally, Ghana is ranked 12th out of the 46 countries in the Sub-Saharan Africa region even though its overall score of 58.1 was below the world average of 59.5. However, with regards to the sub-region it rates well in fiscal freedom, government size and property rights. The report commends the improvement as a reflection of Ghana's private sector expansion, macroeconomic stability, and recent reformations in the financial sector which has ensured steady economic growth. Despite the stagnancy in Ghana's economic freedom performance, the country finished ahead of some major economies like Brazil (105th, 56.7), China (132nd, 53.2), India (123rd, 54.4) and Nigeria (117th, 55.1). Kenya, in spite of its current political instability finished ahead of Ghana placing 90th (58.7). The top ten countries are Hong Kong(1ST, 90.0), Singapore(2nd, 87.1), Australia(3rd, 82.6), Ireland(4th, 82.2), New Zealand(5th, 82.0), United States of America(6th, 80.7), Canada(7th, 80.5), Denmark(8th, 79.6), Switzerland(9th, 79.4) and United Kingdom(10th, 79.0). Technically, Hong Kong is the most freest economy, whilst North Korea with a score of 2.0 is the last and most repressive economy in the world.

The report recommends that Ghana has greater room for improvement in areas such as investment freedom, labor freedom, freedom from corruption due to reasons like restrictions in foreign investment in several sectors, repressive labor laws, and inordinate corruption of public officers and the judicial system.

Some Reflections: It is possible for us as Ghanaians to have a perception of a positive correlation between economic freedom and political freedom as political freedom is synonymous with political stability and good governance, which are currently being commended by the world. However, the correlation between economic freedom and political freedom can be statistically insignificant and non-realistic in actuality if certain conjunctional steps are not taken. Political freedom and Economic freedom are in tandem and what keeps them in tandem is a plan. As a matter of fact, for the country to move from its current political freedom state (which we are so enthused about) to a higher level of economic freedom, a precursor to economic prosperity, the current government would have to have a strategic plan. The plan can be a two-year, four-year plan, six-year plan e.t.c depending on the goals. The strategic plan formulation would call for the performing of SWOT analysis to ascertain Ghana's current state with respect to its Strengths, Weaknesses, Opportunities and Threats. The report from the SWOT analysis would serve as a platform for the development of appropriate strategies geared towards economic freedom and prosperity. Next, such a plan when drawn should be displayed on a Ghana government official website. Currently, there are websites like that of Ghana Investment Promotion Center, National Chamber of Commerce, Modernghana.com, Ghanaweb and Ghana Statistical Service where some information can be obtained. However, the government still needs a separate website where information like the strategic plan and other critical issues of concern can be put for easy public accessibility. Taking this step would depict the government's desire to promote transparency in its governance. The government would also earn the public trust with regards to its deliberations and the direction it is taking the country. In fact, Ghana would not be the first country to have its strategic plan on a government website because a country like Botswana, a candidate of economic prosperity, has already taken that step. Tanzania also has a government website.

The strategic plan should articulate the usage of the oil proceeds and the achieved political stability to promote economic freedom. Political stability coupled with good governance would create a suitable and sustainable environment for increased Foreign Direct Investment (FDI). In fact, it is not only the attraction of FDI that the country needs now but its sustainability. Again, concerning the usage of Ghana's oil proceeds, there should be equity in development of the regions so as to ensure equity in distribution of the national “cake”. Now, the plan can become redundant if corruption is not dealt with gravely. There is the need for the current government to have zero-tolerance policy for corruption in its plan. In the past, the country has seen task force being set up to deal with it but the situation is no better. So there is the need for fresh and unbiased policies to deal with the situation. The plan would also have to deal with the country's current poor infrastructure, energy needs or deficiencies which are deterrents to growing FDI. The financial sector also needs augmentation. The country has an ineffective credit facilities and policy system which is also a set-back to private sector investment. Concerning Ghana's stock exchange, if the government can maintain the current level of investor confidence in the system, there would be the proliferation of the floating and issuing of Eurobonds, a source of revenue for the government. Also to deal with its balance of payment and exchange rate problems, the country has secured an IMF loan of $600million in 2009 after a break from IMF loan acquisition in 2007. The IMF loan is designed to promote growth, generate income and to pay off debt accumulated. Now, the loan is based on the donor expectation of certain conditional reform policies normally termed “Structural Adjustment Policies” (SAP) to be executed by the recipient. The conditionalities of SAP include but are not limited to: heavy cut in social expenditure, privatization or divestiture of all or part of national enterprises, removal of price controls and state subsidies, devaluation of currency, increasing stability of investment through augmentation of stock market, trade liberalization through lifting of imports and exports restrictions, balancing of budgets, fighting corruption and sustaining good governance. Much as the SAP reforms are immaculate predictors of economic freedom, there is a price to pay during their implementation. The reforms cannot be pursued without the government compromising some of the pledges made to Ghanaians during the recent elections. Some of the repercussions of these reforms include deregulation (a key component of a market-economy), inflationary pressures leading to increased interest rates, social unrest (due to stagnancy in state employment) among others. Indeed, the reforms are poverty reduction weapons but if not handled with tactfulness can result rather in poverty escalation. Nevertheless, the current government would have to do the “maths” well to subdue the impact of the reforms set-backs as it works to advance the course of economic freedom and prosperity. Furthermore, improving the country's debt ratio through reforms will give Ghana a better credit rating in the eyes of international donors. It will offer the country an opportunity to receive loans from other development banks with lesser interest and longer pay back periods for specific projects as the IMF does not give loans for specific projects. In this wise, projects like the national H.E.P source (at Akosombo) overhaul can be pursued. Another area which constitutes a potential source of conflict is our ethnic cleavages. No matter your ethnic or political background once you were born in Ghana you are a Ghanaian. Conflict arising out of ethnic cleavages has the ability to gradually derail the political freedom, gravitating towards pandemonium. It is indeed a potential “landmine”. We do not pray for that to happen. However, we need to avoid courtship with such potential implosive “landmine”. We may have differences because of our political or ethnic backgrounds yet this should not give us cause to perpetuate personal or political vendetta or vituperative mannerisms. If the government would seek to have good governance and political stability then it needs to address the potential negative ramifications of political and ethnic cleavages in its plan. Meanwhile, the government should continue to maintain the existing academic freedom which allows free primary school education, religious freedom and the freedom of the press. Ghana needs God's direction and the respect for freedom of speech in spite of the success chalked so far. For there is a saying that the voice of the people is the voice of God. Let's not forget that the world is watching us to see how we can translate our model political freedom into a model economic freedom and prosperity. Currently, we are a model of political freedom and we should strive to be a paradigm of economic freedom for Africa and for the world. In summary, Ghana faces potential political and economic risks, if the aforementioned issues are not resolutely and meticulously addressed with expediency.

God bless our homeland Ghana and make our nation great and strong!

References
1. Heritage Foundation, The Index of Economic Freedom – 2007

2. The Link between Economic Opportunity & Prosperity, THE 2009 INDEX OF ECONOMIC FREEDOM

3. IMF website on conditionalities
Source: Charles Horace Ampong [B.Sc (hons), Graduate Dip, M.Sc (Eng), MBA (finance)],

CFA & Actuarial Candidate & GLG Council Consultant