No Quick Fix for Ghana's Economic Challenges

At 1st glance, Ghana appears to be on a roll, but appearances are deceiving. Ghana faces daunting economic challenges.

No Quick Fix for Ghana's Economic Challenges

Dr. Leif Rosenberger Chief Economist ACERTAS

Introduction

Thanks to the surge in Ghana’s new production of oil, Ghana’s economy is growing at nearly 9% a year, the fastest economic growth in Africa. In addition, an IMF loan helped Ghana clean up its rotten banks and generate a budget surplus. Does this mean Ghana’s economic strategy is a role model for the rest of Africa?

Not so fast. This is no time for Ghana to rest on its laurels. Three million people (or 10% of the population in Ghana) live in extreme poverty. Its unemployment rate is on average higher than the rest of sub-Saharan Africa. Ghana’s GDP per capita is about half that of other emerging and developing economies. And if you use the old measure for its debt to GDP ratio, its debt rose from 73% of GDP to 76% of GDP the last few years.[1] The EU’s Maastricht criterion for EU entry says that any country with a debt to GDP ratio over 60% of GDP is financially unstable.

Putting environmental concerns aside, the core problem with relying on oil for Ghana’s economic growth is it does not produce enough jobs. Not surprisingly, an insurgency is worsening in northern Ghana because of the failures of the non-oil economy. In this regard, Ghana’s President Nana Akufo-Addi and his New Patriotic Party (NPP) deserve credit for their situation awareness and their efforts to do something decisive to help the cause. The government is determined to find the magic formula to make sure Ghana overall economy does not become a “one trick pony.” Unfortunately, there is no quick fix for transforming Ghana’s non-oil economy.

That said, Ghana’s new government is doing its best to change the structure of Ghana’s economy by putting more emphasis on industrializing the non-oil economy. [2] In March of 2019 the government announced the National Industrial Revitalization Program (or NIRP). [3] The government says it has given 60 of its struggling companies in such areas as manufacturing and textiles financial assistance. The idea is to “revive” private sector growth and stimulate broad industrialization.

But is this government assistance (i.e. subsidies) the best way to spend money in the budget? If nothing else, it raises several questions. Are office bound government bureaucrats the best people to decide which businesses should get money and which ones should not get money? Should the government be in the business of picking winners or losers? If the government likes to use its money to prop up failing, inefficient companies, doesn’t throwing good money after bad reward failure? Conversely, if the government instead prefers to support winners, doesn’t the free market already do this without corporate welfare? And if the government wants to attract foreign investors, doesn’t this kind of socialism create an even worse business climate to foreign entrepreneurs?

The point is government subsidies are a sub-optimal use of public sector resources. Subsidies create opportunity costs which crowd out government money for better alternatives such as health care for workers or a safety net for poor people. A better approach would be to follow Joseph Schumpeter’s creative destruction.[4] The government lets sick and inefficient companies fail, which in turn allows human and financial capital to transfer to more productive and competitive companies. And finally, and most importantly, government subsidies simply address the results of a poor business environment (that is, businesses struggling to survive) rather than the causes of non-oil business failures. [5]

Poor Education System

One cause of non-oil business failures is due to the low quality of Ghana’s education system. The government takes pride in putting more and more students in the education system. The problem is Ghana’s education system fails to prepare the students for the workplace. Instead of educating students with critical thinking skills to solve problems in the workplace or creative thinking skills for indigenous entrepreneurship, more and more of Ghana’s students are trained to memorize and spit back information in a rote learning system.[6] Instead of arming high school and college graduates with the king of thinking skill sets to be valuable assets in a business, university students are stuck in a dead-end rote learning system. The point is competitive corporate leaders don’t want any of these employees from Ghana who can’t think.

Poor Infrastructure

Another cause of the non-oil business failures is Ghana’s poor connecting infrastructure. Ghana’s infrastructure has several problems. First, many of the infrastructure projects have a low completion rate. Second, the existing infrastructure suffers from poor quality. And third, there is weak institutional capacity to develop new infrastructure.

To be fair, the central government is trying to beef up federal spending on infrastructure in Ghana’s 2019 federal budget. The government aims to establish Ghana as a regional transportation, energy and logistics hub. The government also plans to establish the Ghana Asset Management Company in the 2019 budget in order to "ensure efficient management of infrastructure." The problem is it takes time to create the kind of comprehensive infrastructure needed to create a supportive business environment and widespread industrialization.

Electrical Power Problems[7]

A key constraint of industrialization is Ghana’s unreliable and costly supply of electric power. In fact, Ghana’s electricity sector is constantly in crisis. Poorly educated and trained workers and managers provide poor maintenance which in turn results in outages. The gap between supply and demand is greater than ever, with black outs and brown outs common occurrences. While Ghana currently has over 4,000 MW of installed generation capacity, its actual availability rarely exceeds 2,400 MW due to changing hydrological conditions, inadequate fuel supplies and dilapidated infrastructure.

There are several reasons for why Ghana’s investment and enabling power environment is inadequate and faces numerous large issues and bottlenecks. The creditworthiness of its utilities is limited. Ghana over-contracts new plants. And Ghana’s procurement framework lacks transparency. [8]

There are several options for reducing the gap between supply and demand for electricity. If money was not a problem, increasing grid transmission capacity and investing in more power plants would be attractive politically. If getting political support was not an issue, increasing the price of electricity would clear the market and be attractive economically. The trick is to do something economically decisive while maintaining political stability. That’s not easy.

Ghana’s electrical power sector is also saddled with poor financial health and a large legacy of debt. Why is debt so high? Even if customers actually paid their bills, power is still being sold at a loss. Electricity rates are set too low to recover generation, transmission and distribution costs. Between collection rates and poor infrastructure, the losses in the electrical sector reduce Iraq’s annual GDP.

At first glance, one could argue that Ghana does not have a shortage of capacity; rather it is incredibly inefficient in its use of existing capacity. If Ghana was able to increase the efficiency of existing generation, then a substantial increase in usable electrical supply would be possible without spending a lot of money for new infrastructure. If grid operators had the political will to minimize unscheduled maintenance outages and ensure that the correct standard fuel was available in sufficient quantities for existing generators, then the existing electrical infrastructure could produce an additional 20-30% megawatts, thus closing most of the gap between demand and supply without the addition of more electricity generation capacity.

But political realities make this option to balance the supply and demand for electricity unlikely to be chosen. With no good choices, Ghana has had to maintain its focus on generating as much electricity as possible. That means setting aside a large chunk of the federal budget to provide investment and transfers to the power sector to make up for revenue shortfalls. Therefore, Ghana favors spending lots of money on building new power plants – or a relatively large % of total government spending. At this point, Ghana’s electricity sector must swim at full speed just to tread water.

Agricultural Challenges

While it’s important to industrialize Ghana’s economy so that it does not rely so much on the oil sector, it’s also important to reverse the neglect of agriculture in the economy. Despite generating almost half the employment in Ghana, farming output has been underperforming relative to the overall economy and struggling to keep pace with population growth in recent years. While the average overall GDP growth over the past decade has been close to 7% a year, agricultural growth has been less than 4%. There are several reasons for agriculture’s weak productivity. Rapid urbanization, a lack of modernization and climate change have all taken their toll on agriculture. [9]

In exploring agricultural weakness in Ghana, it’s important to understand that most of the farmers are small, subsistence farmers who can’t afford to modernize their equipment. Even if they could afford to modernize, poor roads give them no incentive to go beyond subsistence and produce a larger crop. So Ghana’s farmers need better roads.

Ghana’s farmers also depend on rain. Unfortunately, climate change has produced a hotter and wetter season and a drier dry season. In recent years, this has often translated into more droughts, especially in the semi-arid north of the country. As a result, the cultivation of certain crops (including rice and maize) are becoming less viable and farmers need to switch to more drought-resistant crops.

Unlike in some African countries, systematic irrigation is almost non-existent in Ghana. Even if irrigation was more prevalent, neighboring countries reduce the quantity of water downstream in Ghana. Finally, low levels of rainfall reduce hydroelectric power, which in turns slows down the non-oil sector of the economy. As a result of weaker non-oil economic growth, Ghana’s central government has less money to buy fertilizer, seedlings and better transport for Ghana’s small, subsistence farmers. [10] Therefore, other stakeholders need to fill the gap.

Environmental degradation is another reason for low agricultural productivity in Ghana. For instance, farmers have little protection from illegal miners who have a detrimental impact on the environment and agricultural land. Ground water becomes polluted and agricultural land is destroyed because contamination is left in the soil even after the miners have long gone. Ghana also performs badly with deforestation, which combines with climate change to result in desertification. All of this weakens agricultural productivity and reduces agricultural output.

Of course, farmers in Ghana must also be responsive to what consumers in Ghana want. And consumers in Ghana increasingly want processed food. While this rising demand for processed food is potentially a new market for Ghana’s farmers, Ghana presently lacks enough factories to manufacture processed foods locally. Inadequate transport links and electrical power constraints in rural areas are also show-stoppers even if Ghana had enough factories for processed food. Since Ghana’s central government lacks the capacity locally to accommodate the rising demand of Ghana’s consumers for processed food, Ghana is forced to import processed foods for its consumers.[11] Rising imports for processed food have worsened Ghana’s balance of payments and made it even more financially difficult for the central government to support Ghana’s small, subsistence farmers.

Ghana’s central government often speaks confidently about how it can improve agricultural productivity. But that’s public relations rhetoric, not action. To be honest, the capacity that the central government to scale up public investment in agriculture is limited. This weak capacity is reflected in poor information flows and the slow transfer of funds. [12]

If Ghana’s central government can’t do much to strengthen agriculture in Ghana, who can help the cause? Potential actors such as local government, banks, the private sector, foreign governments and international non-governmental organization (NGOs) need to step up and help facilitate the necessary changes in Ghana’s agricultural sector.

There is no lack of changes that Ghana’s actors need to facilitate. For instance, they need to help farmers understand the complexity of the value chains downstream from farmers. Too often the harvest gets stuck in warehouses because milling facilities are inadequate. [13] But these actors cannot operate in a black hole. Ghana’s government needs to be decentralized. There needs to be more operational capacity at lower administrative levels. [14]

Moreover, foreign investors are unlikely to support agribusiness in Ghana because deep-seated land tenure problems make it hard for any outsider to feel secure on any land they wish to acquire. [15] In addition, banks also play a key part in providing credit to help farmers acquire the machinery and other supplies that they need. But this is not going to happen overnight. Banks are reluctant to lend to farmers until a more mature insurance sector develops better tools to mitigate risk to lenders. [16]

Perhaps the best hope lies in hand in hand with the industrialization we discussed earlier. Given the limitation of government and other outside agencies to effect an agricultural transformation individually, much will depend on the ability of all the stakeholders to work together. Public-private partnerships offer promising opportunities for cross-sector collaboration. [17] Another key linkage is likely to be between the agricultural sector and private industry. That said, that happy marriage of good intentions does not always occur. For example, a sugar factory at Komenda had to cease operations shortly after opening last year because it could not get hold of the sugar beet it needed. [18] An inverse problem took place in Ghana’s cashew sector when the raw crop was bought locally and overseas, thus creating a large oversupply of the raw crop and a cashflow problem for Ghana’s local processing plant. [19]

Cocoa, which dominates Ghana’s agricultural sector, is also constrained by several issues. [20] In this regard, Ghana’s cocoa industry faces 3 major problems. First, poor transport infrastructure reduces the connectivity between cocoa farms and its potential markets. Second, too much of cocoa production depends on the high level of subsistence agriculture with limited investment. And third, too much of the crop faces the prevalence of disease across the country. [21]

For starters, the weak performance of the cocoa sector has been hampered by the low quality of physical infrastructure across the country. Since coming to power in 2017, the government has proposed an ambitious agenda for transport development, but it has only limited funds and expertise to achieve this itself.

That said, there has been a promising development recently. The government has announced that work is set to resume on the cocoa roads project, which was initiated by President John Mahama back in January of 2017 but was suspended in July of 2017. The cocoa roads project was started to improve transport links from cocoa farms to markets across the five regions where cocoa is grown.

Now let’s look at the second cocoa problem. Production of cocoa is divided between a small number of large commercial farmers who dominate agricultural exports and most cocoa production which is carried out by subsistence farmers on small plots of land. While these subsistence farmers provide most of the cocoa jobs, they remain inefficient and largely unproductive. Government efforts to bolster their production have not generated meaningful results.

Third, cocoa production volumes have deteriorated in recent years. A re-emergence of swollen shoot disease in Ghana is estimated to have affected at least 17% of cocoa trees. Additionally, Cocobod -- Ghana’s government run cocoa agency that creates a price floor for cocoa prices -- estimate that some 23% of Ghana's cocoa tree stock is over 30 years old and has become unproductive. As a result, cocoa farm yields are far below their productive potential. [22]

Cocobod is in talks with lenders for a US $300 million medium-term facility to fight cocoa diseases. This would be vital to increase yields in the sector. But if the small number of politically powerful large commercial farms benefit the most from such a loan rather than the smallholder farmers that constitute a large percentage of the cocoa sector, it would limit the impact of the fight against crop diseases.

Cocobod’s intentions and plans to fight crop disease deserve three cheers. So do Cocobod’s efforts in the past strengthen Ghana's cocoa sector by arranging financing for a variety of projects, such as arranging training on yield-enhancement techniques; improving the provision of storage facilities; railway infrastructure development; and mechanization of the farming process. However, these efforts have often achieved only limited success because other essential partners for successful cross-sector collaboration have been absent.

That said, one promising development to help the cause occurred in September 2018 when Côte d'Ivoire and Ghana reiterated their bilateral intention to increase co-operation in the cocoa sector. They aim to harmonize marketing systems and co-ordinate bean sales. They aim to work together to tackle disease as well as the problem of old and blighted trees. Increased synergy in production and crop protection should have a significant positive impact on economic activity in both countries. [23]

Of course, Ghana’s farmers also need to adapt if agricultural output is to rise. Farmers need to buy into the transformation in a variety of ways. For instance, farmers need to overcome their own outdated habits and antiquated cultural values. As more and more of Ghana’s men abandon their farms and migrate from villages to urban areas in search of better paying jobs, patriarchal mind-sets need to change to recognize that more and more farmers are women. [24] The women farmers need to be empowered with a clear title for land ownership.

Strengthening Food Security

The result of all the issues we’ve talked about is that Ghana cannot fully feed itself. To strengthen food security Ghana needs to reconcile the supply and demand for food. That requires a balanced food strategy. Ghana needs a balanced food strategy which puts an equal emphasis on reducing the demand for food as much as increasing the supply of food.

On the demand side, Ghana needs to reduce waste and partner with the US navy to protect the supply chain management of food from farm to fork. Ghana also needs to strengthen economic development and reduce population growth. On the supply side Ghana needs to increase its yields, use resources more efficiently on small subsistence farms, grow diverse crops and grow them differently, apply better farming techniques, invest in research and development, capitalize on urban farming, increase aquaculture's productivity and develop new technologies for its small farmers.

In addition, Ghana needs to develop a more sustainable agricultural strategy which improves the environment by stopping illegal mining, deforestation and desertification. Ghana also needs to shift to more organic farming and improve land and water management.

Even if Ghana can reduce food insecurity in the short run, Ghana’s government officials need to ask themselves whether trends have indeed invalidated Malthus's thesis (about population growth outpacing the food supply), or whether climate change will keep creating droughts in northern Ghana and worsening food insecurity. One thing is certain. Given that the world population could rise to over 11 billion people by the year 2100, there will have to be a lot more food available to meet the demand.

Most of the ways to grow more food result from greater farm output, which can be increased either by developing new farmland in Ghana or by making Ghana’s existing farmland more productive. Ghana’s food supply also benefits from reducing the demand for feed food (e.g., reducing population growth) and by developing new sources of food. At the same time, there are many seemingly marginal changes in how Ghana manages farming that could substantially affect chronic shortages in Ghana.

Ghana’s efforts to make better use of existing cropland, to reverse deforestation, to vest women with land ownership they now lack in too many agricultural communities, to modify Ghana’s traditional patriarchal farming practices, to reduce losses of each harvest to pests and decay--each and all could increase the amount of food that is available each season for Ghana’s consumers.

Profound systemic change, such as was prompted by the principles of the Green Revolution, is more problematic. Biotechnology, once the hope of many agricultural specialists, may never rival the Green Revolution's legacy, but it is also probably too soon to write it off. Unanticipated breakthroughs, new theories, proof that genetically altered foodstuffs do no harm to humans when consumed directly or through animal protein--all have the potential to stimulate quantum shifts in the global supply of food. Yet we've seen enough constraints to question anyone's forecast of a food cornucopia in Ghana.

In the near term, strategists need to avoid the twin pitfalls of complacency about Ghana’s food production and doomsday alarms about food insecurity in Ghana. What is needed from Ghana’s political leaders is an unprecedented level of cooperation with all its stakeholders in the formulation of a long-term food strategy for Ghana. One consequence of failure could be a worsening resource-driven insurgency in northern Ghana s that might have been mitigated had policymakers understood the nature and extent of Ghana’s food supply problem and taken appropriate steps with all of Ghana’s stakeholders to deal with it.

What is needed to avert that outcome is a comprehensive strategy that synthesizes diverse approaches to improving the growth, harvesting, storing, and distribution of Ghana’s food supply, while prioritizing resources for the most promising areas of improvement. Thus, biotechnology, the sensible expansion of cropland, the responsible extension of the Green Revolution technology in neglected arable land, continued basic research into plant genetics, and smarter public policies all are important in this holistic approach. Curbing population growth in Ghana and other demand reduction programs are also essential parts of any plan to stabilize Ghana’s food supply for the long term. None of these objectives will be easy to define or carry out; they all have the potential to affect profoundly the values, cultures, societies, and beliefs of the affected peoples in Ghana.

When Norman Borlaug received the Nobel Prize in 1970 for his research leading to the Green Revolution, he warned that the new methods would provide only a limited respite, 30 years at most, in which governments could develop and carry out supply and demand policies for dealing with the world food supply challenge. We are almost two decades past Borlaug's 1970 - 2000 window of opportunity and Ghana is still groping for that strategy. Until we develop one, there will continue to be those who yearn for simple solutions to the complex problems of Ghana’s supply and demand of food.

The real danger is to relegate Ghana’s food supply to the backwater of its strategic studies as it pursues industrialization as well as oil-driven growth. Ghana’s food strategists need to understand that its food supply is a serious challenge that bears most heavily on its peace and prosperity, especially in northern Ghana. Ghana’s political leaders have an unprecedented opportunity to move this serious agricultural issue to the top of its agenda. If Ghana’s political leaders should fail in this regard, their successors may have to deal with food insecurity and a worsening insurgency in northern Ghana "when it comes to visit" as a major and enduring crisis in the near future.

[1] Economist, After its 16th bail-out, Ghana hopes to put the IMF behind it, 22 June 2019

[2] EIU, Changing the Structure of Ghana’s economy, 23 June 2017.

[3] This industrialization program is in addition to government’s over-ambitious promise of one factory in each of Ghana’s districts (i.e. 1D1F).

[4] See Joseph Schumpeter, Capitalism, Socialism and Democracy, Harper Perennial Modern Classics

Paperback, Business & Economics, November 4, 2008

[5] EIU, Struggling companies receive government support, 5 March 2019

[6] David Perkins, Smart Schools: Better Thinking and Learning for Every Child, Simon and Schuster, May 1, 1995

[7] EIU, Infrastructure to remain weak, despite budget boost, 26 November 2018

[8] Power Africa, www.usaid.gov/powerafrica; For good background see EIU, Africa’s electricity access remains inadequate, 12 March 2015; EIU, Ambitious plans to boost power output, 19 July 2012; EIU, Mixed prospects for the power sector, 9 October 2013; EIU, No Light at the end of the tunnel for Ghana’s power sector, 27 May 2015; and EIU, Legal challenge could hold up power sector reform, 1 May 2018

[9] EIU, Government seeks to promote agricultural development, 15 January 2016

[10] Ibid. and see Leif Rosenberger, Reconciling the Global Supply and Demand for Food, Maven/Economonitor, Roubini Global Economics, 28 February 2018.

[11] Ibid.

[12] Ibid and see EIU, Enabling agriculture to reach its potential, 22 July 2014

[13] Ibid and see Christopher Ward and Sandra Stuhl, Water Scarcity, Climate Change and Conflict in the Middle East: Securing Livelihoods, Building Peace, IB Tauris, New York, 2017

[14] Ibid.

[15] Ibid.

[16] EIU, An agricultural renaissance is feasible, but challenging, 6 March 2017

[17] EIU, Public-private partnerships offer opportunities in Ghana, 13 November 2018

[18] Ibid.

[19] Ibid.

[20] EIU, Limited growth prospects for cocoa, 30 Jan 2019 and EIU,

[21] Ibid.

[22] Ibid.

[23] See EIU, Ghana and Côte d'Ivoire lift cocoa-sales suspension, 19 July 2019 for a discussion of why Ghana and Côte d'Ivoire dropped a bilateral price floor for cocoa.

[24] EIU, Government seeks to promote agricultural development, 15 January 2016

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