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Feature Article of Wednesday, 27 July 2011

Columnist: Sakyi, Kwesi Atta

The Import Of Middle Income Status For Ghana

Ghana attained Middle Income Country (MIC) status in November 2010 and this stirred up euphoria and a flurry of media hype, bringing to Ghanaians the feel good factor. Thanks to our ex-presidents Rawlings and Kufuor for laying a solid foundation for this to materialize under the able watch of President John Atta Mills. According to a posting on Ghanaweb site, Dr Grace Bediako, government statistician, reported on 8th November 2010 that Ghana’s GDP estimate had been revised upwards to 44 billion new Ghana cedis or the equivalent of 30 billion dollars. With Ghana’s current population at 24 million, this works out to a per capita income (PCI) of about 1,225 dollars. If this trend continues with the population growth rate at 3% and the economic growth rate at 9% per annum, then in 23 years, the current PCI can be quadrupled by the year 2035. The GDP growth for 2008 was 8.4% and 6.6% for 2009. Ostensibly, the global credit crunch was responsible for the dip in 2009. The 2011 budget forecast a stupendous growth rate of 12%. Granted that the population growth rate is 3% p.a and real GDP growth rate is 9% p.a, then the current GDP will double itself in 12 years, which will still leave us in the middle income status. With this high and unprecedented growth, Ghana is poised to attract massive foreign direct investment (FDI), especially with the onset of the exploitation of oil. Ghana is said to have the highest PCI in West Africa and to be ranked 21st in Africa (2010). This year, the World Bank (WB) has ranked Ghana 28th, behind Zambia at 27th. The World Bank has 187 member countries. These rankings are based on per capita income (PCI), using the World Bank Atlas Method whereby the raw nominal GDPs at market prices are deflated to remove the effects of inflation. Of course, to obtain real GDP at factor cost or constant prices, we have to knock off the effects of indirect taxes, add subsidies and avoid double counting of intermediate goods and transfer payments. GDP can be arrived at by three methods, namely the output or value added method, the income method and the expenditure approach. All three methods yield the same results when used correctly, whereby GDP=GDI=GDE. At equilibrium of GDP, planned investment equals planned savings (I=S) and the sum of total leakages equal total injections (W=J) or S+T+M=I+G+X. Ghana is currently operating below equilibrium and so there is shortage of savings and vast room for economic expansion.
By 2023, all things being equal, Ghana’s PCI will have hit double the current estimate to reach 2450 dollars. Countries with PCI of up to or below 1005 dollars are called Less Developed Countries (LDCs) and these subsist on less than a dollar a day. Those earning 1006 to 3975 dollars are (Ghana’s class) the lower middle income countries and those earning between 3976 to 13275 dollars per head annually are in the upper band of the MICs. The countries with PCI above 12,275 dollars are referred to as the developed countries. Even here, there are many categories and classifications such as he Emergent Countries, Asian Tigers, Transition Countries, First World, G8, G20, OECD, BRICS, PIGS, among others. Many rich or developed countries belong to the Organisation for Economic Cooperation and Development (OECD) which is headquartered in Paris, France. This grouping straddles all the rich countries in Europe, Asia, America, Oceania and other parts of the world.
INCOME DISTRBUTION
It is cosy to have a high PCI but then the important issue is to examine how the GDP is distributed among the population. For example, in the oil-rich countries such as Kuwait, UAE, Qatar, Brunei, Saudi Arabia, Nigeria and Angola, the majority of the wealth may be concentrated in the hands of a very tiny percentage of the ruling classes. This unhealthy situation may lead to political and social unrest. In most of these countries, social justice may be lacking. A case in point in Africa is Gabon. This also applies to Nigeria. The end result is a markedly skewed income distribution normal curve or a tightly bowed Lorenz Curve with the Gini ratio approaching unity. On the Herfindahl Index of Firm concentration, we may approach 10,000 or near monopoly by a few well-heeled individuals and firms. To achieve social justice and equity and avoid the wide income gap between the minority rich and majority poor, we can use fiscal policy interventions such as progressive taxes, tax exempt on basic necessities, transfer payments, subsidies and discretionary or discriminatory monetary policies such as giving concessionary loans to the poor. With such soft loans with low interest charges and long amortization periods or even moratorium, the poor can be empowered. Furthermore, the poor can be given welfare benefits such as the dole or unemployment and old age benefits or tax exemptions for those with many dependants. The problem with the administration of such fiscal and monetary policies is that there is lack of transparency, accountability and probity as most often the implementation stage is mired by corruption and riddled with tribalism, homeboyism, political party cadreism, among many other ills. Stipends meant for the vulnerable might be siphoned off by crooked officials into their pockets.
In Ghana, the high incidence of poverty is worsened by the gross and inequitable distribution of the national cake. This is because our fiscal regime is highly centralized in the hands of the central government, to the disadvantage and discomfiture of regional and district administrations. Government officials and the ruling party officionados capture all the fiscal resources, including donor aid. This is known as fiscal paralysis or executive capture. To come out of the woods on this dilemma, we need to revisit our unitary constitution in order to create political space for our regional and district assemblies to perform to their optimum efficiency. This bottom-up development is what is lacking in Africa, especially sub-sahara Africa, with the exception of countries like Botswana and South Africa. If we examine First World Countries such as Sweden, Switzerland, Britain, USA, Germany and Japan, we find that they have powerful and dynamic grassroots participation in the development agenda. Switzerland has cantons which are semi-autonomous to initiate local projects. The same applies to the prefectures in Japan. We in Ghana need a flexible constitution whereby there is greater decongestion, devolution and deconcentration of power at the central government level. This development paradigm or model will be in accord with the advantages often associated with decentralization. We can have unity in diversity and foster rapid economic growth, using this bottom-up approach. It will also accord well with the theory or principle of subsidiarity where local areas know best their needs and how to approach them, instead of having top-down imposition of the development agenda. According to the World Bank online site, there are 86 countries worldwide in the middle income class of countries. Between them, they have half of the world’s population and they subsist on less than 2 dollars a day. The World Bank online site provides interesting statistics on Ghana. Life expectancy or longevity is put at 57 years. This implies that the standard and quality of life has to be drastically improved to reach say 77 years as found in Japan. Ghana’s literacy rate is pegged at 67%. This is nowhere near a country such as Cuba where they have 100% literacy rate. The way forward here is to improve accessibility to quality education and improvement in instructional delivery. We also need vigorous adult education interventions. The rate of unemployment is put at 10.4%. On the Philips short run curve, the ideal unemployment rate which puts inflation at zero is between 4 to 5%. This is the natural rate of unemployment or NAIRU. This means that we are not operating at the efficiency frontier of the production possibility curve (PPC) as there are many underutilized resources. It is heartening to hear the Minister of Education has recently announced that JHS pupils will be given employable skills free of charge to mitigate the serious situation of youth unemployment. This is exactly what they have been doing in Germany for decades. Of course, there is voluntary unemployment which is not related to job vacancies. There is also frictional unemployment which is unavoidable. Our external debt is put at 37.3% of GDP which to me is too high as this puts our imports cover to 3 months. Of course, with oil as collateral, lenders will be willing to lend. What matters most is how loans are utilized to yield long term benefits for Ghanaians and how they can create internal capacity to increase productivity. I think what we need in Ghana is to reduce our costs, seek capital deepening or increasing the marginal efficiency of capital and the marginal revenue product of labour. To be globally competitive, we need to have industrial democracy, industrial stability and harmonious relationship between employers and employees. In Japan, South Korea, among others, they have high fidelity and loyalty of workers, with few strikes and disruptions to output. Single spine or not, Ghanaian workers should work very hard and wean themselves from money illusion because Adam Smith once said, on quote’ the worker is well or ill rewarded, according to his real, not his nominal income.’ We should not put the cart before the horse by looking for fat pay cheques when we have not increased our productivity. That is a recipe for inflation and uncompetitiveness on the global market. We need productivity-related or performance-related agreements with workers so as to obviate labour disputes and stand-offs which can negatively affect and alarm foreign investors. The World Bank Poverty count for Ghana is 28.5%. This figure is relatively low when compared with other LDCs. However, it is imperative to make strident efforts to reduce poverty, especially in rural areas and in the northern and central regions of Ghana. It is estimated that only 18% of the population in urban areas can access amenities and facilities such as electricity, potable water, hospitals and clinics, quality education, use of cars, fridges, gas stoves, TV, cell phones, among others. This is a very serious issue and indictment on service delivery by different tiers of government. Central government, city and municipal councils have to jack up their acts to ameliorate this appalling state of affairs. There is urgent need to stem the tide of rural urban migration and also to adopt serious attitude towards city and town planning.
There is money in the soil so we need to convince many unemployed youths in the towns and cities to go back to the land. This will require their empowerment with skills and capital. Also our rural areas have to be developed rapidly by providing them passable roads, electricity and, medicare and telecom facilities.
Lastly, the World Bank puts merchandise trade at 52, 1% of GDP. This speaks volumes in the sense that it shows the tenacity of purpose and hard work of small scale entrepreneurs (SMEs) and their contribution to the national kitty or GDP. India and China have become economic giants because of this private sector growth. Therefore, Ghana can learn lessons from them by supporting and facilitating the expansion of this growth vector sector. Government should convince banks to give soft loans to these SMEs and also to reduce their interest rate charges, Furthermore, the government should support the emerging rural banks with adequate capital to capitalize our gallant small scale entrepreneurs. The maze of bureaucratic procedures for accessing loans should be drastically reduced and the rampant politicization of loans should cease forthwith. Loans should be given on merit and not on political party affiliation. Incentives should be provided to help these SMEs to grow to fill the market gap because Ghana’s economy is too much import-dependent. This means that local entrepreneurs can fill the market gap so that we drastically reduce imports of food items, textiles, plastics, shoes and simple electronics and machinery. We need some form of protection for some of our local SMEs so that they are not crowded out of business by big multinationals. Business space should be created for them to operate in. Also the government should reduce the maze of duties charged on imported inputs by providing some form of relief.
NOTE:
BRICS- acronym for Brazil, Russia, India, China and South Africa, a recent grouping of emergent countries with robust economies.
PIGS- EU countries currently undergoing extreme financial difficulties and which need bailouts from the EU and the private financial institutions. These countries are Portugal, Ireland, Greece and Spain. Italy may join the list.

During the John Kufuor era from 2000 to 2008, it was targeted that Ghana should attain middle income status by 2030. But alas, by late 2010, Ghana had attained it 20 years earlier, shy of the planned date. What then was Ghana’s status before attaining this enviable status? The poor countries of the world whose population subsist on less than a dollar a day are classified or designated as LDCs (Less Developed Countries). Some economists prefer the expression, developing countries because they think it is a degrading epithet. Besides, development is a dynamic and ongoing process so using the term Less Developed Countries or underdeveloped countries is thought to assume that those countries are in limbo or are static and frozen in time. Far from it. Development is a very broad and omnibus term as its definition encompasses issues of per capita income, standards of living, cost of living or inflation, political stability or instability, economic growth or real GDP growth, improvement in the quality of life, socio-economic advancement, monetary and fiscal stability, access to the basic needs of life, among others. While economic growth refers to increase in real output (physical progress or quantitative output), development is all encompassing as it looks at both tangible and intangible aspects of life. There has been the famous thesis or paradox in academic circles about the situation of economic growth without development. In Ghana in the 60s, Omaboe, Neustadt, Nurske and Arthur Lewis referred to the Ghanaian economy as suffering from that syndrome of economic growth without development. The import of that observation was that even though there had been a quantum leap in physical infrastructure development such as schools, hospitals, macadamized roads, hydro electric power stations and imposing government edifices, the macroeconomic inroads or gains did not translate into well being or the microeconomic aspects of the ordinary Ghanaian. The early 60s were periods of food shortages, extreme poverty and dire economic straits which led to long queues forming to obtain basic items like sugar, milk, toilet roll, among other groceries. Gunnar Myrdal (Swedish Economist) once referred to the cumulative concentration thesis, what is now popularly referred to as the trickle down effect or ripple effects of development being distributed from the core to the periphery or from the top to the grassroots. It is paradoxical indeed to have huge macroeconomic gains which do not reflect at the micro level in the pockets of the ordinary man in the street. This is because sometimes the gains made economically are concentrated in the hands of a few rich and corrupt officials or apparatchiki or cadres.
The World Bank and the UN classify countries of the world in ascending order of affluence into LDCs, Middle Income Countries, Emergent/Transition Countries and the Developed or First World Countries. The LDCs are by the far in the majority out of the 200 countries in the world. Most of them are in Sub -Sahara Africa, South East Asia and South America (Latin America). They include countries such as Burkina Faso, Sierra Leone, Chad, South Sudan, Bangladesh, Somalia, Yemen, Congo DR, among many others. The Middle Income Countries(MICs) are those classified as having per capita income of between 1006 dollars to 3975 dollars. In this group are 3 categories of those in the lower band, middle band and upper band. The Emergent or Transitional Countries are those which have graduated from the middle income status and some of them are experiencing rapid economic growth in their secondary and tertiary sectors. Examples are the BRICS countries made up of Brazil, Russia, India, China and South Africa. In this group are the Asian Tigers made up of Taiwan, Singapore, Thailand, Indonesia, Malaysia, Hong Kong and Philippines. Others outside Asia are Mexico and those in North Africa and Middle East. The First World or developed countries are those with per capita incomes in excess of 12,275 dollars per annum. Even in this group of developed countries are those in the lower band including the PIGS countries. They are Portugal, Ireland, Greece and Spain. These countries are currently suffering massive and chronic external debts and fiscal hemorrhage, requiring bailout from the EU. Those in the top pile of the Developed or First World include Finland, Canada, USA, Switzerland, Britain, Germany, New Zealand, Norway, Luxemburg, Netherlands, France, Australia, Japan, Denmark, Sweden and Belgium. Those in the Emergent/Transition stage are the former communist East European States such as Romania, Poland, Albania, Serbia, Bosnia, Lithuania, Estonia and Hungary. Every year, the World Bank and the UN publish world rankings. The most popular is the Human Development Index which (HDI) which was developed by late former World Bank Economist from Pakistan, Mohammed Ul Haq.
It employs four variables only to rank the countries of the world. These are per capita income, adult literacy rate, access to basic amenities such as water, mediocre among others and life expectancy at birth or longevity. The countries in the First World, dubbed G8 and G20, fare much better on all these economic and social indicators. Shubin and Tobin, USA economists, also developed their own method called Measure of Economic Welfare (MEW) which emphasise non-financial indicators. So also is the Human Suffering Index (HSI) which ranks countries on the basis of human suffering such as civil wars, torture, oppression, hostile physical environment, among other variables.
MODELS OF ECONOMIC GROWTH
Ghana has been fortunate in discovering that development should be bottom-up and not top-down. This is exemplified in the Local Government reforms in the 80s which led to the establishment of District Assemblies. These Assemblies are attempts at decentralization of power from the core to the periphery. Ghana has a unitary constitution which concentrates fiscal power in the Central Government in Accra. However, by following through the development model of the core-periphery classic, the Central Government has created political space for the District Assemblies to plan their own projects with grants from the Central Government. This has been fairly successful except that there is too much politicking and jostling for power at the District Assemblies. W. W. Rostow came up long ago with the 5 stages of economic growth, likening the process to a plane about to take off. Ghana has now come out of the low equilibrium trap referred to by Lebeinstein and is poised at the take off stage, more especially with the recent discovery of oil in commercial quantities. This stage is critical as we have to wean ourselves off massive doses of donor largesse or donor aid, as aid has proved fungible and ineffective. Arthur Okun likens aid to a leaking bucket because by the time aid gets to the recipient at the grassroots, corruption would have dissipated it. What Ghana’s middle income status implies is that donors are going to give us less official aid and we have to borrow more from private sources and depend less on multilateral and bilateral aid. This means we must not buy into the dependency model which Rosenstein Rodan and Raul Prebisch talked about in the past. Ghana should perhaps examine critically inward and outward oriented strategies of growth. Japan chose an outward -oriented strategy because they lacked natural resources but they had plenty of skilled labour and huge merchant fleet to use in bringing in imports of raw materials and to export finished goods. China on the contrary, dug in its heels and adopted an inward-oriented strategy by concentrating on its vast home market and initialy adopting an autarky or closed economy situation. Now they have liberalized and opened up to FDI. India also, at independence in 1947, adopted self-reliance which has paid off handsomely. South Korea, by virtue of its geopolitical location, benefitted indirectly from massive American capital, as it was being shielded from the spread of communism. Ghana should adopt a faster way to develop by attracting to itself massive inflows of foreign capital in areas of infrastructure development, farming, agriculture, tourism, energy development and education. Dr Mahathir Muhamad of Malaysia used the establishment of world class universities as a leverage to accelerate economic growth in his country. Ghanaian entrepreneurs should find efficient ways to add value to Ghanaian goods for export in order to carve a niche in the global market. This calls for integration in the value chain by ensuring that upstream (primary), midstream (secondary) and downstream (tertiary) activities are intertwined to reduce transactions and marketing costs. We have to pay attention to the 4Ps, namely price, product, place and promotion of goods, and the 7Ps for services in terms of processes, people and physical evidence.
This calls for innovative ways of packaging our products and strategically positioning them on the global market. We have to reduce costs in terms of labour wages, interest rate charges, logistics, administrative charges and transportation and storage costs. Government has to find ways to provide incentives to Ghanaians in the Diaspora to increase their remittances to Ghana in order to increase domestic capital availability. Those outside should be given special concessionary rates of interest on their savings as it is done in India. All those returning for good should have all their luggage tax exempted.


WHAT DID GHANA DO RIGHT?
Ghana has scored fairly well on the MDG (Millennium Development Goals) in the areas of education, health care, poverty reduction and access to amenities. There is still vast room for improvement in the area of service delivery. The inflow of foreign direct investment in the last five years has been stupendous, leading to economic growth rate of 8% in 2008. This year, it is projected to reach 12%, the highest in Africa and perhaps the world. This growth is reflected by:-
1. Number of airlines flying to Ghana
2. New foreign companies registering in Ghana
3. Increase in the number of quality houses being constructed
4. Increase in the number of cars on the roads
5. Increase in the number of businesses and tourist arrivals at Kotuku International Airport (KIA)
6. Record output of Cocoa Beans, reaching a high of a million tonnes
7. Increase in the number of media houses and telecom operators in Ghana
8. Increase in the provision of new schools, roads, hospitals and banks

AREAS NEEDING IMPROVEMENT
- A vigorous gender policy has to be pursued to empower Ghanaian women and elicit their full participation in economic development(cf. Tunisian example)
- Interventions have to be put in place to reduce incidences of street kids, youth unemployment and destitutes
- Massive national campaigns to be launched to sensitive people about the ill effects of bribery and corruption
- A major reform of our basic education system to make it market -oriented, practical and qualitative
- Improvement of sanitation in the towns and cities
- Proper fiscal management discipline to be maintained
- Pay more attention to agriculture and rural development.

HOW DID GHANA MAKE IT?
Ghana, Tunisia and Zambia have been identified in the latest World Bank Report for 2011 as having achieved middle income status. How then did Ghana make it?
Starting in the early 80s, the then military regime of Rawlings laid a solid foundation by embarking on aggressive infrastructural development of roads, bridges, schools and ensuring that there was fiscal discipline. Ghana had to introduce austerity budgets with pressure from IMF and World Bank to undertake suicidal stringent measures such as SAP (Structural Adjustment Programme), EPAS (Enhanced Poverty Alleviation Strategy) and HIPC (Heavily Indebted Poor Countries Strategy). These strategies led undoubtedly to massive macroeconomic gains but also led to undue suffering of the masses. It was the period of inflation, unemployment, privatization and massive brain drain. Ghanaians were declared magicians for being resilient and Ghana became a star pupil of the IMF. The Ghana Government, in conjunction with cooperating partners or donors, made a master plan for increasing GDP and assuring sustainable growth. Many former state-owned enterprises were hived off and sold to the private sector. This was to reduce bureaucracy and also government expenditure. Many tax reforms were carried out in the Inland Revenue Services and Customs departments to enhance collection of government revenue. Furthermore, some central government functions were outsourced.
CONCLUSION
It is heartening to note that Ghana is coming out of the woods and her example can encourage other African countries to attain the middle income status. However, there should be no complacency on the part of Ghanaians or the Ghana Government as this achievement is a challenge to work hard to maintain it or even excel by graduating to a higher income bracket. This is because we will no more have access to soft loans from the multilateral institutions. This window of opportunity will however attract to ourselves more FDI, especially from private corporate investors. Let us maintain a stable political and social atmosphere to woo investors.

Reference: World Bank Online Site

By Kwesi Atta Sakyi, B.A.(Hons) Ghana, MPA(summa cum laude) Unisa

Serious comments and critique to:
Email: kwesi.sakyi@yahoo.com

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