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Opinions of Wednesday, 11 August 2004

Columnist: Gyamerah, Michael

The N.P.P?s Voodoo Economics

We read with trepidation and amusement the piece attributed to the president Mr. J. A. Kufour titled ?I?ll make Ghana Rich? reported by Ernest Prepra Antwi and Sheila Sackey in the 15th July, 2004 issue of The Daily Guide. The president was reported to have ?outlined his vision of making Ghana a rich (middle-income) country in the not too distant future?, when he formally launched the National Medium Term Private Sector Development Strategy in Accra on 14th July, 2004. To achieve this, he suggested ?that the country must endeavor to achieve and sustain a GDP growth of 8 percent per annum?.

In this article we present an analysis of the president?s claim to demonstrate that it is simply voodoo economics without any basis in the present Ghanaian conditions. To avoid any confusion in the mind of the reader, definitions of the terms Gross Domestic Product (GDP) and Gross National Product (GNP) ? now referred to as Gross National Income (GNI)- are presented in plain English. The definitions are as presented by the Development Economics expert Professor Michael P. Todaro in his book ?Economics For A Developing World?, Longman (ISBN: 0 582 64343 0).

The Gross Domestic Product (GDP) refers to the total monetary value of all goods and services produced within the geographical boundaries of a nation during a given year. It is calculated simply by valuing the outputs of all ?final? goods and services at the actual prices at which they are bought and sold (so-called ?market? prices) and then adding the total. It should be noted that the market value of all ?intermediate? products used to produce the final output, e.g., cotton for clothes or steel for bicycles, is excluded from the calculation of GDP since their values are implicitly included in the market prices of the final goods. The word ?domestic? implies that only the income produced in that country is accounted for. Income that arises from investments and possessions owned abroad is not included in GDP estimates.

The Gross National Product (GNP) or Gross National Income (GNI), however, refers to only that part of the GDP which is actually produced and earned by, or transferred to, resident nationals of a country by nationals of that country working in other nations. The earnings of foreigners which arise out of their domestic economic activities are therefore, excluded. In a country with a substantial foreign participation in the economy, where a large part of the total domestic income is earned and repatriated by foreigners and foreign corporations, the GDP will be much larger than the GNP (GNI) and the growth of the former may not be correlated with the growth of the latter. Statistics of GDP growth may therefore, give a false impression of the economic performance of a particular developing country. In analyzing incomes earned by nationals of a country, the use of GNP or GNI is a more appropriate measure and will be used in this article.

Finally, while the Gross National Income (GNI) is commonly used by Economists as a measure of the overall level of economic activity of a country, the Gross National Income (GNI) per head of population, also referred to as GNI per capita (the GNI divided by the country?s population), is frequently used as a summary index of the relative economic well-being of people in different nations.

It is interesting to note that the president stated ?making Ghana a rich (middle-income) country? without telling us whether he meant a lower-middle-income country with an average GNI per capita given by The World Bank Group as US$1390 or an upper-middle-income country with an average GNI per capita of US$5040. Neither were Ghanaians given any indication of the time scale involved ?in the not too distant future?. Sadly, the only number thrown around was the 8% growth of the GDP that he claimed must be sustained to achieve his vision.

For the purposes of our analysis we shall use, as explained above, the GNP or GNI as the more appropriate measure in analyzing incomes earned by nationals of a country. Furthermore, we would accept the 8% annual growth rate of the GDP presented by the president as applicable to the GNP.

Time Required For Doubling the GNI per Capita

To evaluate the president?s claim, the growth of the GNI per capita with time will be calculated. Calculating the time required for doubling the GNI per capita provides a good indication of the performance of the economy and how fast the country approaches a middle-income country (whether in the lower or upper division). The test or evaluation of the president?s claim requires a resort to the use of mathematics, and this is presented in a logical sequence below.

1. Let the current GNI of Ghana = X Let the GNI of Ghana in ?n? years from now = X1 Let the annual rate of growth of Ghana?s GNI = r/100; that is r % In ?n? years, the GNI of Ghana growing at r % per year = X (1 + r/100) ^ n, where the symbol ?^? means ?to the power?. Since the GNI of Ghana in ?n? years from now = X1, we may write X1 = X(1 + r/100) ^ n, which we shall call equation 1.

2. Let the current population of Ghana = Y Let the population of Ghana in ?n? years from now = Y1 Let the annual rate of growth of Ghana?s population = r*/100; that is r* % In ?n? years, the population of Ghana growing at r* % per year = Y (1 + r*/100) ^ n Since the population of Ghana in ?n? years from now = Y1, it follows that Y1 = Y (1 + r*/100) ^ n , which we shall refer to for convenience as equation 2.

3. In (1) the current GNI of Ghana was taken as X, and the corresponding population was taken as Y in (2). Since the GNI per capita is defined as the GNI divided by the population, it follows that GNI per capita =X/Y, and may be referred to as G, and represented as: G = X/Y.

4. Similarly, the GNI and the population ?n? years from now were given as X1 and Y1 respectively. The corresponding GNI per capita = X1/ Y1 and may be referred to as G1, and represented as: G1 = X1/ Y1.

5. Dividing equation 1 above by equation 2 gives: X1/ Y1 = X/Y [(1 + r/100) ^ n / (1 + r*/100) ^ n] and G1 and G may be substituted for X1/ Y1 and X/Y respectively to give G1= G [(1 + r/100) ^ n / (1 + r*/100) ^ n], which we refer to as equation 3.

6. Equation 3 may be simplified by dividing both sides of the equation by G, which may be interpreted as the ratio of the GNI per capita in ?n? years from now to the current GNI per capita. The simplification gives equation 4 below: G1/G = [(1 + r/100) ^ n / (1 + r*/100) ^ n]

7. The GNI per capita doubles when G1/G = 2, and equation 4 may be written as: 2 = [(1 + r/100) ^ n / (1 + r*/100) ^ n], which we may refer to as equation 5. When G1/G = 2, the value of ?n? is the time required for the doubling of the GNI per capita. To proceed further, we first take the natural logarithm of both sides of equation 5. We then obtain the respective logarithmic series of the terms in r and r*, using what is known in mathematical jargon as the general Taylor expansion.

8. The final result after the mathematical manipulations gives the time required for the doubling of the GNI per capita as: n = 69.31/ (r ? r*), which we may call equation 6.

9. Equation 6, that is, n = 69.31/ (r ? r*), states that knowing the annual rate of growth of the GNI (r %) and that of the population (r* %), the time for the GNI per capita to double is easily calculated by dividing 69.31 by the difference of r and r*, that is, (r ? r*).

10. It is worthwhile for the reader to note that in most economics textbooks, a figure of 72 is used instead of the 69.31 obtained above, in order to correct for the assumption made in obtaining equation 6. The assumption was that r/100 and r*/100 should be considered as very small so that all terms in (r/100) ^ 2 and (r*/100) ^ 2 and higher powers in the logarithmic series obtained, may be considered as so small that they could be neglected.

The above mathematical journey is to: - enable the ordinary citizen to easily calculate the time it takes for (1) the population to double given the annual rate of growth and, (2) a fixed amount they have saved for retirement at a known interest rate to double, simply by dividing 72 by the rate - provide the electorate with a way of calculating how the economy is performing when politicians start throwing numbers at them, so the electorate would make informed choices at the polls - demonstrate that the president?s claim as expressed in his vision statement is impossible to achieve even if he wins a second term in office, and - highlight the political implications of the president?s claims.

Voodoo Economics

In order to clearly demonstrate that the president?s claims are false and have no factual basis, no semblance of reality on the ground, the above equation for doubling time of the GNI per capita (using 72 instead of 69.31) and the following data of economic indicators from the Ghana Home Page and The World Bank Group:http//, will be used.

1. The current GNI per capita will be taken as US$290.00 (This 2002 figure, the most current available, is from the Ghana Home Page and is being used instead of the US$270.00 given by The World Bank Group as preliminary estimate for 2002)

2. The average annual growth of the population (1996 ? 2002) will be taken as 2.1 % as given by The World Bank Group

3. A lower-middle-income GNI per capita of US$1000.00 is assumed (based on the Philippines being considered as lower-middle- income country with a GNI per capita of US$1020.00, even though The World Bank Group?s lower-middle-income average was given as US$1390.00)

4. President Kufour?s projected 8% annual rate of GDP growth

Using the above data, the time for the GNI per capita of US$290.00 to double to a value of US$580.00 is given by: n = 72/ (r ? r*), where r = 8 %, and r* = 2.1 %, that is n = 72/ (8 ? 2.1) = 72/5.9 = 12.2 years. It will take an additional 12.2 years for the GNI per capita of US$580.00 to double to a value of US$1160.00. In order words, a total of 24.4 years will be required for the GNI per capita to increase from US$290.00 to that of a lower-middle-income country of US$1160.00. Equation 4 will be used to determine the time ?n? required for a GNI per capita of US$1000.00 to be achieved. From equation 4, G1/G = 1000/290= 3.4483, and it will take a time given by: n = ln3.4483/ln[(1 + r/100 ) / (1 + r*/100)] = 1.2379/ln[1.08/1.021] , which simplifies to n = 1.2379/ln1.0578 = 22.03 years

The above calculations clearly show that it will take Ghana 22 ? 23 years (that is up to between 2026 ? 2027) to achieve even a lower-middle-income status based on the optimistic growth rate of GDP suggested by the president.

The Political Implications of The President?s Claims

Questions that readily come to mind are these. Why did the president claim he will turn Ghana into a middle-income country when the above calculations clearly show that it is impossible for him to achieve the vision even if he wins a second term that ends in 2008? And given the unfulfilled promises of the president and his NPP government during the 2000 election campaign, can the president be believed this time around? The implications of such a promise to the Ghanaian electorate based on the performance of the NPP government for the past three and a half years point to the following:

1. The president and the NPP deceived the Ghanaian public by making claims they knew or ought to know cannot be realized when reelected, or that 2. The president and the NPP took advantage of the public assuming a majority?s ignorance and limitations in carrying out any analysis to test the validity of the economic data they throw at them 3. The president and the NPP themselves are simply incompetent and ignorant, and incapable of doing the type of analysis above to enable the government give realistic promises to the electorate, and 4. President Kufour and his NPP are harboring a secret plan, either constitutional or otherwise, that would ensure that he or the NPP retain the presidency for the next 22 ?23 years to enable him/them achieve his/their vision of making Ghana a middle-income country.

Any of the above makes the president and his government unlikely to improve the living standards if reelected and we are seeing another attempt at hoodwinking the Ghanaian electorate as was done by the same group at the last elections. The president and his cohort of ignorant economists should not be concerned only with GDPs. We have a better way of quantifying standard of living and development in the Human Development Index (HDI), and that is what we as a country must try to improve. The Ghanaian electorate should no longer be taken for granted or should no longer allow itself to be taken for granted. It would be within the patriotic duty of all Ghanaians to consider electing candidates of pro-Nkrumah parties or genuine Nkrumaist persuasion at the forthcoming elections. That would ensure that the expertise of Nkrumaists, as demonstrated by our analytic efforts here, is brought to bear on the development of genuine and rigorously evaluated programs for our dear country.

We note in conclusion the importance of a global view of the political, social and economic issues facing our country to enable us expose policies which cannot stand the test of rigorous scrutiny. Ghanaians should be guided in the process by the words of Frank Lloyd Wright, the American architect, considered one of the greatest figures of 20th-century architecture: ?Get the habit of analysis ? analysis will in time enable synthesis to become your habit of mind?.

by Michael Gyamerah, Ph.D.
Evans Afenya, Ph.D.
George Kweifio-Okai, Ph.D.
and The NkrumaistForum
Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.