Nduom Proposes Economic Stimulus for Ghana

A Stimulus Package for Ghana: By Dr. Papa Kwesi Nduom – April 1, 2009

Ladies and Gentlemen of the Media:

Thank you for accepting my invitation to attend this press conference to share ideas on a stimulus package for the Ghanaian economy. Leaders throughout the world particularly the ones from the developed countries seem to be of one mind about the current global financial crisis – this is not the time to sit and do nothing. The Group of 20 (G20) countries who control the majority of the wealth in the world will meet in the United Kingdom this week to discuss solutions to the crisis. This is the time to act and do something to change the course of the nation. The global crisis is here with us in Ghana.

But in Ghana we seem to be sitting on our individual stools, stuck in our individual corners, talking sometimes, but doing precious little to change our collective fortune as a nation. Getting the nation to come out of this crisis stronger is not a spectator sport. It requires action. I have invited you here today to interact with you as part of my attempt to catch the attention of business, political, religious and academic leaders so that together we can act and not sit by while other nations work to strengthen their competitive positions in the world and protect the prosperity of their citizens. Ghana cannot afford to be left out of this effort to strengthen local economies.

We must also not allow ourselves to be fooled by the message coming out of the capitals of rich nations. They are preaching “…do not rush to adopt protectionist policies”. Yet they are protecting their insurance companies, farmers, automobile manufacturers, banks and markets. They are saying “…do not pick winners”. Yet they are deciding which companies to save and to fund. In America they decided that Lehman Brothers a well known investment banking firm can go bankrupt but AIG a giant insurance company that lost over 60 billion dollars in 4th quarter 2008 alone should be saved. They are saying “…do not interfere in the private sector”. Yet they are deciding who should run automobile companies in the United States of America, banks in the United Kingdom and insurance companies in Europe.

The moral of this is we must stop listening to those who shout globalization and yet act locally to protect their own interests. This is the time to go national and protect the interest of the ordinary Ghanaian. No one will save Ghana but Ghanaians.

Ladies and Gentlemen:

I am not here to comment on the 2009 budget presented by the Mills Administration and approved by Parliament recently. This is not about politics. I have restrained myself from making any comments on the performance of the new administration. It needs time to demonstrate that it can implement the ideas it has for a better Ghana. My objective today is not to criticize but to offer solutions. I am a member of an opposing political party, but I am Ghanaian first.

Ladies and Gentlemen:

I am a Ghanaian who wanted to be President but did not win the 2008 election. But I want a better Ghana like the people who voted in December 2008 with the hope that something different and that is also positive will happen in this country for the ordinary Ghanaian. It is in this spirit that I have called this press conference to offer some suggestions to improve our chances for a better standard of living and a great future for our children and their children. This is the time to define the Ghanaian way and the direction that takes us on a positive road ahead. This is a call for action on the part of our country’s political and business leadership.

I believe that this is the time to find a way to enable Ghanaians to gain control over the domestic economy and adopt nationalistic policies in the management of the nation’s development agenda. But first, we should understand why the world is going through such difficult financial times.

The Global Financial Crisis

Without a doubt, the current global financial crisis is a failure, short or long term of the hands-off free market system. This crisis was not just manufactured in 2008/2009. To learn anything from it, we must understand where it came from. We should at least go back to the OPEC-induced oil crisis of 1973-74. The oil crisis introduced a global financial shock that affected economies the world over including that of Ghana. Inflation shot up and in its wake brought about high unemployment. This together with other factors led to an unprecedented loss of confidence in government participation and intervention in the global economy. Governments started withdrawing from the marketplace in a big way. Privatisation became the order of the day. Wage and price controls were banished along with the removal of barriers to competition. Insurance provided by the state against uncertainties in the marketplace – what socialist states promoted in the past were discredited. International financial institutions raced to developing countries with conditions that required the adoption of free market policies and shrinking the influence of the state in the economy. To some, capitalism triumphed at the expense of everything else. Socialism, state participation in the economy and worse communism were declared dead.

If privatization was the code word of free marketers, deregulation since the 1970s has been the burning “must-have” of market operators. So governments in the developing world went on a deregulation binge. It affected the telecommunications and the financial industries the most. Anything that seemed like the state “meddling” in the affairs of the market was swept aside. It affected the role of Central Banks and government treasuries worldwide. The IMFs and the World Banks of this world jumped in and passed on the deregulation mantra to the developing countries, they required that governments and their regulatory agencies must not “meddle” with the market. Banks, insurance companies, investment bankers and their agents were assured by law of all manner of rights while Central Banks were insulated more and more from “government interference”.

In Japan, Ministry of International Trade and Industry (MITI) was the powerful agency that commanded the external and domestic strategy. From the 1950s onward, it deliberately and successfully supported Japanese companies to adapt to world export markets and provided information and knowledge to enable them to take advantage of world export markets. It facilitated their gaining access to new technologies and together with the Ministry of Finance made Japan an economic superpower to rival the USA. In the 1990s, the Japanese market burst due to over speculation and greed. The market took over. The Japanese economy fell ill and this was blamed on government intervention. Individual interests scrambled to benefit i.e. getting their share of the profits from a free market. But we must note that the Japanese state’s participation or intervention had created wealth in the first place. Korea, Singapore, Malaysia and others gained strength through government intervention.

In the USA, there developed in the late 1960s and early 1970s the view on regulation that participants in the market were “rational actors, pursuing particular interests and treated the political and regulatory systems as variants on markets in which outcomes were bought and sold”. Regulation, many experts reasoned had “outlived its time because technology made it obsolete or because of rigidity”. The airline, telephone, railroads, trucking, electricity, everybody gained “a considerable measure of freedom” from government regulators. In my opinion, leaving the market to operate on its own – deregulation, privatization etc, etc, led the global economy to its current situation of ruin.

The global financial crisis took root in the USA and moved rapidly to other developed or linked economies then gradually spread to other parts of the world. To many, the crisis emerged with the failure of several American financial companies leading to the bankruptcy of companies, recession in developed economies, declining values on various stock exchanges and a general, severe downturn in business.

The inadequacy of controls in banks, investment banks and insurance companies led to bad debts, and debt instruments that were overvalued and became too risky leading to a credit crunch and in turn led to bank failures and a slowdown in economic activity. If banks cannot lend, businesses cannot produce and jobs are lost. This is how the American economy lost about four million jobs. This is what has caused many Americans to lose their homes because they can no longer afford the mortgage payments on them. And it is this that has caused the United States of America to set aside the free market and made its government to interfere in the affairs of the private sector.

Domestic Situation

In Ghana, we must accept and recognize that the global financial crisis is here with us, without a doubt. The Stock Market is experiencing selling instead of buying which means lower prices for shares on offer. The big buy orders from abroad have virtually dried up. We went through similar challenges from 1999 to 2002. We are feeling the effects of global economic difficulties combined with self-inflicted problems. Inflation is above 20%. The Bank of Ghana’s prime rate has gone up to 18.5% driving up the cost of money. Many banks have deliberately slowed down lending. We are selling one dollar today for 1.45 GHC and buying it for 1.55 to 1.65 GHC. Those with a pessimistic (or perhaps realistic) outlook are forecasting buying the dollar for 1.8 to 2.00 GHC this year. Money has been made scarce and so it is becoming very expensive. The ordinary person is borrowing at 48% per annum with the urban and rural poor borrowing at 5 – 8% per month or 60 to 96% per annum. Some businesses have started going back to the old practice of tying prices to the US dollar.

But the important point is that we have not done anything in 2009 to take advantage of the global financial crisis, the inconsistency in the responses coming from the free marketers and the opportunity created to move our people to make sacrifices for a better future.

Do We Need a Domestic Stimulus Package?

In my mind, there is a great need for a domestic stimulus package in Ghana. The 2009 budget does not offer a stimulus package. It is a business as usual budget. Some politicians and economists even say that we do not have a need for any kind of a stimulus because our economy is overheated and they point to high inflation to support their position. That is why they support the actions of the Bank of Ghana to increase the cost of borrowing to reduce money supply and fight inflation. They claim that the Americans need a stimulus package because the consumers are not spending and bankers are also not lending which is different from the Ghanaian situation. Unfortunately for the ordinary Ghanaian, they are so wrong in many ways. This is not the time for textbook economics written for the developed markets – and even the developed world is putting those textbooks aside and seeking practical solutions right for the times we are in.

There is an aspect of the budget statement read in Parliament that needs to be revised in view of the global financial crisis. The Minister of Finance & Economic Planning said: “The policy thrust of the 2009 budget is to reduce the current budget deficit to sustainable levels, improve the exchange rate regime, and work towards the attainment of single digit inflation.” This policy thrust goes against the grain of what is needed to achieve self-determination which requires growth and aggressive action to get the productive sectors of the economy moving.

A survey of manufacturers, traders and small scale enterprises in Ghana if done with accuracy will show low production and productivity combined with high cost. Unemployment is increasing while at the same time, lending for buy and sell activities has increased. As most consumer goods are imported, our import level remains high with increasing pressure on the value of our local currency, the cedi. Without a doubt, we remain a raw material exporter and reliant on development assistance from other countries. This one fact which all our presidents and prime ministers have confronted is what makes us more vulnerable to global shocks – energy, financial etc.

President Nkrumah and to a much smaller extent, General Acheampong took bold steps to facilitate the development of local industries and promoted the implementation of solutions that would enable Ghanaians to gain the commanding heights of the nation’s economy.

I am not asking us to copy the American, British, Japanese, French or Chinese stimulus packages. I am calling for a homegrown Ghanaian solution. The kind of stimulus package I am calling for is one that will give the commanding heights to Ghanaians, ‘domesticate’ the economy and create productive, sustainable jobs.

Ghana Stimulus Package

To have a package that would stimulate the economy in the right direction, it is important that we set the goals we want to achieve. I suggest the following goals:

- Reduce the importation of what we can produce in this country – particularly products where we have a competitive advantage due to the availability of raw materials locally.

- Transform the economy from a raw material to a manufactured goods producer.

- Create jobs for Ghanaians and reduce youth unemployment.

We need consensus over what type of package is needed in the country to meet these goals so I cannot pretend to know everything that needs to be done. This is my offering for the consideration of others with the ability to command the resources needed to make a difference. I know that what I am offering is not new - many others have promoted some aspect of these solutions. My contribution is putting the ideas together into a single package and putting them on a national stage for consideration.

Solution 1: Use Government’s Purchasing Power: We need an aggressive crusade to ensure the mandatory procurement of local of goods and services by government.

No country that has prospered has done so with a liberal government programme that favours imported goods and services. One relatively inexpensive way to enable local producers to find their feet in the market, walk and then run is for the government to ensure that the taxes collected from the people go to fund local enterprises. A very good way to do this is to use the government’s purchasing power. Locally produced items such as fruit juices, soap, electrical supplies, chocolate, rice, etc must be supported through a hard and secure policy that directs all government-funded organizations and projects to buy local with no exceptions.

Also, services provided by local professionals – consultants, architects, road/building/electrical contractors and investment advisors must be given a preference. In addition to providing support financially, such a policy must also come with measures to promote quality through technical assistance. The Koreans did this successfully which enabled them to overcome poverty and gain a giant measure of prosperity within two decades.

Solution 2: Restrict Importation of Consumer Goods Produced Locally:

Quite often when the matter of restricting the importation of consumer goods produced locally comes up, all manner of special interest groups rise up. Sometimes, they pretend they are protecting the consumer by ensuring that they do not pay high prices for inferior products produced locally. Other times, they question the ability of local producers to meet demand. Some also question the ability of local producers to meet demand. They forget that great and prosperous nations are built on sacrifice and a high sense of patriotism. Ghanaians can do what others through their sweat and determination have done.

Those old enough will remember that not too long ago, “Made in Japan” was not a great label. Now that label is widely respected throughout the world. Even in America and Japan, there are trade restrictions that regulate how much American beef is exported to Japan. The European Union does not embrace all imports from every country in the world without quotas, tariffs or special arrangements.

The developed economies became that way with support from their governments including import/export restrictions. Now that they can meet domestic demand, they want foreign markets by kicking the ladder they climbed to prevent countries such as Ghana from moving up the prosperity ladder. They have the support of the International Finance Institutions like the IMF and the World Bank whose policies appear directed at keeping developing countries from being self-reliant in terms of basic consumer products.

Pricing, quality and supply challenges can be overcome when we concentrate our attention on managing the program with a sense of urgency.

Government must spell out which industries and preferably which products will attract preferential treatment through import tariffs and where necessary, restrictions.

Solution 3: Adopt Value Addition to Raw Materials Policy:

This is a good time to spell out clearly the Government of Ghana’s policy on adding value to raw materials prior to their export. A few days ago, the President of Brazil was very clear that crude oil discoveries in his country will have to respect his policy of value addition. He was very clear – Brazil will not become another exporter of crude oil. He wants his country to become even more of a petro-chemicals producer and an exporter of high value products, not raw materials. We need a firm policy that will affect crude oil, timber, cocoa, sheanut, gold, bauxite and other raw materials so that progressively, we can build an industrial/manufacturing base upon which foundation sustainable increase in our standard of living can occur.

Solution 4: Provide Low Cost Funds for Local Producers: Most of the time, as Ghanaians we flog ourselves as being great planners and poor implementers. This has affected our attitude towards industrialization. We have great ideas, but ask any entrepreneur, and he/she will promptly tell you his/her biggest problem is lack of capital to start, continue and expand. It is the lack of private sector capital that led the Italian government to fund ENI and the French government, Elf-Aquitaine both oil companies. National entities such as Volkswagen, Lufthansa and Renault became multi-national companies through government support. In the case of Korea, a country Ghanaians love to compare their nation to, it was a case of government providing the funds and technical assistance under the Heavy and Chemical Industries Initiative. Government officials made investment decisions and controlled credit. Goldstar, Hyundai, Samsung and Daewoo all Korean brand names well-known in Ghana were nurtured and promoted with low-interest government loans, tax incentives and export/import facilities.

The question is where are the Ghanaian brand names? Also, how many people know that Ghana was ahead of Korea in its march towards industrialization in 1966? This was so because once upon a time, we had a state-driven industrialization policy similar to what has made Korea, Singapore, Malaysia to become more prosperous nations and their people better off than we are.

The Government of Ghana can no longer afford to mouth “the private sector is the engine of growth” and leave the situation to improve somehow. We need a deliberate, well-defined and broadly debated plan to fund plans prepared by new and existing local companies. A team of hard-nosed experienced business people, experts from government and the Bank of Ghana and professionals from the financial sector should be put together to help make the selection of companies/industries to support. This team can become members of the Ghana Domestic Business Stimulus Committee under the direction of the President of the Republic. This Committee should work to ensure the identification of beneficiary enterprises, the raising of the funding required and the effective implementation of the stimulus package.

(A related matter is the need to accelerate the implementation of the new Pension Law which if diligently done and actively promoted will help accumulate a significant pool of long term money that can be used in financing productive ventures in the country.)

We must be bold, innovative and comprehensive in our approach.

Solution 5: Reduce the Cost of Money: It is difficult to think that interest rates are as high as they are in Ghana and yet we still expect that agriculture and manufacturing particularly agro processing will gain a boost somehow as if by magic. The policy of inflation fighting which has been used for more than three decades now has proven not to be a stimulant for growing domestic industries. I am in favour of fiscal responsibility but we cannot use a low budget deficit as the indicator for success in a country in need of development and growth like Ghana. Therefore, we must attack the stigma associated with cooperation between the political administration and the Central Bank.

In addition to the support the Bank of Ghana must give in funding selected enterprises by the state, it must lead in the effort to reduce the cost of money that is used for productive purposes and not for buying and selling imported goods. The maximum level of interest rate should not exceed 15% for those enterprises selected to participate in a stimulus package designed to strengthen local production capacity.

Related Solution 6: Education, Sanitation, Public Sector Reform and Culture: The five solutions recommended above need to sit on an important bedrock made up of the type of education that will support industrialization, a clean and sanitary environment to rid the nation of preventable diseases for productivity gains; strengthening of the public sector to facilitate the work of the private sector; and attitudinal change so that we can development a culture of self-determination and the will to succeed.

Financing the Stimulus Package

We must find the money to provide the stimulus required. About 5 billion GH Cedis will be needed as an initial investment to begin the strengthening and transformation of our economy; to provide it with the ability to deal with external shocks in the future; and create the jobs our people need to improve their standard of living. It will take sacrifice and consistency of thought and action to find the money and make it work.

The sources of funding should be the Bank of Ghana, the Government of Ghana and the Financial Institutions. They should be tasked to commit to their share of funding at an agreed low cost to support the stimulus package over a two year period. For example:

1. The Government of Ghana working with Parliament should adopt the ‘Buy Local’ policy of using the purchasing power of the state for goods and services.

2. The Government of Ghana working with Parliament should pass laws that encourage local production and restrict imports through a combination of tax incentives, import tariffs, technical assistance, etc.

3. The Government of Ghana should commit to providing its share of low cost funding for the stimulus package (e.g. 2 billion GH Cedis).

4. The Bank of Ghana should commit to providing its share of low cost funding for the stimulus package (e.g. 1.5 billion GH Cedis).

5. The Financial Institutions – universal banks, savings and loans companies, rural banks, venture capital funds etc. should commit to providing their share of low cost funding for the stimulus package (e.g. 1.5 billion GH Cedis).

As has been said by others, “…extraordinary times require extraordinary measures”. I could not have imagined that the day would come for an American government to ask the Chief Executive of General Motors to resign his position in that company or give Chrysler a few days to execute a merger with an Italian company, Fiat. The question is “…what is the Ghanaian government telling local enterprises to do to become stronger financially and more competitive in the market place in order to create more jobs in this country?”

This is the time for Ghana’s leaders to show what they are made of. I do not have all the answers. But this is my contribution. I believe that we need a stimulus package that will do something different and enable our economy begin the transformation from a primitive raw materials export base to a developed manufacturing and related service base.

We need a package that will be biased towards strengthening domestic industries, provide employment for our youth and give us the ability to fight external shocks successfully. It is my hope that what I have presented will be considered in the spirit with which it was prepared – as a contribution to the national thinking process to provide solutions to help us achieve a better Ghana. We must act with a sense of urgency to bring about change Ghanaians can feel in their pockets.

I will now try and answer your questions and consider your comments as well on what I have presented to you.

Thank you for listening to me.