We ignore manufacturing at our peril

Ghana’s economic growth story has been the envy of most countries, including the world’s advanced nations -- where governments are still labouring to rebuild their economies from the ruin caused by the worst financial crisis since the 1930s.

In typical Chinese fashion, Ghana’s GDP growth has topped 7 percent for a decade, and this week the Economist Intelligence Unit (EIU), the London-based economic research and analysis firm, said the country ranks 14th in the world for its rate of economic growth.

But look at the state of manufacturing and the country’s industrial base, and the celebrated GDP growth seems like a facade. The conventional wisdom is that economic modernisation begins from agriculture through manufacturing and then to services. But Ghana, traditionally an agricultural economy, is not treading this conventional path. The economy has leapfrogged manufacturing into services, leaving manufacturers in the lurch. And yet this other road is not leading to prosperity as the services sector does not have the same capacity for job-creation as manufacturing.

“Manufacturing is integral to economic development. Scarcely any country in the world has developed without passing through this route,” said Frank van Rompaey, the United Nations Industrial Development Organisation’s (UNIDO) representative to Ghana. “There is a need for Ghana to embark on structural change for industrial development.”

The benefits of industrial transformation are several, including rapid productivity growth, stable, well-paid jobs, the fostering of innovation, and facilitation of trade integration through exports. But the country’s manufacturing data are dismal.

Manufacturing value-added per capita in constant 2005 prices is US$43.13, compared to a lower middle-income average of US$181.35 and an average of US$127.27 for sub-Saharan Africa, according to van Rompaey. As a share of GNP, Ghana’s 6.5 percent trails the lower middle-income average of 16.1 percent and the 10 percent of sub-Saharan Africa.

“There’s hardly any foreign direct investment going into manufacturing, and hardly any export dynamism in manufacturing,” van Rompaey said.

Foreign investors like to extol the virtues of Ghana as a destination for capital, but most foreign direct investment flows into mining, oil and gas, and the financial sector.

“Manufacturing attracts low FDI because of the challenges it is facing in this country,” said Nana Owusu Afari, president of the Association of Ghana Industries. “We are telling government that if you don’t concentrate on manufacturing, you are not going to create the necessary jobs that we are fighting to create. It’s the manufacturing sector that employs a lot.”

Cynical about the central bank’s inflation-targetting policy, Nana Afari said despite the Bank of Ghana (BoG) keeping inflation below 10 percent during the last three years, interest rates on credit have not been falling.

Part of the cause of expensive credit is the accelerating pace of government borrowing. With the government cranking up spending ahead of last December’s presidential election, the budget deficit soared from 4 percent in 2011 to 11.8 percent in 2012.

As banks, drawn by the lucrative yields on government debt help to finance the deficit, they have little incentive to lend to the private sector -- or at best would do so at interest rates higher than the average of 20 percent on Treasury bills and bonds.

Manufacturing is also stymied by insufficient electricity, which has also become costlier after government slashed subsidies in October, pushing up the price by 79 percent. State support for manufacturing is meagre despite a boost to revenues from the oil industry.

The paradox is that oil may lead to a complete destruction of the manufacturing sector if Ghana does not avoid the Dutch Disease, said van Rompaey. The Centre for Policy Analysis (CEPA) has already warned of symptoms of the Dutch Disease, with agricultural growth, which peaked at 7.4 percent in 2008, slowing to a crawl -- registering 0.8 percent in 2011 and 1.3 percent in 2012.

“If you take the fact that agriculture and manufacturing growth has not been encouraging, you need to be mindful of the Dutch Disease,” van Rompaey said. “But the impact of the Dutch Disease depends on public choices. You have to increase public investment in infrastructure and special economic zones. This was done by Malaysia,” he added.

To turn its fortunes around, manufacturing needs a facilitative state and an industrial policy formed from a consensus between industries and government, van Rompaey said. Two years ago, the Ministry of Trade and Industry launched an industrial policy and its related implementation plan, but the launch remains the last that has been heard of it.

“Industrial policy is not just about fiscal incentives; it is a process,” said van Rompaey. “You need a dialogue, not a patron-client dialogue; and you need government and the private sector sitting together to identify opportunities.”

So are there opportunities for Ghana’s manufacturers? van Rompaey thinks so: “Rising wage rates in China offer a lot of opportunity for African countries to move into segments such as apparel and leather manufacturing. The prospects for Ghana are more in the area of agro foods, where demand is projected to double in the BRICS (Brazil, Russia, India, China, and South Africa) in the next 30 years. That provides a lot of prospects.”

Pharmaceutical production also holds great promise for boosting the technological input of the manufacturing sector, he said, and Ghana can scale the intellectual property rights barrier by adopting technologies that are freely available, while also encouraging innovation.