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Economic transformation against rapid deindustrialization in Ghana

Economic transformation against rapid deindustrialization in Ghana

Sat, 19 Jul 2014 Source: Appiah-kubi, K.

Economic transformation is the change in the structure of an economy over time from a subsistence economy, through industrialisation, to an industrial or even post-industrial society. Available evidence suggests that all countries with high levels of economic and social development as well as low levels of poverty have achieved that on the back of economic transformation and industrialization. For this reason governments of Ghana have always regarded economic transformation as a way to change the structure of the country’s economy and reduce poverty over time. There is, indeed, no budget or economic development blueprint without lengthy justifications of the country’s need for economic transformation and industrialization. The medium-term strategy of the NDC government (the GSGDA 2010-2013), for instance, makes socio-economic transformation and industrialization a pre-requisite for the attainment of its long term goal of a per capita income of at least US$3,000 by 2020. The GSGDA even sets an average annual industrial growth rate of 14.5% over the period 2010 – 2013 as a necessary condition for the achievement of economic transformation and industrialization. In the view of the government “to transform the economy and deliver an average growth rate of 8% per annum in the medium-term will require an accelerated industrial development”. The 2014 budget statement, for instance, was presented to parliament as “... truly transformational”. The NDC government thus justified all policies, programmes and projects contained therein as activities “...to reinforce the foundation for socio-economic transformation of the country”. However, despite all these ideals, economic transformation has not taken place in Ghana, because it has failed to achieve industrialization, the precondition for a country’s economic transformation.

What is even more striking is that, despite the much touted economic transformation, there is little doubt that the Ghanaian industrial sector has rather experienced deindustrialisation in recent years both in relative and in absolute terms. Indeed the economy of Ghana is rapidly losing industrial capacity in the face of governments having time and again paid lip service to economic transformation and industrialization. Given past governments’ crusade at industrialization, since independence, the Ghanaian experience is, especially, telling. The evidence appears to manifest itself in almost all measures of economic transformation. All available scientific measures of industrialization, including statistical data on value added (output by sector), employment and investment trends, clearly show a generalized trend towards absolute and relative declines in industrialization and thus underscores the deindustrialization trends in Ghana, particularly, in the case of the manufacturing sector. Manufacturing is of course not synonymous with ‘industry’ (which includes in Ghana mining and quarry, electricity, water and sewerage, and construction as well). However, it is the special specific characteristics of the manufacturing sector that make it important as an ‘engine of growth’ and hence make industrialization important for growth and economic transformation.

There is ample evidence that deindustrialization began to set in Ghana in the 70s and has since then accelerated in terms of production and employment. Between 1976-1982, for instance, industry’s share of GDP fell significantly from a peak of 21.4% to a low of 6.5%. The level of deindustrialization as evidenced by the drop in manufacturing GDP was even more severe. It dropped from 15.5% in 1975 to an abyss of 3.7% in 1982. Even though the situation improved somehow in response to the economic reforms of the 80s it is yet to attain the levels of the 70s. The manufacturing share of the country’s GDP, for instance, has continued to fall consistently from its height of 12.44% in 1985 to about 6.62% in 2012. According to Shafaeddin (2005) Ghana’s growth in manufacturing value added was significantly negative (-3.5 per cent) during the 1990s, implying severe de-industrialization.

Another evidence of deindustrialization is reflected in declining employment trends as an indicator measure. Available evidence indicates that employment in the industrial sector, for instance, declined by 0.2 percent on average per annum during 1980-1991 and has worsened since then, declining annually by 4.6 percent on average. This rapid decline has been attributed to, among others, slow growth, shrinking manufacturing output by sector, employment freezes in the public sector and incessant lay-offs in employment intensive sectors including mining and textiles sectors. This has led to consistent declines in the proportion of economically active population employed in the industrial sector from 19% in 1990 to about 15.4% in 2010. Experts estimate that overall employment and employment in the industrial sector have decreased by 0.3% and 0.2% respectively on average per annum over the years. This has impacted negatively on the overall employment situation of the country, as evidenced in the overall decline of the share of economically active population in formal employment from 17.8% in 2000 to 12.8% in 2010.

Analysis of investment and gross fixed capital formation trends over time also confirm the increasing deindustrialization in the country. Even though the industrial sector appears to have benefited substantially from foreign direct investments in general in recent times, the bulk seems to have gone to the mining, oil and gas sectors with relatively little to show for employment generation. Information available from GIPC reveals that less than nine jobs were generated averagely from every million dollar foreign direct investment between 1994-2012, with less than six jobs being created in the manufacturing sector over the same period. According to ISSER the value of the manufacturing and construction sub-sectors as a proportion of total investments from 2008-2012 as reflected in their gross fixed capital formation has been dropping consistently with increasing shares of total investments accounted for by investments in oil and gas production and exploration. Another indicator that underscores recent rapid declines in the level of investments, particularly, in the manufacturing sector is the consistent decline in the share of credit of DMBs to the sector from 21.4% in 2004 to 15.6% 2012. Similarly government capital investment spending, for instance, has since 2008 declined by more than 50% of total government expenditure from 36% in 2008 to about 17% in 2013. Thus in Ghana continued deindustrialization has come to be associated with absolute decreasing total employment, shrinking manufacturing output by sector and falling levels of real capital investment spending.

Normally the process of economic development of a country follows that, first the share of employment and of the manufacturing (secondary) sector in GDP increases (while that of the primary sector declines) till it reaches a certain level of development in terms of per capita income (around US $12,000) before it declines. The difference with Ghana is that not only has the process of industrialization been slow, but deindustrialization has begun to set in much sooner with serious implications for long-term growth prospects, poverty and inequality.

Globalization, economic liberalisation and stabilization (ERP/SAP), and trade openness have been identified to cause the rising deindustrialization trend in Ghana. Without doubt these factors have contributed to open domestic less competitive low-valued labour intensive activities unfavourably to higher competitive less labour-intensive imports. But the major culprit for the rising deindustrialization trend is the worsening government policy shortfalls, which manifest themselves in lack of clear cut government industrialization policy and prioritization of government goals, lack of consistency and political commitment in the pursuit of government policies, constant shifts in policy directions, etc. These shortfalls seem to have been compounded by a never ending serious energy crisis, deterioration of the macro-economic environment, declining government investment expenditure in infrastructure, high costs of business credit and dwindling availability of long term financing, etc. These factors have contributed to a near strangulation of the industrial sector and a rise in the deindustrialization trend in the country and consequently a failure of all transformational efforts.

Apparently a major cause of the failure in achieving structural transformation can be attributed to the lack of continuity in policy planning for transformation, inconsistencies in the country’s approach to development and lack of focus in policy implementation. For instance, after several attempts the country launched in June 2011 a new industrialization policy to promote a consistent and stable environment for accelerated structural transformation and industrial development. The implementation of the policy was to be effected through an Industrial Sector Support Programme, with a detailed action plan and budget specifying time-bound interventions to be undertaken annually, to speed up the industrialization process over a five-year period from January 2011 to December 2015

The action plan included the establishment of an Industrial Development Fund to facilitate rapid development of Ghana‘s industrial sector. Specifically the structural transformation of the manufacturing sector was to be accelerated with the creation of a ¢297 million fund to be disbursed in medium and long term loans and matching grants by 2015. An amendment to the Export Development and Investment Fund was also proposed to expand its mandate to provide financing for agro-processing as well as a proposed presentation of an Industrial Competitiveness Bill to Parliament for passage to provide incentives for the use of local raw materials and to increase domestic content in local industry. Other activities included the implementation of an Export Diversification Programme, the establishment of Enterprise Development Centres and efforts to give legal backing to the Local Content Policy. Ironically not only have these laudable measures remained unimplemented, the 2014 budget, which is to drive government industrialization policy implementation, does not even mention the national industrialization policy let alone allocate a budget line and make it a focus for policy pursuit.

There is no doubt that the country currently faces two major challenges of unemployment and poverty that require urgent attention through the concerted efforts to transform the economy of Ghana via industrialization. This, however, does not require any new rocket science inventions and investigations but only the discipline and political commitment to implement the good plans and policies available in the country, i.e., do exactly what we tell ourselves we want to do.

Columnist: Appiah-kubi, K.