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The Mysteries of the Colonized Cedi

Thu, 6 Feb 2014 Source: Fordjour, Asante

Review: Measuring The True State of Ghana Economy Through Prudent Application of Basic Economic Theories: Demand & Supply; Scale of Preference; Opportunity Cost; The Economies of Scale and The Bloomberg FT’s recent Economic Predictions on the Falling Ghanaian Cedi

DUBAI: ECONOMIC OVERVIEW

“The economy of Dubai is one of the most unique and unusual in the world. As an entrepôt, (or free port or porto franco) duties and taxes are not imposed on imported goods. Dubai has numerous free zones including Jebel Ali free zone, Dubai Maritime City, Dubai Internet City, and Dubai Media City. The free zones in Dubai have attracted considerable foreign direct investment (FDI). Combined, the internet and media free zones are called TECOM (Dubai Technology, Electronic Commerce and Media Free Zone Authority). Within them are large multi-national firms such as Microsoft, Oracle Corporation, IBM, and EMC Corporation; BBC, CNN, Reuters, Sky News, and the Assoiated Press are in the media free zone. While many believe Dubai's economy is totally driven by oil and gas, that sector only comprises less than 6% of Dubai's economy. In fact, Dubai's portion of natural gas revenues in the United Arab Emirates is only about 2%. Dubai's oil production is estimated to be about 240,000 barrels per day. By the height of the boom years in 2007, Dubai had come to epitomise 'bling' or extravagence on a national scale. It contains the largest building in the world (the Burj Khalifa), and many other largest/ biggest/ deepest projects, such as the seven start Burj al-Arab hotel and the man-made Palm Islands. However much of this construction boom has been financed by debt. By the start of 2010, the emirate as a whole owes anywhere between $80 billion and $120 billion. Government-linked Dubai World almost defaulted on its debts at the end of 2009, and was saved only by oil-rich neighbour, Abu Dhabi. Its biggest challenge now will be riding out the debt repayment and confidence challenges to take advantage of the fantasy-like infrastructure it has built.” (http://www.economywatch.com/world_economy/dubai) As a resident Ghanaian how do you measure the true state of the county’s current economic indicators?

COMMENTARY

This commentary is premised on basic economic knowledge on the fundamental rules governing demand and supply; opportunity cost; scale of preference; economies of scale, and “The Wealth of Nations” as espoused by renowned economists Adam Smith and commented by one of our cherished authors- Yaw Owusu-Asante, celebrated for his famous O-Level Economics Textbook- “Economics Without Tears”.

The caveat here is that the author of this commentary is not an economist and therefore must treat this attempt as an elementary. As an ordinary citizen of Ghana, to measure the true state of the nation’s economy as observed by Flt-Lt. Jerry John Rawlings, rests on your own stomach: thus, if you are a worker, unemployed or pensioner/retiree relying on the handouts of government, families or relations but do not feel the value or worth of your wages, salary or support at the marketplace where the purpose of your salary or honorary were to be measured, then you could be the best person to feel the real impact of the national economy. The same could be true of people from all walks of life, including children, legally involved in various forms of economic activities within the country in which they reside.

In Ghana, there seems to be no established standards of measuring unemployment- especially, amongst the teeming youth and the difficulty governments struggle to meet the monthly payouts to pensioners or retirees. The global economy and markets are however; quick to respond whenever the chase of the national currency- the Cedi, becomes unstoppable, thereby, forcing its commanding and facilitating roles into financial abyss and hopelessness as the national currency plays fiddle to major world currencies such as the United States Dollar; the British Pound, the Japanese Yen and the Euro.

The classical case in point is the recent fall of the Ghanaian Cedis where Bank of Ghana (BoG), was called upon by the teeming economic stakeholders to hem the national pride which carries the statues and the monuments of the country’s cherished founding-founding-fathers and mothers, so as to avoid the humiliating walkovers by crusading forces and empires from abroad. The forecast; according Bloomberg FT report, is that the Ghanaian Cedi, “will remain under pressure as importers continue to seek scarce dollars to pay for goods procured on credit during the holidays as well as buy fresh stocks for the New Year. So the BoG, said to have been cautious about using its international reserves too quickly to ease the shortage of dollars, nervously, injected $20 million to meet the demands in selected sectors. But the amount; in the quoted words of the Bloomberg, was seen as paltry, with banks saying the central bank must intervene more vigorously lest the cedi, which fell by 3.1 % against the dollar in January, gives up further ground to not just the greenback, but also the euro, pound and the CFA.

This brings us to the fundamental concept of demand and supply as espoused by Adam Smith and commented by Yaw Owusu-Asante and more recently; read from businesscasestudies.co.uk, which states: “The term demand refers to the quantity of a given product that consumers will be willing and able to buy at a given price. As a general common sense rule- 'the higher the price of a particular product the lower will be the demand for it'. The term supply refers to the quantity of a particular product that suppliers (producers and/or sellers) will make available to the market at a particular price. The higher the price, the greater the quantity that suppliers will be willing to supply to the market. Markets consist of individual or groups of businesses that are prepared to supply a product, and customers who demand [or want]the product. Market price is determined by the interaction of the forces of demand and supply.”

But Wants- as “Economics without Tears” emphasized, is simply a desire for a product; and must not be misconstrued as effective demand which is supported with a purchasing decision. Businesscasestudies writes that for demand to be effective the consumer needs to have the money required to make the purchase. “Elasticity of demand refers to the sensitivity of demand to a change in price. The more sensitive demand is (i.e. the more it changes) to a price change the more elastic it is said to be.” So what are the forces behind the cedi/dollar race for overseas trade in products such as rice, garments, poultry and leather which have its composite in Ghana? In the words of Businesscasestudies.co.uk, “Nowhere is this truer than in the development of new production technologies leading to the production of high volume low cost goods.” This means that the Ghanaian manufacturer/farmer, lacking in this basic technological know-how and economies of scale, can be faced with economic realities of high pricing.

Taking Corporate Ghana as a marketplace, it is suggested that an important aspect of marketing is knowing what the demand is for your products. “All companies engage in marketing activities to find out what the demand for their different products will be. For example, Coca-Cola will want to investigate market trends in the carbonated drinks sector, while a bank will want to find out about the demand for financial services. Armed with this information they are able to make appropriate pricing decisions based on what other suppliers are doing, as well as on the demand from consumers in the market,” says businesscasestudies.co.uk. And as we all know; every consumer- being it a service or product, want to compare prices before making informed choice on the basis of his/her financial capabilities and of course within certain time-constrained. So if you spend weeks or decades in having a product manufactured or say, you spend a huge service or direct production cost that makes your final production cost price expensive then obviously, the turnover of that product or service might struggle.

Many Ghanaians, it seems, troop to Asia- specifically, China or Dubai, for familiar products such as textiles, cosmetics and even frozen chicken wings, probably, not because of their outstanding designs, makes or the economies of scale that they enjoy but perhaps, due to the psychological effect that everything origination from Ghana has some doubts or low quality. Yet there had been reported cases where Ghanaian invented print designs are sent to China or elsewhere for reproduction for re-export to the country under the guise of foreign trademarks. There had also been a case where it is told that in an attempt to raise image a Ghanaian produced rise- either from Avatime or else in the Northern Ghana, are sacked in trade-marks purported to have been originated from the United States or from Bangladesh.

Of course there are good omens about economies of scale which includes maximization of production at a lower cost and service time-scale, and where for example, it is easier for large firms to carry the overheads of sophisticated research and development (R&D). But the Economist of UK (Oct 20th 2008) argues that economies of scale, however, have a dark side, called diseconomies of scale. “That the larger an organisation becomes in order to reap economies of scale, the more complex it has to be to manage and run such scale. This complexity incurs a cost, and eventually this cost may come to outweigh the savings gained from greater scale. In other words, economies of scale cannot be gleaned forever.” So travel destinations such as Japan or China; known for its technological breakthroughs, in the same way as Ghana, could also not immune to this. Frederick Herzberg, a distinguished professor of management, is said to have also suggested a reason why companies should not aim blindly for economies of scale:

“Numbers numb our feelings for what is being counted and lead to adoration of the economies of scale. Passion is in feeling the quality of experience, not in trying to measure it.” T. Boone Pickens, a geologist turned oil magnate turned corporate raider, is said to have written this about diseconomies of scale in his 1987 autobiography: “It's unusual to find a large corporation that's efficient. I know about economies of scale and all the other advantages that are supposed to come with size. But when you get an inside look, it's easy to see how inefficient big business really is. Most corporate bureaucracies have more people than they have work.” My O-Level Economist Master- Prince Eyeson explained some decades ago that when you add a variable factor [cocoa plant, cassava plant and a shea-butter tree] on a fixed farmland for some time, output will increase and later decrease. The same could be true of a government, the entrepreneur, or the Dubai/China businesswoman or businessman. If you put pressure on the resources of your workplace or your local currency then you are likely to experience financial or workplace crisis.

Thus if you employ more than the necessary employees needed to do the same piece of work at the same given time and place then chances are that the result will initially rise but eventually decline with inefficiency as overcrowding and lukewarm attitudes begin to set in. On the part of the Ghanaian-China trader, the higher demand you put on the dollar or the pound or the number of times you flock to China for business but without corresponding product/service trading, the consequences are that the worth of your local currency including your nation’s traditional products, are likely to sacrifice its image. The Bloomberg report observes that at the start of 2014, the exchange rate was GHC 2.335 to the dollar, but it slipped to 2.45 Cedis by the end of January and on 04 February it was pegged at 2.4650 to the dollar.

Mr Inusah Musah- Head, Global Markets, at Stanbic Bank in Accra, is quoted as saying: “We are also experiencing a supply issue because the mining sector, which is one of the key forex providers in the country, is going some price challenges. And once you have more demand than supply, naturally, you expect the push.” “Basically, what we have seen from the beginning of the year is that the currency has come under pressure mainly from strong demand on both the corporate and retail side. We are also experiencing a supply issue because the mining sector, which is one of the key forex providers in the country, is going some price challenges. And once you have more demand than supply, naturally, you expect the push.” Though the BoG has supplied dollars to aid the import of oil, non-oil demand - which is also strong - has not been met sufficiently,” he said. Bloomberg quotes a banker who keeps his eye on the currency market - but asked not to be named because he is not authorised to speak as saying: “the remainder of the first quarter is a critical period for the market, with more depreciation pressure on the Cedi' expected from multinationals that will be buying dollars to repatriate dividends to shareholders.”

In the words of Bloomberg “the Bank of Ghana seems to be in a quandary,* however: its reserve's, which per the report, stood at US$5.6billion in November, are enough for only 2.9 months of imports compared to its target of 3 months- and hot all of it is liquid, which limits the extent of its interventions.”

But who must be blamed for these economic/financial uncertainties- the devil, leadership or ourselves? We want to have a car, wish to have a trade, a house, a wife or probably, to have a degree all but with a fixed savings or income? We must make a choice by drawing what economists describe as scale of preference- usually or prudently, by putting the most reasonably important ones at the top of the scale? Most of us including our leaders- both in governance or traditional settings- wanted to be remembered for fanciful things- for example, ostentatious kente or adinkira cloths, jewellery or magnificent buildings instead of viable plough-back investments such as educational sponsorships or establishment of industries which could offer a life-long economic and social leanings to family, country and the unborn generations. The Ask.com defines scale of preference as a basic economics concept:

“It means that there is a list of wants that everyone has that they want to satisfy. This list is then placed in order from most important to least important in terms of needing satisfaction.” Because we all have to make a choice over so many variables that might come on our ways: whether we have to travel to Nigeria, Togo Ivory Coast, China, Dubai, the UK, to do business, there is always going to be a missed alternatives known economics term as opportunity cost for not having that thing. According to opportunity cost is usually defined in terms of money, but it may also be considered in terms of time, person-hours, mechanical output, or any other finite resource. “It is the opposite of the benefit that would have been gained had an action, not taken, been taken- the missed opportunity. The concept of opportunity cost may be applied to many different situations. It should be considered whenever circumstances are such that scarcity necessitates the election of one option over another.” What then, is the opportunity cost of the Ghanaian? In their article: “Europe's meat waste on African menu”, Deutsche Welle (20 Jan 2014) wrote this under the sub-title: “Millions made by selling poultry to Africans”:

“In 2003, Ghana's Parliament tried to fight the cheap imports by increasing in import duties, but after a short time, the government overturned the law.”I think it was the pressure from the international community," says Quame Kokroh from the Ghanaian Poultry Association…"Ghana was negotiating with the World Bank for a debt relief loan at the same time. If the government had not backtracked, then the state would have lost a lot of money." JusticeGhana puzzles: If our great-great-great ancestors were able to mould mud-house in the Stone Age of Wangara; why struggle today, to refurbish our presidential retreats and palaces with our homemade materials and the asafo? You might want to read our earlier article: “Travellers Without Destination”; to understand why the crushing Cedi by invading economic crusaders, deserves no spiritual intervention but rather attitudinal change premised on our own strengths.

Researched and Compiled By Asante Fordjour for The OmanbaPa Research Group

JusticeGhana

References

1. Duba: Economic Overview, http://www.economywatch.com/world_economy/dubai, 11 March 2010

2. Adam Sminth, The Wealth of Nations, www.adamsmith.org

3. Owusu-Asante(1983), Yaw, Economics without Tears

4. “Falling Cedi's hopes hang on BoG”, Bloomberg FT, 04 February 2014

5. What is Scale of preference?, https://www.google.co.uk/#q=scale+of+preference

6. What is Opportunity Cost? http://www.inc.com/encyclopedia/opportunity-cost.html

7. What is Demand and Supply? http://businesscasestudies.co.uk

8. Differential Pricing: Offer Higher and Lower Prices. http://www.pricingforprofit.com/pricing-explained/differential-pricing.php

9. Economies of scale and scope, The Economist UK, http://www.economist.com/node/12446567

Columnist: Fordjour, Asante