Economic Diversification through Productivity Enhancement GHANA June 2019 GHANA ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT June 2019 iii TABLE OF CONTENTS ACKNOWLEDGMENTS.................................................................................................................................. vii ACRONYMS AND ABBREVIATIONS............................................................................................................. ix EXECUTIVE SUMMARY................................................................................................................................... xi GROWTH ANALYSIS AND MACROECONOMIC CHALLENGES.............................................................. 1 1.1  Growth Analysis..................................................................................................................................................1 1.1.1 What Kind of Growth and Diversification Suits Ghana?............................................................................1 1.1.2 Key Growth Drivers...................................................................................................................................4 1.1.3 Falling Productivity Growth......................................................................................................................6 1.1.4 Declining Impact of Structural Factors......................................................................................................7 1.2 Major Growth Challenges...................................................................................................................................7 1.2.1 Reliance on Natural Resources...................................................................................................................7 1.2.2 Low Productivity and Investment..............................................................................................................8 1.2.3 Macroeconomic Volatility..........................................................................................................................9 1.2.4 Lagging Human Capital and Infrastructure.............................................................................................11 1.2.5  Stagnant Business Environment...............................................................................................................12 ENHANCING PRODUCTIVITY TO ACHIEVE ECONOMIC DIVERSIFICATION............................... 15 Status of Firm Productivity................................................................................................................................15 2.1  Constraints to Firm Productivity.......................................................................................................................17 2.2  2.2.1 Access to Finance.....................................................................................................................................17 2.2.2  Human Capital........................................................................................................................................18 2.2.3 Access to Land for Industrial Use.............................................................................................................19 2.2.4 Reliable Access to Electricity....................................................................................................................20 Opportunities for Productivity Growth: Exporting and Foreign-Owned Firms..................................................21 2.3  2.3.1 Maximizing Positive Spillovers.................................................................................................................21 2.3.2 Enhancing Service Quality.......................................................................................................................23 INCREASING INVESTMENT FOR PRODUCTIVITY ENHANCEMENT AND ECONOMIC DIVERSIFICATION........................................................................................................ 27 3.1  Overall Investment Trends.................................................................................................................................27 3.2 Constraints to Domestic Private Investment......................................................................................................27 iv GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT 3.2.1  Nominal Interest and Lending Rates........................................................................................................27 3.2.2 Options to Lower Interest Rates..............................................................................................................31 Foreign Direct Investment (FDI) in the Non-Resource Sector...........................................................................34 3.3  3.3.1 Overall Trends in FDI in Ghana..............................................................................................................34 3.3.2 FDI Determinants: How to Attract Non-Resource Inflows?.....................................................................39 POTENTIAL PATHWAYS FOR ECONOMIC DIVERSIFICATION............................................................ 43 4.1  Summing It All Up............................................................................................................................................43 4.2 Short- to Medium-Term: Product and Sector Opportunities.............................................................................44 4.3 Medium- to Long-Term: Laying the Foundation for Economic Diversification.................................................52 APPENDIXES Appendix 1: Disaggregated Productivity Development Patterns (1990–2010)...........................................................55 Appendix 2: Perception Score on the Provision of Selected Public Services in 2017–2018.........................................56 Appendix 3: Firm Performance Measures in Ghana in 2009 US$, unless Specified....................................................57 Appendix 4: Determinants of Technology Upgrading in Developing Countries.........................................................58 Appendix 5: Drivers of Productivity Growth.............................................................................................................59 Appendix 6: Comparison of Financial Sources for the Purchase of Fixed Assets, Selected Countries (in Percentage of Total Asset).................................................................................................................60 Appendix 7: Human Capital Index Variables.............................................................................................................62 Appendix 8: Heatmap on the Perception of Different Factors as Severe or Major Obstacle to Business in Ghana.......63 Appendix 9: Firms’ Performance Impact of Alleviating Obstacles in Services Supply..................................................64 Appendix 10: Regression Results – Drivers of Nominal Lending Rates........................................................................65 Appendix 11: Empirical Strategy of the Econometric Analysis on Investment..............................................................66 REFERENCES.................................................................................................................................................... 67 Table of Contents v LIST OF FIGURES Figure 1: Two Approaches to Diversify an Economy...............................................................................................4 Figure 2: Growth Dynamics in Ghana....................................................................................................................5 Figure 3: Sectoral Value Added and Growth Accounting........................................................................................7 Figure 4: Key Growth Drivers of Real GDP per Capita in Ghana (Percentage Points)............................................8 Figure 5: Export Concentration, 2017....................................................................................................................8 Figure 6: Productivity and Investment....................................................................................................................9 Figure 7: Stabilization vs. Structural Policy Indices in Ghana and Peer Countries.................................................10 Figure 8: Growth Volatility and Fiscal Balances....................................................................................................11 Figure 9: Human Capital and Infrastructure.........................................................................................................12 Figure 10: Ease of Doing Business Score in 2018....................................................................................................12 Figure 11: Global Competitiveness Scores (0–100).................................................................................................13 Figure 12: Comparison of Labor Productivity........................................................................................................15 Figure 13: Labor and Capital Cost.........................................................................................................................17 Figure 14: Proportion of Total Purchase Fixed Assets by Financial Sources (% of Total Purchase of Fixed Asset).......................................................................................................................................17 Figure 15: Access to Finance by Firm Size...............................................................................................................18 Figure 16: Correlation between the HCI and the Productivity of Industry (2010 US Constant Prices)............................ 19 Figure 17: Access to Electricity and Associated Losses.............................................................................................20 Figure 18: FDI in Ghana........................................................................................................................................23 Figure 19: Backward Value-Added Composition, Ghana (%-age of Total Value Added).........................................24 Figure 20: Exported Service Value Added by Sector, Ghana (%-age of Total Exported Value Added)......................24 Figure 21: Firms’ Perception of Some Market Efficiency Issues, 2017–2018...........................................................25 Figure 22: Trends in Investment.............................................................................................................................28 Figure 23: Trend Change of Nominal Lending Rates, Ghana and Comparator Countries......................................29 Figure 24: Factors of Change in Nominal Lending Rates, Ghana and Comparator Countries................................29 Figure 25: Public Debt and Lending Rates in Ghana..............................................................................................30 Figure 26: Value of Collateral Needed for a Loan in 2018 (% of the Loan Amount)..............................................31 Figure 27: Trends in Overhead Cost, Ghana and Selected Countries......................................................................32 Figure 28: Changes in Debt, Lending Rates and NPLs, Selected Countries............................................................34 Figure 29: FDI in Ghana and Selected Countries...................................................................................................35 Figure 30: Ghana’s Composition of Inward FDI Flows, 1997–2016 (in US$Million).............................................35 Figure 31: Greenfield FDI in Ghana and Selected Countries..................................................................................36 Figure 32: Top Sources of Greenfield FDI in Ghana...............................................................................................37 Figure 33: Sectors Receiving Greenfield FDI in Ghana...........................................................................................37 Figure 34: FDI Typology and the Situation in Ghana.............................................................................................38 Figure 35: Host Country Determinants of FDI: A Theoretical Framework.............................................................39 Figure 36: Estimated Regional Market Potential for Ghanaian Products.................................................................41 Figure 37: Ghana Economic Fitness: 2008–2016...................................................................................................45 Figure 38: Ghana Sector Fitness, 2011 and 2016....................................................................................................46 Figure 39: Framework for Mapping Opportunities.................................................................................................48 Figure 40: Potential Opportunities in Ghana by Upgrading and Diversifying Potential..........................................50 vi GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT LIST OF TABLES Table 1: Average Gross Savings and Total Investment, 2000–2017 (in Percentage of GDP).................................10 Table 2: Median of Share of Imported Products in Ghana by Economic Activities..............................................22 Table 3: Summary of Key Policy Recommendations............................................................................................44 vii ACKNOWLEDGMENTS The Ghana Growth and Diversification Study was Benyagoub (Private Sector Specialist) and Kirstin prepared by Michael Geiger (Senior Economist), Ingrid Roster (Consultant) provided inputs for, Steve Loris Gui-Diby (Young Professional), and respectively, Chapter Three and Chapter Four. Some Jean Michel N. Marchat (Lead Economist). Inputs inputs were received from Kaliza Karuretwa (Senior were received from colleagues within and outside Private Sector Specialist) and Kwabena Gyan Kwakye the Bank. Jan Trenczek (Consultant), Konstantin M. (Economist) at different stages of the report prepara- Wacker (Consultant) provided inputs for Chapter tion. The Report was prepared under the overall guid- One. The contributions received from Federico Ganz ance of Abebe Adugna (Practice Manager), Henry G. R. (Consultant), Gonzalo Varela (Senior Economist), Kerali (Country Director), and Errol George Graham Kirstin Ingrid Roster (Consultant), and George (Program Leader). The report was peer reviewed by Clarke (Consultant) were used in Chapter Two. Ivailo Izvorski (Lead Economist), Ian Gillson (Lead Maria Reinholdt Andersen (Consultant), Mehdi Economist), and Mombert Hoppe (Senior Economist). ix ACRONYMS AND ABBREVIATIONS AfCFTA African Continental Free Trade LIC Low Income Countries Agreement LMIC Lower-Middle Income Countries BI Bank of Indonesia LPI Logistic Performance Index CGAP Consultative Group to Assist the M&A Mergers & Acquisitions Poor MENA Middle East and North Africa DEA Data Envelopment Analysis MNE Multi-National Enterprises EAP Asia and Pacific region MSME Micro, Small & Medium ECOWAS Economic Community of West Enterprises African States OJK Indonesian Financial Authority FDI Foreign Direct Investment NPL Non-Performing Loan FGLS Feasible Generalized Least Squares PPP Purchasing Power Parity FX Foreign Exchange R&D Research and Development GDP Gross Domestic Product RCA Revealed Comparative Advantage GTAP Global Trade Analysis Project SSA Sub-Saharan Africa HCI Human Capital Index TFP Total Factor Productivity ICT Information and Communications TVET Technical and Vocational Education Technology and Training IMF International Monetary Fund UNSD United Nations Statistics Division KOR Republic of South Korea WDI World Development Indicators xi EXECUTIVE SUMMARY Introduction After nearly a decade of strong growth fueled by the boom in commodity prices, Ghana’s economy remains undiversified and vulnerable to external shocks. About 40 percent of workers work in non-wage agriculture and most urban workers are in low-productivity informal jobs. Ghana has also suffered in recent years from recurrent macroeconomic instability, linked to election and commodity cycles; a self-inflicted energy crisis; and a financial sector weakened by high levels of bad loans. Going forward the Government’s strategy is to achieve inclusive and sustainable growth, with the private sector as the main drivers for a more diversified domestic and trade economy. In the words of Ghana’s President, the aim is to “build the most business-friendly economy in Africa” and foster the competitiveness of Ghanaian firms. To achieve this, the Government agenda includes improving the business environment and fostering trade; investing in infra- structure; and diversifying the economy beyond hydrocarbons, cocoa and gold. This report strives to analyze the main challenges for economic diversification from a productivity angle. In looking at a set of high-growth economies of the past, the Growth Report 2008 identified com- mon characteristics of successfully applied growth models—the “ingredients of growth”—to inform policy formulation around the world. Accordingly, World Bank (2008) argues that for an economy to grow there is a need for high levels of investment and savings. Investment in human capital is as important as investment in the more visible, physical capital of a country. This is particularly important in natural- resource rich countries. To foster structural change and growth an economy needs access to technology and knowledge through an active transfer of know-how. Export-led growth is associated with high-growth countries, especially if it is of a diversified nature. Developed financial sectors that are open and connected with international financial markets are conducive to economic growth. Finally, macroeconomic stability is one of the main pre-conditions for ensuring long-term growth of an economy. Ghana’s mixed growth performance since independence in 1957 shows distinct challenges of the country to close the growth-gap to the successful economies of the world. From independence in 1957 until 1993, growth was largely stagnant and heavily relied on agricultural output. Between 1994 and 2005, growth sharply accelerated, and per capita GDP doubled in just 13 years. And in 2006–2017, per capita GDP growth averaged 4.4 percent a year, and per capita GDP almost doubled in just 10 years. These shifts in the economic expansion of the country helped to reduce poverty, putting Ghana at the forefront of poverty reduction in Africa since the 1990s; but the growth elasticity of poverty is on a declining trend. At the same time, the Ghanaian economy’s long-term growth record lags when com- pared internationally. Still, Ghana’s economic structure changed significantly over the years and nowadays the service and natural resource sectors are the dominant forces in the economy. On the supply side, from the 1990s to xii GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT the 2000s, there has been a significant increase in the contribution of the service sector and other industries (including mining and oil) as a greater number of people found economic opportunities in those sectors, and Ghana started producing oil. For instance, in 2011, out of 14 percent of real GDP growth recorded, 5.9 percent was attributed to the natural resource sector, and 5.4 percent to the oil sector. Because of those changes, the share of the service sector in GDP increased to about 52 percent in 2012–2016 and the share of the agricultural sector declined to 21.2 percent in 2012–2016. On the demand side, commodity exports are currently the dominant source of growth. But those exports are extremely concentrated: almost two-thirds of all goods exports are concentrated in two products: gold (48.7 percent of total goods exports) and crude oil (17.3 percent of total goods exports). As a consequence of the recent structural change observed in the economy, the contribution of total factor productivity to growth is on a declining path. There is a concentration of jobs in low-pro- ductivity growth service activities while labor productivity is declining in the manufacturing sector. And structural factors have a declining impact on growth in Ghana. While in the period 2000–2015 growth was mainly driven structural factors, their impact lately declined and key macroeconomic factors had a marginal contribution to growth. Stimulating productivity could help unleash new sources of growth, as witnessed in Ghana’s aspirational peers. Increasing investment outside the natural resources sector and mobilizing more domestic savings will be essential to raise productivity and diversify the economy, and to sustain growth. Ghana’s shift to services sectors only marginally contributes to labor productivity growth. In the traditional form of structural change, labor and economic activity move from agriculture to higher-pro- ductivity sectors like manufacturing. In Ghana, however, labor moved into the service sector, albeit with higher productivity than agriculture, but where productivity was fairly stagnant over time. Since the 2000s, an increasing number of people who moved to services found jobs in wholesale and retail trade. But this subsector has a very low productivity that over time experienced even negative labor productivity change. This suggests that the capacity of the service sector to absorb labor in a higher-productivity sector (higher than agriculture) has decreased since the 1990s. The concentration of economic activity in natural resources increases economic volatility and com- plicates macro-management. Amid new oil revenues, political consensus on sustainable fiscal management has been difficult to achieve and fiscal volatility has increased markedly. Deeper deficits followed by stabiliza- tion measures and then further slippage cost Ghana about 0.3 percent of growth annually during 2000–2015, with the heaviest toll in the early 2010s (0.7 percent a year). This is confirmed by analysis using the approach of Araujo et al. (2016); Ghana’s performance is rather average in terms of structural policies among compara- tor countries but significantly falls short in terms of macroeconomic stabilization policies. Macroeconomic management is further complicated by the fact that Ghana has been affected by emerging signs of Dutch disease and in fact even a pre-source curse. Despite Ghana having sovereign wealth funds, the country lacks efficient institutions that could improve the management of fiscal risks and contribute to fiscal sustainability and transparency. And the provision of basic public services remains a challenge. Firms’ executives identified financial system, infrastructure, and macroeconomic volatility as key competitiveness issues in Ghana. In compari- son with the average lower-middle-income countries and Sub-Saharan African countries, the quality of the educational system (primary and tertiary levels), roads, and ports is better in Ghana. However, Ghana falls Executive Summary xiii below its aspirational peers in the above-mentioned areas, as well as health and electricity. For instance, the economic impact of diseases such as malaria, tuberculosis, and HIV/AIDSs is still severe in Ghana. Moving to a more diverse production and trade structure would help Ghana to overcome (some of ) the challenges holding the socio-economic development back in the country. Diversification sup- ports job creation and higher growth rates. More diverse economies have more dynamic private sectors and are better able to move into activities with expanding global demand and to participate in global value chains. Economic diversification also helps reduce vulnerability to external shocks that can undermine prospects for longer-term economic growth. The world’s poorest countries, many of which are often small or geographically remote, landlocked and/or heavily dependent on primary agriculture or minerals, tend to have the most concentrated economic structures. This creates challenges in terms of exposure to sector- specific shocks, such as weather-related events in agriculture or sudden price shocks for natural resource commodities. Growth also tends to be unbalanced in the case of natural resource dependent countries or slow and difficult to sustain in agrarian ones. Poverty-reducing, trade-driven, growth has been particularly difficult to achieve in countries whose economies are heavily dependent upon primary commodities (World Bank 2019a). But what kind of growth and diversification suits Ghana? There is a case for Ghana to approach growth through diversification from two angles: the production and the endowment base, both of which rely on the effective utilization of key institutions:  Indirect approach (endowment base). To connect growth and diversification, World Bank (2014) argues that economies successful in their diversification efforts can broaden their endowments base by maximiz- ing three types of institutions to deliver services that ultimately increase productivity. These institutions include the abilities to manage natural resource rents, to provide public services, and to regulate economic activity (and foster a business-enabling environment).  Direct approach (production base). The production base can be expanded by either adding new commodities to the aggregate production mix, or through simply upgrading of the existing exports. A promising way to expand the production base is to upgrade the existing commodity exports. Cocoa is an illustrative example: Ghana is the world’s second largest producer of cocoa, but Ghanaian chocolate is nearly absent on international markets. Developing basic refining capabilities to be able to export more differentiated products than just raw cocoa could be one way to expand the existing production base. Another example is groundnuts, Ghana’s second largest agriculture commodity export, after cocoa.  Taken together the direct and indirect approaches define a coherent way for Ghana to diversify. While the enlargement of endowments will require some time, the enlargement of production, if based on the exist- ing production mix, has the potential to have a quick impact. Such an approach takes into consideration the current and future structure of the economy as well as the need for long-term institution building as a foundation for diversification through broadening the national endowment base. This study’s underly- ing concept of analysis is based on the understanding of this framework. Constraints to Firm-Level Productivity In Way of Economic Diversification Firm productivity is higher in Ghana than in most regional peers, but there is significant potential to raise it further to global levels. Half of Ghanaian manufacturing firms have a labor productivity below $3,969, xiv GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT TWO APPROACHES TO DIVERSIFY AN ECONOMY Goal Structural Transformation / Diversification ‘Direct Approach’ ‘Indirect Approach’ Approach Interventions in economic sectors Foundation for any economic activity to flourish Export promotion Tax holidays Macroeconomic policies Human capital and infrastructure Examples Fertilizer subsidies Targeted import Business enabling environment substitution Source: Adaption of World Bank (2016), drawing on World Bank (2014). the median productivity level in Ghana (Ghana 2013 Enterprise Survey). This is above the levels observed in Cameroon (one of the peer countries used) and Indonesia (an aspirational peer country). Foreign-owned firms have labor productivity levels of far more than double of domestic firms (US$8,901 vs US$3,307). Likewise, exporters’ labor productivity far exceeds non-exporters (US$10,125 vs US$3,555). An income per capita based analysis suggests that this median productivity level could be higher or even increase to the one recorded in Vietnam; one of Ghana’s aspirational peers. Female-owned firms show particularly low productivity levels in Ghana. This can be explained by the type and size of their activities, and the existence of gender-based inequalities. About 56.1 percent of female- owned enterprises are in food, hotel, restauration, and retail activities, and 84.2 percent of female-owned firms are small (Ghana 2013 Enterprise Survey). However, the recent productivity of the service sector has been slug- gish, and small firms have low productivity. In addition to these sectoral specificities, in Ghana, there is an unequal care burden between men and women (within households) that reduces the potential learning time of women; a period that could have been used to build business skills or other specific skills. The gender gap in productivity level is confirmed in econometric analyses. The median firms with a minority of female owners have a labor productivity that is 2.6 times of the productivity of female-owned firms. While this situation is partially explained by the small size and low capital intensity of female-owned firms, there are signs of lower efficiency in the latter as: (1) their total factor productivity (TFP) is lower than in female-minority firms; and (2) the labor cost per unit of value-added is higher than either the national median or in female-minority firms. As expected, productivity increases alongside firm size; but there are questions around the qual­ ity of innovations reported by firms. The positive impact of firm size on the productivity level suggests that larger firms may have access to more resources for innovation and marketing, and that it positively affects productivity. This is usually the case in Enterprise Surveys, and Ghana is not an exception (Ghana 2013 Enterprise Survey). The cost of production factors partially explains differences in productivity as capital cost and labor cost are respectively higher and lower than in aspirational peers. In combination, the analysis sug- gests that the high cost of capital, inadequate human capital and/or inefficiencies are dragging productivity in Ghana, but globalization is an opportunity. Executive Summary xv Firms’ access to finance is a major business constraint because it’s lack impedes asset purchase and innovation activities. About 62 percent of Ghanaian firms in the survey mentioned access to finance as a major or severe obstacle to their current operation (Ghana 2013 Enterprise Survey). An international compari- son with peer countries confirms firms’ perception of access to finance as a major constraint because Ghana has the lowest proportion of purchased fixed assets financed through banks and because non-bank financial institutions access to finance is uneven and collateral requirement represent a major obstacle to loan access. Large firms are significantly more likely to have a loan or a line of credit—50.8 percent of large firms vs. 19.9 percent for small firms. The need for a loan as well as rejection rates are inversely correlated with firm size: the larger the firm the lower the need for a loan and the lower the rejection rate. Firms identified electricity outages as major constraint to conducting business, and losses due this issue are significantly reducing productivity levels. About 61 percent of firms identify electricity as a major constraint (Ghana 2013 Enterprise Survey). Moreover, almost nine out ten firms experience electrical outages, well above the regional average and levels recorded in aspirational peers. Yet, overall, access to electricity is likely to be less of a problem now than during the Ghanaian ‘Dumsor’ energy crisis of 2014/15. Then, there were dramatic, frequent, and largely unpredictable outages around the country (Hardy and McCasland 2017). Access to well located, well serviced, and affordable industrial land is a binding constraint in Ghana, especially for foreign direct investment (FDI). A significant number (46.3 percent) of respondents to the survey note access to land to be a constraint against pursuing their business activities (Ghana 2013 Enterprise Survey). World Bank (2017a) reports that access to land for large-scale investment continues to be complex and costly, with one case taking as much as six years to secure its land lease. The market rate for one acre of land in the TEMA Free Zone (the only operational Special Economic Zone in Ghana, already at full capacity) is $350,000, reportedly the highest price in West Africa. Ghana’s Special Economic Zone (SEZ) regime remains in in the inception stage despite the relative success in filling the TEMA Free Zone, two hours outside of Accra. Human capital and insufficient access to qualified labor is a concern particularly for a subset of companies operating at the technological frontier. Overall, only 15.3 percent of respondents to the sur- vey cite human capital as a major constraint (Ghana 2013 Enterprise Survey). Yet, Ghana’s human capital index (HCI) is low and does not match with its income level. Ghana’s HCI is lower than the average of its income group, and below the ones of its aspirational peers. Differences with peers primarily originate in the adult survival rate and educational quality. Based on Ghana HCI, it could be inferred that the Ghanaian labor force has a learning gap of 5.9 years; such a substantial gap may indicate future issues for the coun- try’s productivity and innovation capacity as it develops further and the share of companies operating at the technological frontier will increase. Access to backbone services is also often identified as an impediment to Ghana’s economic upgrading and vertical diversification process. The provision of competitive backbone services is crucial to create the conditions for a more diversified and sophisticated productive structure (World Bank 2017). For example, in order for Ghana to keep its leading position as an exporter of cocoa beans, the knowledge for adapting its cocoa bean growing techniques to meet new, more stringent EU regulations on cadmium content in cocoa will be required. This will require tapping into expert consulting services so that farmers implement the needed mitigation techniques. Increased efficiency in backbone services provision could be achieved by encouraging competition at home and by reducing the regulatory burden on firms. xvi GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT Increasing Investment for Productivity Enhancements and Economic Diversification The importance of capital accumulation to growth has steadily increased over the past three decades. Over the period from 1991 to 1998 capital accumulation contributed 0.52 percentage points to growth at a time when growth was driven primarily by TFP and labor growth. Since then, the importance of capital has increased substantially in light of large-scale capital accumulation in natural resource sectors such as oil and gas. Between 2012 and 2016, capital contributed 2.56 percentage points to growth, far outpacing con- tributions from labor accumulation (1.59 percentage points) and TFP; the latter, in fact, has been negative since 2012 (–0.29 percentage points). Capital accumulation was accompanied by strong increases in total investment since 2011; but this investment had only limited impact on economic diversification as it was primarily driven by FDI inflows in the hydrocarbon sector. After a decline between 2000 and 2010, total investment has sub- stantially increased since 2011 as the country continues to investment in its hydrocarbon sector. This surge in investment was primarily driven by foreign direct investment inflows; the latter representing about 54 percent of total investment in 2013–2017. Despite these increases, total investment has been below levels recorded in aspirational peer countries. To maintain high rates of investments, especially domestic private investment, there is a need to mobilize more domestic savings in the economy. To maintain an economic expansion of seven percent and become an upper middle-income country by 2040, long-term growth analyses suggest that investment would have to reach 30 percent of GDP by 2022 and remain at around 31–33 percent of GDP for the remaining period. These high levels of investment needed are currently not matched by equivalent high rates of gross savings rates. Ghana’s gross savings rate stood only at 15.5 percent of GDP on average between 2007 and 2017, indicating a significant mismatch. The average gross savings rate for lower-middle income countries reached 29.3 percent of GDP during this period, which is almost double the Ghana rate. Deepening finan- cial development and attracting more FDI in the non-resource sector commensurate with the domestic investment-savings gap will hence be key to maintaining capital accumulation levels that not only drive high economic growth but also support a more diversified economy. Unfavorable interest rates and high collateral requirements constrain access to finance and represent an impediment to channeling savings into productive (investment) use. The low level of loans used to finance capital goods can be explained by the fact that firms consider interest rates are unfavorable and collateral requirement are too high. Nominal lending rates are also high in Ghana in comparison with lower-middle- income countries, and aspirational peers. High interest rate can be explained by macro-financial conditions, banking sector structure, and business environment variables. Challenging macro-financial conditions help maintain high nominal lending rates, which emerged from higher sovereign risks, and substantial inflation- ary pressures. Except for the period 2010–2012, inflationary pressures have been quite high in Ghana, in comparison with both lower-income and low-income countries (LIC and LMIC respectively), among which some aspirational peers. Inflation is fueled by fiscal dominance and foreign exchange (FX) pass-through in Ghana (International Monetary Fund 2018). In addition, credit risks substantially increased as non-performing loans have been on the rise since 2014, and lower competition levels positively weighed on the dynamic of lending rates. Higher credit risks are reflected by the surge in non-performing loans to 22.7 percent in 2017 from 11.3 percent of gross Executive Summary xvii loans in 2014. Simultaneously, credit information coverage remains low, and contract enforcement remains challenging; with consequences on collateral requirements. Ghana has three credit bureaus since the adop- tion of the Credit Reporting Act in 2007 and they have credit data on about only 22 percent of the adult population, in comparison with around 86 percent in Malaysia, for instance. With inflation easing since 2018, Bank of Ghana was able to gradually reduce lending rates, albeit from a very high level. Ghana achieved, for the first time in the last five years, a single-digit inflation in 2018 (9.8 percent, down from 12.4 percent in 2017). This was the result of the tighter monetary policy stance and lower non-food inflation. The Bank of Ghana used monetary restraints including the placement of a moratorium on Central Bank financing of the Government, as part of the program with the IMF between 2015 and 2018. The moderation in inflation created room for monetary policy easing. Other countries with high lending rates have used different types of direct policy interventions but they yielded mixed results. Governments from emerging and developing economies with lending rates mostly used direct policy interventions to address this issue. Direct policy interventions were related to interest rate caps, credit guarantee mechanisms, or interest rates subsidies, and were used in Brazil, several transition economies in the European and Central Asian countries, Indonesia, Laos PDR, and in several countries in the Middle East and North Africa (MENA) region. A cluster analysis of top reforming countries suggests that sovereign risks and credit risks are strongly correlated with nominal lending rate and lending-deposit spreads. Based on an analysis of clusters of top developing countries that significantly reduced nominal lending rates and lending-deposit spreads between 2003 and 2017, it can be concluded that lower sovereign and credit risks were strong characteristics of this group of countries. For instance, between 2003 and 2017, one can find a strong correlation between both changes in external debt and changes in NPLs, and changes in nominal lending rates. Ghana’s commercial banks could further improve operational efficiency, which is still below several benchmarks, and digital technology could be a plinth to achieve such objective. Ghana’s commercial banks overhead costs declined to 6.3 percent of total asset in 2017 from 8.4 percent in 2003, but still are above levels observed in both LMIC and LIC. Better utilization of digital financial services and payment systems could help reduce banks’ overhead costs, and act as negative weight on lending rate dynamics. Much more, it would broaden the reach of financial instruments in the economy, which not only is good for social-economic development through more inclusive financial services but would also positively impact the savings rate in Ghana. To facilitate this the already thriving ICT sector, which has much potential for business-related investment in Ghana (World Bank 2017), could support the creation of a reinforcing eco- system between tech entrepreneurs and the financial system in Ghana. Increasingly, FDI is playing a role in stimulating growth, productivity, and diversification through services. To date, most of Ghana’s FDI projects have been greenfield investments, particularly in the extrac- tives sector. Yet, over time, Ghana has seen its share of FDI shift from natural resources to services. Although extractives made up the bulk of Ghana’s FDI (2003 to 2016) in terms of new greenfield projects, the largest number of projects were in services. The shift from natural resource to services FDI tells a story of structural transformation through FDI. Services projects have over time increased (from 45 percent in 2003 to 2007 to 64 percent in recent years), while projects in extractives have diminished from a quarter of projects in 2003 to 2007, to only a fifth in recent years. Facilitating investment, and particularly FDI, in high-productivity services such as ICT would be an important step in advancing economic diversification in the country. xviii GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT World Bank (2017a) pointed to the potential for private sector investment to provide ICT services-enabling infrastructure such as the developing the capacity in the electrical grid for cable deployment or the promo- tion of internet exchange points. While Ghana clearly has a potential to attract FDI inflows in the non-resource sector, the country needs to achieve an increase of investment size to maximize the development impact. According to the Investing Across Sectors World Bank database, Ghana is one of the most open economies to foreign equity ownership in the Sub-Saharan Africa region as restrictions only exist in selected sectors. Yet, taxation and tax administration remain an issue in Ghana because firm executives flag it as a major constraint that can affect investment decisions. Comparisons with aspirational peers like Malaysia show that taxation negatively affects investment decision, and custom procedures are burdensome. For instance, to facilitate payment, the government of Malaysia relies heavily online tools for tax payments. Any decision about tax rates, which are part of the policy mix to attract FDI needs to be made in the context of each host country’s fiscal space. In Ghana, such space is very limited for the foreseeable future. But other, facilitating measures to ease the burden for tax administration will remain a viable policy option for Ghana. Other constraints to non-resource FDI include red tape and corruption, contract enforcement, and access to land. More than 40 percent of Ghanaian firms rated corruption as a major or severe constraint to their daily operation (Ghana 2013 Enterprise Survey). Ghana also lags on contract enforcement procedures; the latter being critical to foster investment. Ghana ranks 116th out 190 economies in Doing Business 2019, while aspirational peers such as Malaysia and Vietnam rank at respectively 33rd and 62nd. Furthermore, access to land is a major issue that would limit the occurrence of large investment in productive land, for instance, for the development of agribusiness. Summing it All Up: Exploring Potential Pathways for Economic Diversification In conclusion, a product and sector analysis shows and identifies those sectors with potential for future development. This analysis is based on the concept of “Economic Fitness” as part of the framework to identify promising segments in the economy in the spirit of the “direct approach” for diversification. It helps identify relatively short-term opportunities to expand the production base. In addition, the work provides options for a policy reform agenda that aims to broaden the endowment of the country, which was earlier labeled as “indirect approach” for diversification. Broadening endowments requires institutions and time. Combining both to identify complementary opportunities allows the development of a forward-looking medium-term diversification agenda. The two are interdependent. The direct approach is a means to identify promising sectors that can have targeted interventions to broaden the endowment in this sector; as such, these interventions also contribute to the indirect, broadening of the endowments in the whole economy. To illustrate: if better access to land is a required element in the institutional framework for a more diversified economy, access to land with irrigation is a very specific, targeted requirement for diversification through agriculture and agribusiness. Utilizing a mix of direct and indirect approaches would help to identify short-, medium-, and long-term priorities to achieve economic diversification. In terms of indirect approaches, Ghana needs to reduce macroeconomic volatility, further develop human capital, invest in infrastructure to tap into the regional potential market, and improve the currently weak business environment and institutional frame- work. These elements are cross-cutting issues that are important to enhance productivity, and foreign and domestic investment in the non-natural resource sector. In addition, access to finance, a major constraint in Executive Summary xix Ghana, is analyzed through the lens of high nominal interest rates in Ghana. The direct approach provides a glimpse into potential sectors that can be considered in an economic diversification strategy going forward. The chart below provides a summary of recommendations to consider for policy makers. SUMMARY OF KEY POLICY RECOMMENDATIONS “Direct Approach” – Identified Sectors “Indirect Approach” – Laying the foundation Interdependences exist between “Direct” and “Indirect” Approach Short-term upgrading potential Reduce macroeconomic volatility Agribusiness • Preventing fiscal cycles • Medium-term Chemicals • Implementing an economic diversification • Long-term strategy Improve human capital Textiles • Allocating substantial resources to address the • Medium-term Extractives and processed resources shortcomings of the education systems, and • Medium-term the Government Education program • Restructuring the TVET system to better align job skills to the market demand Medium-term diversification potential Enhance connectivity Agribusiness • Invest in trade and logistics infrastructure • Medium- to long-term Extractives and processed resources Strengthen the institutional framework • Improve procedures for contract enforcements • Medium-term Plastics and rubber • Reform land administration and systems to • Long-term Information and Communications Technology ease secured access to land • Medium-term • Streamline tax policy and tax administration • Medium-term procedures • Anti-corruption in public service provision Notes: Short-term = 1–3 years; Medium-term = 3–6 years; Long-term = more than 6 years. 1 GROWTH ANALYSIS AND MACROECONOMIC CHALLENGES 1 1.1  Growth Analysis percent in the last 25 years (or sometimes longer). Six of these thirteen economies even managed to reach the What Kind of Growth and 1.1.1   per capita income level of industrialized economies.3 Diversification Suits Ghana?1 The following is a short selection of those “ingredients of growth” that could be relevant for Ghana’s future After nearly a decade of strong growth fueled by development. the boom in commodity prices, Ghana’s economy For an economy to grow there is a need for remains undiversified and vulnerable to external high levels of investment and savings. This “ingre- shocks. About 40 percent of workers work in non- dient” of growth is related to the need for an initial wage agriculture and most urban workers are in accumulation of resources that can be used later in low-productivity informal jobs (World Bank 2018). the production of goods and services. Typical for the Ghana has also suffered in recent from recurrent high-growth economies is that their overall invest- macroeconomic instability, linked to election and ments (public and private) are around 25 percent commodity cycles; a self-inflicted energy crisis; and of GDP. Within this envelope and especially shown a financial sector weakened by high levels of bad by some of the successful Asian countries (China, loans. Going forward the Government’s strategy is Thailand, and Vietnam), the public investment in to achieve inclusive and sustainable growth, with the the infrastructure sector was between 5 and 7 per- private sector as the main drivers for a more diver- cent of GDP. The 2008 Growth Report emphasizes sified domestic and trade economy. In the words the importance of domestic savings as a counterpart of Ghana’s President, the aim is to “build the most of investments. Attracting FDI is important, but the business-friendly economy in Africa” and foster the Growth Report argues that an economy should not competitiveness of Ghanaian firms. To achieve this, only rely on foreign savings to avoid vulnerability to the Government agenda includes improving the busi- fluctuations in inflows, especially in downturns. The ness environment and fascinating trade; investing in importance of domestic savings is their stability and infrastructure; and diversifying the economy beyond relative predictability. hydrocarbons, cocoa and gold. This report strives to Investment in human capital is as important analyze the main challenges for economic diversifica- as investment in the more visible, physical capital tion from a productivity angle. of a country. Investments in the health, knowledge, In looking at a set of high-growth economies of and skills of the people—human capital—are as the past, the Growth Report 2008 identified com- mon characteristics of successfully applied growth 1 This summary is an excerpt of World Bank (2016b): Sudan Country models—the “ingredients of growth”—to inform Economic Memorandum—Realizing the Potential for Diversified Development. policy formulation around the world. The Growth 2 Botswana, Brazil, China, Hong Kong –China, Indonesia, Japan, the Report (World Bank 2008) analyzed the experiences Republic of Korea, Malaysia, Malta, Oman, Singapore, Taiwan – China, and Thailand. of the thirteen fastest growing economies2 in the world 3 Hong Kong – China, Japan, the Republic of Korea, Malta, Singapore that managed to sustain growth rates of at least seven and Taiwan – China. 2 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT important as investments in more visible, physical increases the level of financial inclusion, thereby capital of a country. This is particularly important helping the economy to better mobilize savings and in natural-resource rich countries. Investments in to allocate them more easily to investment needs. human capital will generate opportunities for growth, Consequently, the Growth Report 2008 encour- including opportunities unforeseen at the time of the ages policies that aid the development of financial investment. But those investments do not translate systems. Another complementary determinant of mechanically into growth. Other factors can inter- growth is the financial openness of a country that, in vene. For instance, the timing of education spending the long run, aids the goals of financial development matters as well as the amount. Investments in early and deepening. childhood raise the returns to investments later in Last but not least, macroeconomic stability is life—children must learn how to learn. If they do one of the main pre-conditions for ensuring long- not, they may never regain the lost ground, leaving a term growth of an economy. Yet, the Growth Report society sapped of potential and scarred by inequality does not offer a unified definition of “macroeconomic (World Bank 2008). Still, every country that sus- stability.” Instead, it points to the fact that monetary tained high growth for long periods put substantial and fiscal policy makers hold the keys for macroeco- effort into schooling its citizens and deepening its nomic stability in their hands. To this end, the Growth human capital. Conversely, considerable evidence Report emphasizes the need for independent central suggests that other developing countries are not banks. In terms of fiscal policy, the lessons from high- doing enough. growth countries show that policies that avoid high To foster structural change and growth an budget deficits over long periods of time along with economy needs access to technology and knowledge efforts to keep debt-to-GDP ratios at sustainable lev- through an active transfer of know-how. Technology els pay off positively over time. In addition, an effec- transfer and inflow of know-how is usually associated tive and committed government, clearly focused on with FDI inflows. In successful countries, domesti- long-term growth objectives, is needed to maintain cally owned companies can absorb technologies and macroeconomic stability. know-how from advanced countries, thereby compen- Economic diversification is a key element of sating for the relatively low capacity and resources for economic development in which a country moves research and development. to a more diverse production and trade structure. Export-led growth is associated with high- First, diversification matters as it supports job creation growth countries, especially if it is of a diversified and higher growth rates (Hesse 2008). More diverse nature. The export sector played a critical role in the economies have indeed more dynamic private sec- thirteen high-growth countries, especially in the initial tors and are better able to move into activities with period of their growth process. Much more, policies expanding global demand and to participate in global to facilitate exports are most effective if they support value chains (Abouchakra and al. 2008, Gelb 2010, export diversification. Designing policies for non- Rodrik 2005). Second, economic diversification helps natural resource exports is particularly important in reduce increased vulnerability to external shocks that resource-rich countries. can undermine prospects for longer-term economic Developed financial sectors that are open and growth (World Bank 2019a). The world’s poorest connected with international financial markets countries, many of which are often small or geographi- are conducive to economic growth. Development cally remote, landlocked and/or heavily dependent on of the financial sector is particularly relevant because primary agriculture or minerals, tend to have the most of its ability to support the goal of high savings for concentrated economic structures. This creates chal- high investments. A more developed financial system lenges in terms of exposure to sector-specific shocks, GROWTH ANALYSIS AND MACROECONOMIC CHALLENGES 3 such as weather-related events in agriculture or sudden  The ability to provide public services relates to the price shocks for natural resource commodities (World ability of governments to invest in the human Bank 2019a). Growth also tends to be unbalanced in capital of the younger generation and to build the case of natural resource dependent countries or infrastructure that can be used for forward-look- slow and difficult to sustain in agrarian ones. Poverty- ing economic activities in the long-term. reducing, trade-driven, growth has been particularly  The ability to regulate economic activities refers to difficult to achieve in countries whose economies are the Government’s capabilities to establish and heavily dependent upon primary commodities (World nurture a business-enabling environment. Bank 2019a). Economic diversification helps thus to manage But in the short term, expanding the produc- volatility and provide a more stable path for equita- tion base could help kick-start diversification. ble growth and development. Successful diversifica- Ghana’s export and trade levels are above other coun- tion is all the more important in the context of slowing tries at similar levels of development, but they are very global growth and the imperative in many developing concentrated. Ghana’s overall trade share of GDP countries to increase the number and quality of jobs. was 88.6 percent in 2016 and Ghana’s overall export Moving labor from low productivity employment, share of GDP was 43.9 percent (World Bank, DEC mainly in agriculture, to higher productivity jobs in a Country Development Diagnostics, cited in World range of mostly urban activities characterized by strong Bank 2018). However, Ghana’s exports are concen- agglomeration economies is imperative for sustained trated in four categories: cocoa, gold, petroleum, and growth. Countries in East Asia made such a growth ICT and professional services, which make up most transition in the 1990’s through reliance on exports of service exports. Non-natural resource exports have of labor-intensive manufactures. The challenge today been flat over time, reflecting a relatively weak overall for many developing countries is not only to grow trading environment and low integration with sup- labor-intensive manufacturing, but also value-adding ply chains. Natural resources in the country tend to agribusiness, horticulture, and selected services, activi- be exported in unrefined raw states, exposing Ghana ties that are all at once labor-intensive, tradable and to volatile commodity cycles and below-potential value-adding (World Bank 2019a). export rents. Institutions are critical to the diversification of The production base can be expanded by either the endowment base of the economy. To connect adding new commodities to the aggregate pro- growth and diversification, World Bank (2014) argues duction mix, or through simply upgrading of the that economies successful in their diversification existing exports. One recent example of expanding efforts can broaden their endowments base by maxi- the production mix was the Government’s approach mizing three types of institutions to deliver services to develop gas exploration, for instance through the that ultimately increase productivity. These institu- Sankofa gas field in 2015; another example is the tions include the abilities to manage natural resource Government’s desire to develop an integrated bauxite rents, to provide public services, and to regulate production base, which was kickstarted by a 2018 economic activity (and foster a business-enabling Financing Arrangement with China (IMF, 2018). Such environment). expansion of the production mix requires large-scale  The ability to manage natural resource rents refers to investment, which if guaranteed by the Government the ability to pursue overall stabilizing macroeco- could have a detrimental impact on long-term debt nomic policies of which stable fiscal management sustainability. An alternative way to expand the pro- is key, sometimes achieved with stabilization funds duction base is to upgrade the existing commodity for natural resource rents. exports. Cocoa is an illustrative example: Ghana is the 4 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT world’s second largest producer of cocoa, but Ghanaian to upgrade the existing commodity exports. Cocoa chocolate is nearly absent on international markets. is an illustrative example: Ghana is the world’s sec- Developing basic refining capabilities to be able to ond largest producer of cocoa, but Ghanaian choc- export more differentiated products than just raw cocoa olate is nearly absent on international markets. could be one way to expand the existing production Developing basic refining capabilities to be able base. Another example is groundnuts, Ghana’s second to export more differentiated products than just largest agriculture commodity export, after cocoa. raw cocoa could be one way to expand the existing So, what kind of growth and diversification production base. Another example is groundnuts, suits Ghana? There is a case for Ghana to approach Ghana’s second largest agriculture commodity growth through diversification from two angles: export, after cocoa. But increased processing and the production and the endowment base, both of diversifying into new products based on existing which rely on the effective utilization of key insti- production requires significant investment in pro- tutions (Figure 1): duction facilities and building new relationships with customers in foreign markets. If that cannot  Indirect approach (endowment base). To con- be shouldered through increased private invest- nect growth and diversification, World Bank ment (foreign and domestic), a more accessible (2014) argues that economies successful in their alternative would be to upgrade the quality of diversification efforts can broaden their endow- existing export baskets and selling them at a higher ments base by maximizing three types of institu- price through improvements to National Quality tions to deliver services that ultimately increase Infrastructure & Branding (Portugal et al. 2019). productivity. These institutions include the abili- ties to manage natural resource rents, to provide Key Growth Drivers 1.1.2   public services, and to regulate economic activity (and foster a business-enabling environment). Since independence in 1957, Ghana’s long-term  Direct approach (production base). The produc- growth dynamics have been mixed and can be tion base can be expanded by either adding new divided into three distinct periods. From indepen- commodities to the aggregate production mix, or dence in 1957 until 1993, growth was largely stagnant through simply upgrading of the existing exports. and heavily relied on agricultural output. Between A promising way to expand the production base is 1994 and 2005, growth sharply accelerated, and per FIGURE 1: Two Approaches to Diversify an Economy Goal Structural Transformation / Diversification ‘Direct Approach’ ‘Indirect Approach’ Approach Interventions in economic sectors Foundation for any economic activity to flourish Export promotion Tax holidays Macroeconomic policies Human capital and infrastructure Examples Fertilizer subsidies Targeted import Business enabling environment substitution Source: Adaptation of World Bank (2016b), which drew on World Bank (2014). GROWTH ANALYSIS AND MACROECONOMIC CHALLENGES 5 capita GDP doubled in just 13 years. During this number of people found economic opportunities period, Ghana undertook several structural reforms in those sectors, and Ghana started producing oil resulting in a rapid increase in total factor productiv- (Figure 2b). For instance, in 2011, out of 14 percent of ity (TFP) with a shift of labor from agriculture to real GDP growth recorded, 5.4 percentage points was the service sector. In 2006–2017, per capita GDP attributed to the oil sector. Because of those changes, growth averaged 4.4 percent a year, and per capita the share of the service sector in GDP increased to GDP almost doubled in just 10 years (Figure 2a). about 52 percent in 2012–2016 and the share of Growth during this period was considerably above the the agricultural sector declined to 21.2 percent in averages of non-high-income, Sub-Saharan African 2012–2016 (Figure 2c). (SSA) countries (2.0 percent) and other low-income On the demand side, commodity exports countries (LICs) (2.6 percent) and slightly above the are the dominant source of growth. Commodity average of lower-middle-income countries [LMICs] exports play an increased role in the expansion of (4.3 percent). The initial boom during this latter the Ghanaian economy while investments, which period mainly reflected increased prices for Ghana’s had been quite volatile in 2006–2016, recently had a main commodity exports, notably gold and cocoa, marginal contribution to growth (Figure 2d). In 2017, and the start of commercial oil production in 2011. Ghana’s goods export value totaled US$17.1 billion, Drivers of the economic expansion changed making it the 70th largest exporter in the world. Almost significantly over the years; more recently, the ser- two-third of all goods exports are concentrated in two vice and natural resources sectors provide the main products: gold, which represented 48.7 percent of sources for growth. On the supply side, between the total exports of Ghana in 2017, and crude petro- 1990s and 2000s, there has been a significant increase leum, which accounted for 17.3 percent of exports in the contribution of the service sector and other in the same year (MIT, Observatory of Economic industries (including mining and oil) as a greater Complexity 2017). FIGURE 2: Growth Dynamics in Ghana a) Comparison of Changes in GDP and GDP per capita at 2010 b) Evolution of Sectoral Contribution to US$ Constant Prices, 1961–2017 (%) Value-Added Growth in Ghana, 1970–2016 (%) 8 5 7 6 4 5 3 4 3 2 2 1 1 0 –1 0 –2 –3 –1 Ghana LMIC World Ghana LMIC World 1970–1993 1994–2005 2006–2016 GDP growth GDP per capita growth Agriculture, hunting, forestry, fishing (ISIC A-B) Manufacturing (ISIC D) 1961–1993 1994–2005 2006–2017 Other Industries (ISIC C, E-F) Services c) Evolution of Sectoral Composition of d) Dynamics of the Contribution of(continued next page) onVariables Expenditure Value-Added in Ghana, 1970–2016 (%) to GDP Growth in Ghana, 1970–2016 (%) 100% 6 90% 5 80% –1 0 –2 –3 –1 6 Ghana LMIC World Ghana LMIC World GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT 1970–1993 1994–2005 2006–2016 GDP growth GDP per capita growth Agriculture, hunting, forestry, fishing (ISIC A-B) Manufacturing (ISIC D) 1961–1993 1994–2005 2006–2017 Other Industries (ISIC C, E-F) FIGURE 2: Growth Dynamics in Ghana (continued) Services c) Evolution of Sectoral Composition of d) Dynamics of the Contribution of Expenditure Variables Value-Added in Ghana, 1970–2016 (%) to GDP Growth in Ghana, 1970–2016 (%) 100% 6 90% 5 80% 70% 4 60% 3 50% 40% 2 30% 1 20% 0 10% 0% –1 1970–1993 1994–2005 2006–2016 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Services Household consumption expenditure Other Industries (ISIC C, E-F) General government final consumption expenditure Manufacturing (ISIC D) Gross fixed capital formation Agriculture, hunting, forestry, fishing (ISIC A-B) Exports Source: Staff calculations based on data from World Development Indicators (WDI), and the United Nations Statistics Division (UNSD) data. 1.1.3   Falling Productivity Growth sectors, mainly driven by within-sector effects. For all sectors excluding trade services, shifts in the labor The contribution of total factor productivity to force between sectors also contributed to positive pro- growth is on a declining path, signaling an impor- ductivity growth as the labor force moves into sectors tant change in input factors to the growth perfor- with above-average productivity levels (Structural static mance. While, a growth decomposition shows that effect).4 However, within the service sector, workers capital accumulation has always been a major input moved into sectors with negative productivity growth to growth, the contribution of TFP declined and (Structural dynamic effect), and recent labor produc- reached negative values during recent years (Figure 3). tivity growth in the service sector has been sluggish. This situation is worrisome because TFP is generally This situation suggests that high-productivity service associated with technological innovation and techni- sectors are not able to absorb most of the labor supply cal efficiency which both drive labor productivity. (partially freed up by productivity increases in agri- In fact, with Ghana not yet a frontier technological culture) or that this labor supply does not have the economy, it would be expected that TFP would have skills to enter high-productivity services and hence a greater contribution to the economic expansion. end up in low-productivity sectors such as retail trade. The contribution of capital accumulation to growth Concerning the manufacturing sector, its productivity can be explained by recent investment in the natural growth (originating from within-sector effects) was resource sector. below the national average and could reflect lagging There is a concentration of jobs in low pro- technical efficiency of firms, firm dynamics, and a ductivity growth service activities while labor strong link between wage levels and firm size that productivity is declining in the manufacturing sector. Overall, productivity levels increased in all 4 See Appendix 1 for details. GROWTH ANALYSIS AND MACROECONOMIC CHALLENGES 7 FIGURE 3: Sectoral Value Added and Growth Accounting a) Trend in Sectoral Value-Added per Worker in Ghana, b) Ghana Growth Accounting, 1970–2016 2006–2017 (2010 US$ Constant Prices) 7,000 8 6,000 6 4 5,000 2 4,000 0 3,000 –2 2,000 –4 1,000 –6 1970–2016 1970–1980 1980–1990 1991–1998 1998–2005 2005–2012 2012–2016 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Agriculture, forestry, and fishing Industry Services TFP Capital Labor Schooling Overall Source: Staff calculations based on data from World Development Indicators (WDI), and Penn World Table 9.0 (Feenstra et al. 2015). weighs on international competitiveness (see Teal prices and associated terms of trade gains, macroeco- 1999; Davies and Kerr 2018). Furthermore, labor nomic stabilization policies concerning inflation, the productivity growth in the manufacturing sector real exchange rate, and financial stability marginally recorded in 2013–2017 has been below levels recorded explained growth performance since 2000 (Figure 4). in 2007–2012 (excluding 2011 during the launch of commercial oil production). Major Growth Challenges 1.2  Declining Impact of Structural Factors 1.1.4   Reliance on Natural Resources 1.2.1   During the period 2000–2015, growth was mainly One major challenge that Ghana faces is its heavy driven by structural factors, but their impact has reliance on natural resources. This points to the declined, and key macroeconomic factors had a need to diversify the economy, which could improve marginal contribution to growth. Growth was driven growth inclusiveness and help reduce macroeconomic by structural improvements, particularly in infrastruc- volatility. Ghana’s export concentration index is above ture and financial development. Infrastructure (tele- its aspirational peers, and that of lower-middle-income phone lines) and financial development (credit as a countries and SSA countries (Figure 5). This suggests share of GDP) improved markedly especially during that, in comparison with peers, exports are concen- the early 2000s, which explains most of Ghana’s trated in few products. The recent increase of the growth performance in the 2000s. For the latter half contribution of the natural resource sector to growth of the decade, this is also reflected in the persistence raises some challenges such as: the capital intensity of term, as initial improvements had a fading-out effect the emerging natural resource sector (oil) which lim- on the growth rate. The persistence term captures its jobs creation despite demographic pressures, the the transition of a country towards its steady state. depletion of the stock of natural resources which lim- Improvements in the country’s commodity exports’ its future income opportunities from this sector and 8 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT Key Growth Drivers of Real GDP FIGURE 4:  requires adjustment in the non-resources sector, and per Capita in Ghana (Percentage the increasing macroeconomic volatility that affects Points) the country’s capacity to grow at an adequate rate. To 5% overcome this challenge, it will be necessary to stimu- 4% late new sources of growth and to diversify the national 3% asset portfolios that include natural resources, built 2% capital, and public institutions (World Bank 2014). 1% Adequate natural resources management and 0% economic institutions are key success factors of the diversification, but Ghana faces some challenges in –1% these areas. Empirical analyses find that resource-rich –2% countries that were able to diversify their economy –3% 2000–2015 2000–2005 2005–2010 2010–2015 had appropriate institutional mechanisms to man- Structural Stabilization External Persistence age natural resources revenues and developed strong institutions that supported private sector development Source: Staff calculations based on data from WDI. Note: “Stabilization” variables contain inflation, banking crises, and (World Bank 2014; International Monetary Fund the real exchange rate, capturing the idea that macroeconomic fluc- 2011). However, government effectiveness has been tuations can influence growth over an extended period. “Structural” variables capture a broad set of fundamental country characteristics. identified as a constraint to growth in general, and to This includes secondary school enrollment as a proxy for human cap- the creation of a sound business environment (World ital, a measure for trade openness (trade-to-GDP ratio adjusted for population), an institutional variable (polity2), private credit-to-GDP Bank 2018). Addressing these constraints would help as a measure of financial development, fixed telephone lines per reshape Ghana’s major growth drivers through the capita as a proxy for infrastructure, and government size measured by government consumption/GDP . “External factors” are reflected needed increase in the contribution of investment and in terms of trade and commodity prices, more specifically net barter productivity to economic expansion. terms of trade and the country-specific commodity export price index. Low Productivity and Investment 1.2.2   Increasing productivity could help unleash new FIGURE 5: Export Concentration, 2017 sources of growth as witnessed in Ghana’s aspira- 0.50 tional peers. Just as sustained increases in productivity 0.45 levels were recorded in Malaysia, Chile and Vietnam 0.40 0.35 during the past twenty-five years (Figure 6a), increased 0.30 productivity would be important to to the diversity of 0.25 the economy in Ghana. While there might an endoge- 0.20 neity between productivity and diversification because 0.15 firms invest in sectors with high potential of produc- 0.10 0.05 tivity growth, this report emphasizes the importance of 0 productivity for economic diversification as evidenced by (Imbs and Wacziarg 2003). In addition to those LMIC Indonesia Vietnam Malaysia Kenya SSA Chile Cameroon Côte d’lvoire Mauritania Ghana aspirational peers, increases in productivity and inno- vation5 contributed to the economic diversification Source: UNCTAD database. Note: The export concentration index is the Herfindahl-Hirshmann product index (for exports) and it indicates that exports are concen- 5 Innovation refers to improved products, services, organization, or trated in few products. processes. GROWTH ANALYSIS AND MACROECONOMIC CHALLENGES 9 FIGURE 6: Productivity and Investment b) Average Domestic Credit to Private Sector, a) Changes in Productivity Growth (%) 2000–2017 (in percentage of GDP) 6 60 5 50 4 40 3 2 30 1 20 0 –1 10 Côte d’lvoire Mauritania Kenya Cameroon Ghana Sub-Saharan Africa Indonesia Lower middle income Malaysia Chile Vietnam 0 Cameroon Cote d'Ivoire Ghana Indonesia Kenya LMIC SSA 1994–2005 2006–2017 Source: Staff calculations based on data from WDI. Note: Productivity is measured in GDP per worker (PPP) in 2011 US$ constant prices. of countries such as the United States of America or 1.2.3  Macroeconomic Volatility Canada (World Bank 2014). Moreover, policies that spur efficiency and foster the entry of new firms would Aggregate indices for stabilization and structural be essential for economic diversification (International policies in Ghana suggest that the country needs Monetary Fund 2011). to improve its macroeconomic framework and to Increasing investment in the non-natural initiate structural reforms. Based on the approach of resources sectors and mobilizing more domestic Araujo et al. (2016), a structural policy index is com- savings will be essential to diversify the economy puted with the following variables: schooling, credit in and to sustain growth. To maintain an economic percentage of GDP (proxy of financial development), expansion of seven percent and become an upper openness, government consumption, telephone lines, middle-income country by 2040, long-term growth and mobile phone subscriptions. Macroeconomic analyses suggest that investment should reach 30 per- policy variables are as follows: inflation, real exchange cent of GDP by 2022 and remain at around 31–33 rate, and banking crisis.6 Figure 7 shows that Republic percent of GDP for the remaining period. However, of South Korea (KOR) achieves the highest possible investment rates and gross savings rates observed in level of the structural policy index; it means that Korea Ghana during the past fifteen years were below that of performs well in those structural policy variables that aspirational peers, and lower-middle-income countries matter for growth. Ghana’s performance is average (Table 1 and Figure 6b). Furthermore, despite the in terms of structural policies among comparator recent increase in FDI inflows, technological spillover countries but falls short in terms of macroeconomic effects on the overall economy were likely limited because more than 50 percent of FDI projects were 6 See Geiger, Trenczek, and Wacker (2018) and Araujo et al. (2016) for in the natural resource sector. detailed results, explanations and methodology. 10 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT Average Gross Savings and Total TABLE 1:  increased as the volatility of GDP growth and GDP Investment, 2000–2017 per capita growth is increasing (Figure 8a), and infla- (in Percentage of GDP) tionary pressures mount in 2000s. During the period Countries/Group Gross Gross Fixed 2000–2015, macroeconomic volatility reduced annual of Countries Savings Capital Formation GDP growth by 0.3 percentage points, and the cost Cameroon 17.9 22.6 of volatility increased to 0.7 percentage points in Chile 22.4 22.4 early 2010s after the discovery of oil reserves. Ghana’s Cote d’Ivoire 15.2 12.6 growth volatility mirrors the heavy reliance on natural resources and is exacerbated by fiscal volatility that Ghana 15.5 21.7 results from election cycles. In fact, forest and mineral Indonesia 27.9 27.2 rents have together accounted for about 8–13 percent Kenya 12.3 19.0 of GDP since 2000, and oil rents brought natural Lower-middle income 29.3 26.0 resource rents to 20 percent of GDP in 2015, the Malaysia 33.3 23.7 highest such share in West Africa (World Bank 2018). Mauritania* 26.7 38.5 Moreover, fiscal slippages increased significantly dur- Sub-Saharan Africa 20.7 21.3 ing elections cycles (Figure 8b). Vietnam 31.6 29.0 In addition to emerging Dutch disease effects, Source: WDI. changes in macroeconomic variables also suggest * For Mauritania, there are missing points in 2000–2011. that Ghana has already been affected by a pre- source curse. The term “pre-curse” refers to situations where growth is lower after the discovery of a major stabilization policies, where it shows the worst perfor- natural resource in comparison with initial projection, mance among both groups. resulting thus in imprudent behaviors of public and Ghana experienced an increased macroeco- private economic agents (Cust and Mihalyi 2017). nomic volatility that retarded growth in recent These imprudent behaviors, amplified by weak insti- years. Macroeconomic volatility seems to have tutions, can lead to imbalances as the government can FIGURE 7: Stabilization vs. Structural Policy Indices in Ghana and Peer Countries 1.0 CMR Stabilization policy index (0 lowest, 1 highest) PER MYS 0.8 DOM KOR MRT CIV ECU KGZ VNM COL 0.6 NIC KEN PRY BLR DZA GHA w/avg inflation 0.4 JOR 0.2 GHA 0 0 0.2 0.4 0.6 0.8 1 Structural policy index (0 lowest, 1 highest) Source: Geiger, Trenczek, and Wacker (2018). GROWTH ANALYSIS AND MACROECONOMIC CHALLENGES 11 FIGURE 8: Growth Volatility and Fiscal Balances a) Evolution of the Volatility of GDP Growth and b) Fiscal Balances and Elections Cycles in Ghana, GDP per Capita Growth in Ghana, 2000–2017 1999–2016 (Percent of GDP) 1.2 0 1.0 –2 –2.0 –4 –3.3 –3.2 0.8 –4.0 –4.4 –4.9 –6 –5.8 0.6 –6.3 –6.5 –6.6 –8 –7.8 0.4 –8.6 –10 –10.1 0.2 –12 2012 –11.5 0 –14 GDP per capita growth GDP growth 1999 2000 2001 2003 2004 2005 2007 2008 2009 2011 2013 2015 2016 2000–2004 2005–2010 2011–2017 Overall balance Source: Staff calculations based on data from WDI, and Ministry of Finance. overborrow at low costs, or it can overspend before Lagging Human Capital and 1.2.4   the effective commercial production of the discovered Infrastructure natural resource. In the case of Ghana, the combined effect of election cycles and ‘jubilation of discoveries’ Growth is still constrained by structural issues even resulted in higher fiscal deficit in 2011–2018, and though structural factors heavily contributed to a surge of the external debt level to 57.8 percent of growth during the 2000–2015 period. In fact, the GDP in 2018. impact of structural variables on growth has been fad- At the same time, and despite having sovereign ing in 2000–2015 (See Figure 4). A comparison of wealth funds, Ghana lacks effective institutions that Ghana with its aspirational peers and lower-middle could improve the management of fiscal risks and income countries shows that infrastructure indica- contribute to fiscal sustainability and transpar- tors are well below those observed in comparators ency. While Ghana has sovereign wealth funds (the (Figure 9b). Moreover, despite improvement on sev- Petroleum Holding Fund and the Ghana Petroleum eral human capital indicators, there are still significant Fund) that were established by the Petroleum Revenue disparities in the completion of school between poor Management Act, it lacks formal institutions that and non-poor or the access to health services—the could improve the management of fiscal risks and average years of schooling is between four and five contribute to fiscal sustainability. Adopting and con- years for the poorest quintile (Figure 9a). stantly implementing clear fiscal rules and establishing The provision of basic public services remains a a fiscal responsibility council could help to reduce the challenge according to private sector executive sur- fiscal volatility related to election cycles, and negative veys. In comparison with the average lower-middle- terms of trade shocks. Moreover, as transparency is an income countries and Sub-Saharan African countries, essential element of governance and natural resource the quality of the educational system (primary and revenues management, Ghana could benefit from tertiary levels), roads, and ports is better in Ghana. designing and implementing a strategy that fosters However, Ghana falls well below its aspirational fiscal transparency, and accountability. peers in the above-mentioned areas, as well as health 12 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT FIGURE 9: Human Capital and Infrastructure a) Average Years of Schooling (Ages 15–19) by Income Quintile b) Logistic Performance Index Score (LPI), 2018 16 3.50 14 3.00 12 2.50 10 2.00 8 1.50 6 1.00 4 2 0.50 0 0.00 Côte Cameroon Ghana Kenya Indonesia Vietnam Chile Vietnam Malaysia Indonesia Côte d’lvoire Kenya Cameroon Ghana Mauritania d’lvoire Poorest Quintile (ages 15–19) Richest Quintile (ages 15–19) Source: WDI, and Logistics Performance Index 2018. Note: A high logistic performance index (LPI) score means that the country has a better perceived logistic infrastructure for trade. and electricity. For instance, the economic impact Ghana implemented several positive reforms during of diseases such as malaria, tuberculosis, and HIV/ the past 10 years, including the implementation of a AIDSs are still severe in Ghana according executives paperless customs clearance system, the publication of (Appendix 2). Health issues could affect the quality construction regulations, a strengthened construction of the workforce, its capacity to increase productivity, quality control, and several simplification measures and thus diversification prospects. for trading across borders. However, the country still needs to further reform its business environment as 1.2.5  Stagnant Business Environment it ranks 114th out of 190 countries in Doing Business 2019 (Figure 10). Despite positive reforms implemented during the While Ghana has a relative favorable regional past 10 years, Ghana still needs to substantially positioning in Africa, firms’ executives identified improve the quality of its business environment. financial system, infrastructure, and macroeconomic FIGURE 10: Ease of Doing Business Score in 2018 0 100 82.65: United Kingdom (Rank: 9) 70.31: Kenya (Rank: 61) 59.22: Ghana (Rank: 144) 58.00: Côte d’Ivore (Rank: 122) 53.50: Mali (Rank: 145) 51.61: Regional average (Sub-Saharan Africa) Source: Doing Business 2019. Note: The ease of doing business score captures the gap of each economy from the best regulatory performance observed on each of the indica- tors across all economies in the Doing Business sample since 2005. An economy’s ease of doing business score is reflected on a scale from 0 to 100, where 0 represents the lowest and 100 represents the best performance. The ease of doing business ranking ranges from 1 to 190. GROWTH ANALYSIS AND MACROECONOMIC CHALLENGES 13 FIGURE 11: Global Competitiveness Scores (0–100) Institutions 59/140 100 Innovation capacity 83/140 Infrastructure 116/140 80 60 Business dynamism 87/140 ICT adoption 88/140 40 20 Market size 73/140 0 Macroeconomic environment 132/140 Financial system 112/140 Health 112/140 Labor market 89/140 Skills 104/140 Product market 61/140 Ghana SSA EAP Source: World Economic Forum Competitiveness Report 2018. volatility as key competitiveness issues. Figure 11 side analyses. The remaining chapters of the report illustrates Ghana’s competitiveness position over the are organized as follows: Chapter Two analyzes the twelve main drivers of competitiveness compared to status of productivity and innovation in Ghana and Sub-Saharan Africa (SSA), and the East Asia and Pacific identifies their key constraints; Chapter Three analyzes region (EAP).7 Even though, Ghana ranks 106th out of the role of public and private investment to achieve 140 countries, it outperforms the SSA region on the economic diversification; and Chapter Four explores majority of all twelve pillars of competitiveness, but potential pathways for economic diversification by lags countries in the EAP region. In addition, global presenting potential sectors that can be considered competitiveness scores are particularly low for the in a diversification strategy, and discusses important financial system (112th), infrastructure (116th), and policy recommendations that would support the macroeconomic stability (132nd). implementation of this strategy. This report focuses on key constraints on the supply side and proposes potential product-based 7 Individual rankings are included near each twelve pillars while indices diversification pathways that are based on demand scores are depicted in the radar chart. 15 ENHANCING PRODUCTIVITY TO ACHIEVE ECONOMIC DIVERSIFICATION 2 Status of Firm Productivity8 2.1  concentration of resources as they primarily flow to more productive sectors and more productive firms Firm productivity is higher in Ghana than in most within sectors. As a result, large firms have higher labor regional peers, but there is significant potential to productivity levels than smaller ones, foreign firms are raise it further to global levels. Half of Ghanaian more productive than domestic ones, and exporters manufacturing firms have a labor productivity below show higher productivity than non-exporters. US$3,969, which is above the level observed in a Female-owned firms show particularly low peer regional country such as Cameroon and an productivity levels in Ghana. This can be explained aspirational country such as Indonesia (Figure 12a). by the type and size of their activities, and the exis- However, an income per capita based analysis suggests tence of gender-based inequalities. About 56.1 per- that this median productivity level could be further cent of female-owned enterprises are in food, hotel, increase to the level recorded in Vietnam, one of restaurant, and retail activities, and 84.2 percent of Ghana’s aspirational peers. female-owned firms are small. However, the recent There are notable differences in productiv- productivity of the service sector has been sluggish, ity by type of firms in Ghana. This is shown in Figure 12b, and, in more detail in Appendix 3. Such 8 This section is primarily based on the Ghana 2013 Enterprise Survey. To account for the fact that the economic structure has evolved since differences indicate that there are barriers to the alloca- then, where possible, the analysis will rely on additional data sources; tive efficiency of resources between firms, leading to these are clearly marked. FIGURE 12: Comparison of Labor Productivity b) Labor Productivity by Ownership Characteristics a) Comparison of Labor Productivity (2009 US$) and Gender in Ghana, 2012 (2009 US$) 12,000 12,000 Domestic ownership Foreign 10,000 10,000 8,000 8,000 Foreign-owned 6,000 6,000 Non-exporters Exporting status 4,000 4,000 Exporters 2,000 2,000 Female minority in capital Gender 0 0 Cameroon Indonesia Ghana Malaysia Vietnam Female majority in capital Labor productivity (2009 Prices) – Left Axis GNI per capita – Right Axis 0 4,000 8,000 12,000 Source: World Bank Enterprise Surveys. Note: Survey years are as follows: Ghana (2013), Cameroon (2016), Indonesia (2015), Malaysia (2015), and Vietnam (2015). All data points are median values observed in the manufacturing sector. 16 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT and small firms have low productivity. In addition developments through copying and re-engineering. to these sectoral specificities, in Ghana, there is an Econometric analyses confirm the role of foreign own- unequal care burden between men and women (within ership and exports in enhancing labor productivity. households) that reduces the potential learning time of Econometric analyses confirm that productivity women; a period that could have been used to build increases alongside increases in firm size but raise business skills or other specific skills (Charmes 2015; questions on the quality of innovations reported by and Ghana Statistical Service 2014). firms. The positive impact of firm size on productivity The gender gap in productivity level is con- level suggests that larger firms may have access to more firmed in econometric analyses, and it suggests resources for innovation and marketing. However, female-owned firms may face specific challenges. econometric analyses do not show a statistical and The median firms with a minority of female owners significant impact of firm age, manager experience in have a labor productivity which represents 2.6 times the sector, and innovation on productivity. While this the productivity of female-owned firms. While this insignificant impact of age on firm’s productivity may situation is partially explained by the small size and be interpreted as an opportunity for all entrepreneurs low capital intensity of female-owned firms, there to perform well (everything else being equal), the insig- are signs of lower efficiency in the latter as: (1) their nificant impact of most innovation variables (excluding TFP is lower than in for female-minority firms; and the holding of an internationally recognized quality (2) the labor cost per unit of value-added is higher certificate) on productivity contrasts with the fact that than either the national median or in female-minority more than half of enterprises report an introduction of firms (Appendix 3). In addition, Ghana’s institutional product innovation or process innovation. While there framework is somewhat biased against women;9 and could be some data issues related to the understanding female entrepreneurs face more challenges to increase and definition of “innovation” by respondents and the their productivity because significant gender differ- sample size, this situation raises questions on the qual- ences have been identified in areas related to broad- ity of new products and innovative products. ening skills, access to finance and/or access to land The cost of production factors partially explains (World Bank 2018). differences in productivity as capital cost and labor Differences in productivity levels, that emerge cost are respectively higher and lower than in aspi- from exporting status and the foreign ownership, rational peers. The fact that, despite a lower capital may be related to the positive effects of the access intensity, capital cost per unit of value-added is higher to international markets.10 Empirical and theoreti- in Ghana than in aspirational peers (Figure 14a) sug- cal analyses show that the access to foreign market gests that access to capital is an issue in Ghana. Labor and the receipt of foreign capital can increase the cost per unit of value-added, and labor cost per worker probability to innovate and to increase productivity are low in Ghana, in comparison with those observed level (Brambilla, Hale and Long 2009). International in comparators (Figures 13a and 13b). However, these trade can affect the structure of an economic sector by lower labor costs did not translate into higher produc- allowing more productive firms to get in, and less pro- tivity as low salaries can be associated with low human ductive to exit (Melitz 2003). To remain efficient and capital, or the existence of a large pool of potential record profit, international competition would force workers that are active in the informal sector. firms to be more creative and to innovate regularly. A 9 http://wbl.worldbank.org/en/data/exploreeconomies/ghana/2018 (Ac- firm can have access to more innovations developed cessed on June 11, 2019) – Ghana Rank in Women, Business and the Law. abroad and foreign licenses by having foreign share- 10 A firm is foreign-owned (or a multinational enterprise) if more than 10 percent of its capital is owned by foreign firms. An exporting firm holders (Kafouros et al. 2008; Sun & Du 2010), and is defined as one selling more than 80 percent of its output on the it can internalize the acquired knowledge for future international market. ENHANCING PRODUCTIVITY TO ACHIEVE ECONOMIC DIVERSIFICATION 17 FIGURE 13: Labor and Capital Cost a) Labor and Capital Cost per Unit of Value-Added b) Labor Cost per Worker (2009 US$) 1.2 3,000 2,750 12,000 1.0 2,500 10,000 0.8 2,000 8,000 1,552 1,570 0.6 1,500 6,000 0.43 0.4 0.36 1,000 831 4,000 0.31 0.17 0.18 505 0.2 500 2,000 0.0 0 0 Ghana Cameroon Vietnam Malaysia Indonesia Cameroon Ghana Indonesia Malaysia Vietnam Labor cost per unit of value added Labor cost per worker (2009 Prices) – Left Axis Capital cost per unit of value added GNI per capita – Right Axis Source: World Bank Enterprise Surveys. Note: Survey years are as follows: Ghana (2013), Cameroon (2016), Indonesia (2015), Malaysia (2015), and Vietnam (2015). All data points are median values observed in the manufacturing sector. The above analyses suggest that the high cost of Proportion of Total Purchase FIGURE 14:  capital (access to finance), inadequate human capi- Fixed Assets by Financial Sources tal for frontier firms, and inadequate access to land (% of Total Purchase of Fixed are retarding productivity in Ghana. Capital cost Asset) per unit of value-added is higher than in aspirational 80 peers. Moreover, signs of inefficiencies or inadequate 70 human capital emerge from two contrasting facts: 60 the existence of a low labor cost per worker and the 50 reporting of several innovations by firms despite lower 40 productivity, in comparison with peers. Exporting and 30 foreign ownership are positive elements that could 20 help increase productivity and stimulate meaningful 10 innovation.11 0 Internal funds Equity Bank Advances Other Constraints to Firm Productivity 2.2  Indonesia Cameroon Malaysia Vietnam Ghana Source: World Bank Enterprise Surveys. Access to Finance 2.2.1   Note: Survey years are as follows: Ghana (2013), Cameroon (2016), Indonesia (2015), Malaysia (2015), and Vietnam (2015). All data points are average values observed in the manufacturing sector. Ad- Constraints to productivity are analyzed by focus- vances refers to “Credit from supplier and advances from customers.” ing on major constraints to physical capital and knowledge accumulation or reallocation, and to efficiency increase. Based on results from the Ghana Enterprise Survey (2013) and the analytical frame- 11 Cusolito and Maloney (2018) stress that entrepreneurs are too opti- mistic about their capabilities, and it is assumed that this entrepreneurial works proposed by World Bank (2010, p.8) and characteristic can affect Ghanaian firms’ judgement on their own in- Cusolito and Maloney (2018, p.119) to enhance, novations. 18 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT respectively, innovation and productivity (See FIGURE 15: Access to Finance by Firm Size Appendix 4 and Appendix 5), this section focuses 90 80.4 77.5 on financial constraints to productivity and inno- 80 vation, and on constraints related to infrastructure, 70 and human capital. This focus is also justified by the 60 55.9 50.8 consistency of the ratings of finance and electricity as 50 major constraints in Ghana (Appendix 8). 40 Firms’ access to finance is a major business con- 30 19.9 22.9 20 14.8 straint as it impedes asset purchase and innovation 10 3.5 activities. About 62 percent of Ghanaian firms men- 0.0 0 tioned access to finance as a major or severe obstacle Firms with a loan Firms that needed Loan application was to their current operation. An international compari- or lineof credit (Pct.) a loan (Pct.) rejected (Pct.) son with peer countries confirms firms’ perception of Small (5–19) Medium (20–99) Large (100+) access to finance as a major constraint because Ghana Source: Ghana Enterprise Survey (2013). has the lowest proportion of purchased fixed assets financed through banks or non-bank financial institu- tions (Figure 14), and only one in four firms have at (219 percent of loan amount) and the world (209 least 20 percent of their purchase of fixed assets being percent). In addition, the type of collateral required financed by banks or non-bank financial institutions. by banks—often the owner’s personal assets and While some minor disparities in financial sources immovable assets such as building and land—makes of purchased assets exist (Appendix 6), the overall it challenging to obtain a loan, particularly for start- impact of this constraining financial situation is the ups and small enterprises. development of innovations or the use of innovations that are mostly new to the local market, and cannot 2.2.2  Human Capital benefit from scale effects related to sale of products/ services sold on the national or international market. Lack of human capital seems to be an impediment Limited resources would thus be available to research to productivity growth and innovation; Ghana, and development activities (R&D), even though an with the quality of education lagging, has a low analysis shows that the occurrence of R&D activities human capital index (HCI). This is an issue for firms could increase firm efficiency by an average of about at the technological frontier where specific skills are eight percent.12 important inputs. The issue will likely be increasingly Access to finance is uneven and collateral important as the economy at large moves closer to requirement represents a major obstacle to loan the frontier of production and processes over time. access. Large firms are significantly more likely to have As such, it is necessary to address the low HCI now, a loan or a line of credit: 50.8 percent of large firms given reforms to the education system take time and vs. 19.9 percent for small firms. The need for a loan changes in the human capital of an economy will as well as rejection rates are inversely correlated with lag behind educational reform. The development of firm size: the larger the firm the lower the need for a innovative products and processes relies heavily on loan and the lower the rejection rate (Figure 15). The human capital as a critical input. While 71 percent of amount of collateral required to obtain a loan is high with banks demanding more than twice the value of 12 This result is the outcome of a data envelopment analysis (DEA) of the loan amount; approximatively 240 percent of loan Ghanaian firms to calculate their efficiency scores, and a set of Tobit amount, which is higher than the averages for SSA regressions that explain efficiency scores. ENHANCING PRODUCTIVITY TO ACHIEVE ECONOMIC DIVERSIFICATION 19 Ghanaian firms do not identify inadequately educated Correlation between the HCI FIGURE 16:  work force as an obstacle or rate it as a minor obstacle and the Productivity of Industry (Ghana 2013 Enterprise Survey), Ghana’s HCI is low (2010 US Constant Prices) and does not match with its income level. Ghana’s 13 HCI is lower than the average of its income group, 12 and below the ones of its aspirational peers (Appendix 11 Productivity (Ln) 7). Differences with peers originate mainly from the 10 adult survival rate and educational quality. Based on 9 Ghana’s HCI, it could be inferred that the Ghanaian labor force has a learning gap of 5.9 years, and such 8 gap is a drag on the country’s productivity and inno- 7 vation capacity (Figure 16). 6 Low education quality, and disparities in the 0.2 0.4 0.6 0.8 1.0 access to education services can explain the level of HCI human capital proxied by the HCI. There are issues Source: World Bank Human Capital Project, and WDI. related to the skills acquired by students throughout Note: Ghana is the green dot on the chart. their life, since only two percent of learners are fully proficient (Ghana 2017). Performance in mathematics and science has been below standards across education operated by private developer/operator LMI Holdings levels. This situation can be explained by substantial and houses 75–80 companies. TEMA has received weaknesses in the education system such as teacher World Bank assistance in the past, and, as measured absenteeism, poorly defined standards, shortage in by uptake of plots, has been successful in providing education teaching and learning materials, the poor serviced, industrial land to its tenant companies with state of education infrastructure, significant dropout a 98 percent occupancy rate. However, the demand rates in rural regions, and the persistence of gender of the private sector in Ghana for serviced, industrial and income disparities in the access to educational land is far greater than this single project can supply. services (Honorati & Johansson 2016; Ghana 2017). Additionally, there have been some coordination chal- lenges with LMI Holdings that should be improved 2.2.3   Access to Land for Industrial Use upon for subsequent private developer/operators (World Bank 2019b). Access to well-located, well-serviced, and affordable Challenges in the access to land are reflected industrial land is a binding constraint in Ghana, in Ghana’s low rank in the Doing Business Report especially for FDI. World Bank (2017a) reports that Property Indicator (123rd out of 190). Ghana over- access to land for large-scale investment continues to all performs within regional norms, but behind the be complex and costly, with one case taking as much best performers (Doing Business 2019). More specifi- as six years to secure its land lease. The market rate cally, delays associated with closing a land transaction, for one acre of land in the TEMA Free Zone (the only although better than the regional average, are still operational Special Economic Zone in Ghana, already larger than many competitors. These are the result of at full capacity) is $350,000, reportedly the highest long searches at the Land registry to ensure that right- price in West Africa. Ghana’s Special Economic Zone ful ownership and that the property to be transferred (SEZ) regime remains in inception stages despite is free of dispute. In addition, the difficulty in finding the relative success in filling the TEMA Free Zone, the ownership of plots is reflected in the low quality two hours outside of Accra. The TEMA Free Zone is of the land administration index, which has a score 20 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT of 8 over 30, below the regional average and many those losses are difficult to address as the purchase of competitors. There is no electronic or computerized electrical generators is required, and their main source system for deeds or title record keeping, nor is there of financing is “internal funds or retained earnings.” an electronic database for searches related to encum- Overall, access to electricity is likely to be less of brances such as liens, mortgages, etc. a problem now than during the Ghanaian ‘Dumsor’ energy crisis of 2014/15. Then, there were dramatic, 2.2.4   Reliable Access to Electricity frequent, and largely unpredictable outages around the country (Hardy and McCasland 2017). Blackouts led Firms identified electricity outages as a major to economically meaningful declines in both weekly constraint to conducting business, and losses due revenues and weekly profits; each additional black- this issue significantly reduced productivity levels out day was associated with an 11 percent decrease in 2012/2013. About 61 percent of firms identify in weekly profits on average. Firm owners respond to electricity as a major constraint—almost nine out blackouts by working fewer hours during blackouts, ten firms experience electrical outages, well above the without fully shifting labor supply to non-blackout regional average and levels recorded in aspirational days. Expenditures on wages fall, suggesting that firm peers (Figure 17). Losses due to electrical outages are owners may shift from the use of higher-paid workers also substantial in Ghana. Losses due to electrical out- to low-wage apprentices, which is evidence of a real ages average 15.8 percent of annual sales at the national human impact. Power outages have since decreased, level but increase to 18.3 percent for small firms, but poor financial sector performance is still creating and 18.6 percent for domestic firms that have fewer substantial fiscal risks and reducing the security of financial resources. For small and medium enterprises, supply (World Bank 2018). FIGURE 17: Access to Electricity and Associated Losses a) Comparison of the occurrence of electrical outages, and their perception as a major constraint b) Comparison of losses due to electrical outages (in percentage of total number of firms) (in percentage of total annual sales) 100 18 90 16 80 14 70 60 12 50 10 40 8 30 6 20 10 4 0 2 Malaysia Indonesia Vietnam East Asia & Pacific South Asia Sub-Saharan Africa Ghana Cameroon 0 Malaysia Indonesia Vietnam East Asia & Pacific Sub-Saharan Africa Cameroon South Asia Ghana Firms experiencing electrical outages Electricity is a major constraint Source: World Bank Enterprise Surveys. Note: Survey years are as follows: Ghana (2013), Cameroon (2016), Indonesia (2015), Malaysia (2015), and Vietnam (2015). ENHANCING PRODUCTIVITY TO ACHIEVE ECONOMIC DIVERSIFICATION 21 Opportunities for Productivity 2.3  national market” and most innovations being new to Growth: Exporting and Foreign- the local market, the level of innovativeness of product Owned Firms innovations could be considered limited. Vertical spillover effects from exporting firms 2.3.1   Maximizing Positive Spillovers are more important than the ones from MNEs as the latter have fewer linkages with domestic Positive spillover effects could occur through an firms. There is weak integration of domestic firms enhanced integration of other firms in the produc- with MNEs, since half of MNEs have a 70 percent tion chain of exporting firms and Multi-National share of imported inputs. Exporting firms are more Enterprises (MNEs). Positive spillovers may arise connected to domestic firms even though their main from the entry of foreign firms in a country because inputs are mostly imported. Overall, the proportion multinational firms can transfer knowledge to local of imported main inputs is substantial across sectors, producers through interactions with downstream excluding the following sectors: textiles, non-metallic clients and upstream suppliers (vertical spillovers). mineral products, and furniture (Table 2). Moreover, potential competitors can have access to Spillover effects from MNEs to domestic firms some technical information on new products, and could be increased by fostering MNE assistance they could develop improved products through dem- programs but results from such initiative would onstration effects (horizontal spillovers). The mobility depend on the FDI motives and local absorptive of workers who previously worked for MNEs could capacities. In a study of SSA countries, including help local firms to access specific technical knowledge. Ghana, empirical analyses show that backward spill- The same principle could be applied to exporting firms over effects were more significant when local suppli- as: (i) they are expected to be more efficient because ers receive assistance from MNEs. For instance, an their survival relies on their level of productivity; and increase of export occurred for local suppliers that (ii) the competition with international firms may result received technical audits before and after signing in the access to more technical knowledge. However, contracts, along with assistance from their foreign the occurrence of the above-mentioned spillovers will customers, jointly developed products with their for- depend on the absorptive capacities of local firms, the eign customers, and made use of foreign licenses from motivation of foreign investors, and the type of output. their clients. However, the probability of receiving In Ghana, horizontal spillover effects from both assistance was significantly greater for market-seeking channels of technological transfer exist but the FDI, and for firms with the largest shareholders being resulting level of innovativeness seems to be limited. from SSA. Moreover, the occurrence of positive spill- About six percent of firms export directly more than overs was also conditioned by the proximity with the 20 percent of their output, and 16 percent of firms MNE and the existence of a minimal stock of human have foreign ownership above 10 percent of the total capital within local firms. For instance, local firms capital. Results from empirical analyses show that there with at least 20 percent of workers with a secondary exist positive horizontal spillovers (intra-industry) from education were more likely to supply MNEs while both types of firms on productivity levels of domestic local firms, that are located more than 500 km from firms and non-exporting firms.13 These results are also the MNE, are less likely to be integrated in the value supported by the fact that 38 percent and 54 percent chain of the latter.14 of firms report product and process adaptation respec- tively as the main origin of their innovation idea. 13 This conclusion is based on results from an econometric analysis of labor productivity. Spillover effects measures are like the ones used by Gui-Diby However, with about 29 percent of firms reporting (2016), Farole and Winkler (2014), and Brambilla, Hale and Long (2009). product innovations that are considered “new to the 14 Farole and Winkler 2014. 22 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT TABLE 2: Median of Share of Imported Products in Ghana by Economic Activities 2nd Most 3rd Most Imported Inputs Activities Main Input Important Input Important Input (% of total input) Textiles 40 30 15 50 Garments 60 25 0 30 Publishing, printing and record media 100 100 25 90 Chemicals 67.5 20 20 62.5 Plastic & rubber 100 45 0 97 Non-metallic mineral products 0 0 0 2.5 Basic metals 95 0 0 77.5 Fabricated metal products 100 70 50 82.5 Electronics 90 20 0 90 Furniture 0 10 0 20 Overall economy 65 25 5 50 MNEs 95 17.5 0 70 Exporting Firms 80 20 0 30 Source: Ghana World Bank Enterprise Survey (2013). While several FDI projects have been announced among others, the size of the market (and its potential to in the service sector, the value of accumulated FDI grow), the availability and price of a skilled labor force, stock confirms the relative importance of the natu- the quality of infrastructure, institutional quality, sound ral resource sector. Fifty-eight percent of the 408 macroeconomic policy, and the existence of local service announcements of FDI projects received by Ghana support facilities.16 While Ghana could attract market- between 2003 and 2018 had services as their desti- seeking FDI inflows because of its ECOWAS mem- nation according to Financial Times FDi Markets, bership and the future implementation of the African a database of FDI announcements. Manufacturing Continental Free Trade Agreement (AfCFTA),17 it still industries accounted for 33 percent of the projects, faces challenges in some of the identified determinants the largest being food and tobacco (six percent), metals (four percent) and industrial machinery (four 15 The main sources of Ghana’s inflows of FDI are the EU, South Africa percent). Natural resources extraction industries and US. When FDI is decomposed by country of origin, we see that the accounted for the remaining (8.8 percent). However, majority comes from 3 sources that account for almost 70 percent of total FDI: the EU (39 percent), South Africa (21 percent) and the United of the US$42.9 billion of realized investment since States (9 percent). FDI projects in services are not labor intensive: services 2003, US$22 billion (over 50 percent) corresponds related projects only represent one fifth of total direct jobs created by FDI. If we analyze the accumulated number of jobs directly created by to natural resource extraction activities, and 28 per- FDI projects since 2003 and we decompose them by sector, we see that cent of the total stock of announced foreign direct the largest contribution is made by projects that have manufacturing as a destination (59 percent), followed by primary activities (21 percent) investment (in US$) were for the manufacturing and services (20 percent). sector (Figures 18a and 18b).15 16 Narula and Dunning 2010. 17 Ghana is one of the 44 countries having signed the Framework Agree- Ghana could leverage its ECOWAS membership ment of the AfCFTA on March 21, 2018. Key details of the Agreement and the upcoming implementation of the continental are still to be agreed upon, including which specific tariff lines will be liberalized. The Agreement requires members to remove tariffs on 90 free trade agreement to attract market-seeking FDI. percent of products, though countries have not yet decided which ones. Market-seeking FDI inflows are positively affected by, Also, rules of origin for the Agreement have not been finalized. ENHANCING PRODUCTIVITY TO ACHIEVE ECONOMIC DIVERSIFICATION 23 FIGURE 18: FDI in Ghana a) Ghana's FDI Inflows, Number of Projects Accumulated b) Trends in the Stock of Inward FDI by Sector, by Sector, 2003–2018 2003–2018 (in US$Million) 450 50,000 400 350 40,000 300 30,000 250 200 20,000 150 100 10,000 50 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Natural resources Manufacturing Services traditional Natural resources Manufacturing Services traditional Services non-traditional Total Services non-traditional Total Source: Staff calculations based on Financial Times FDi Markets Database. of market-seeking FDI inflows. In addition to challenges embedded in metals (mainly gold), and US$2 in agri- discussed previously in Chapter 2 or in Chapter 1, the culture (mainly cocoa) (Figure 20). fact that service provision is identified as a major con- In the absence of quality backbone services, straint by firms—particularly the ones integrated into productivity will be subdued due to the inherent the global market—shows that there is scope to further inefficient supply of services inputs. In lower-mid- develop the service sector. dle income countries, both worldwide and in SSA, obstacles to accessing services inputs affect firms’ per- 2.3.2   Enhancing Service Quality formance. For lower-middle income countries, such as Ghana, improving the quality of services supply, so Although the size of the service sector has increased, that firms perceive that supply as less of an obstacle, commodities still account for the bulk of domestic is associated with improved firms’ performance. value-added in Ghana. The participation of fruits In regions in which transport infrastructure is, for and vegetables (mainly cocoa), oil, and metals (mainly example, perceived as only a moderate obstacle, firms gold) as embedders of value-added grew from 18 per- are, on average, 5.1 percent more productive than cent in 2004 to 27 percent in 2014 (Figure 19). This in regions where it is perceived as a major obstacle means that although there has been some diversifica- (Appendix 9). tion towards services value-added in the economy, a Improving services provision is key to Ghana’s large proportion of that value-added ends up being economic upgrading and vertical diversification embedded in traditional commodities with highly vol- process. The provision of competitive backbone atile prices. It is estimated that, out of every US$100 services is crucial to create the conditions for a more of Ghanaian value-added exported, US$32 are gener- diversified and sophisticated productive structure. For ated in services and exported in a good, and within example, if Ghana is to keep its leading position as an those US$ 32, that US$28 correspond to commodity exporter of cocoa beans, it will require the knowledge exports: US$16 is value-added generated in services to adapt its cocoa bean growing techniques to meet and embedded in energy (oil) products, US$10 are new, more stringent EU regulations on cadmium 24 0% 5% 10% 15% 20% –5% 0% 5% 10% 15% 20% 25% Sugar cane, sugar beet Prim. agric. Cattle,sheep,goats,horses Cereal grains nec 2.4% Animal products nec FIGURE 20:  Crops nec Other primary Oil seeds 0.7% Paddy rice Plant-based fibers Origin: Services Energy Raw milk 15.9% Vegetables, fruit, nuts Destination: Primary goods Wheat Proc. foods Wool, silk-worm cocoons Forestry 1.6% Fishing Minerals nec Bev. & Tob. Coal 0.1% Electricity Gas Textiles Gas manufacture, distribution Oil 0.1% Petroleum, coal products Clothing Meat: cattle, sheep, goats, horse Dairy products 0.0% 2004 Food products nec Meat products nec Leather Processed rice Sugar 0.0% 2007 2004 Vegetable oils and fats Beverages and tobacco (%-age of Total Exported Value Added) Lumber Textiles 0.3% GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT Wearing apparel Leather products 2011 2014 Paper Source: Staff calculations based on Global Trade Analysis Project (GTAP) database 10. Source: Staff calculations based on Global Trade Analysis Project (GTAP) database 10. Wood products 0.0% Paper products, publishing Exported Service Value Added by Sector, Ghana Chemical, rubber, plastic products Chemicals Mineral products nec 2014 Origin: Services Ferrous metals 0.3% Metals nec Non metal min. Metal products Destination: Manufactured goods Motor vehicles and parts 0.0% Transport equipment nec Metal Electronic equipment Machinery and equipment nec 10.0% Manufactures nec Water Fab. metal Construction 0.1% Trade Air transport Transp. equip. Transport nec Sea transport 0.0% Communication Financial services nec FIGURE 19: Backward Value-Added Composition, Ghana (%-age of Total Value Added) Machinery Insurance 0.2% Business services nec Recreation and other services Other manuf. Dwellings PubAdmin/Defence/Health/Education 0.0% ENHANCING PRODUCTIVITY TO ACHIEVE ECONOMIC DIVERSIFICATION 25 content in cocoa. This will require tapping into expert Firms’ Perception of Some FIGURE 21:  consulting services so that farmers implement the Market Efficiency Issues, needed mitigation techniques. 2017–2018 Increased efficiency in backbone services 6 provision could be achieved by encouraging com- 5 petition at home and by reducing the regulatory burden on firms. When implemented strategically, 4 such reforms can result in reduced prices of services 3 inputs, increased varieties, and improved quality. 2 Private firms’ perceptions of the extent of market dominance, the effectiveness of anti-monopoly 1 policy and the degree of customer orientation (of 0 firms) show that Ghana is above the SSA average Extent of market Effectiveness of Degree of customer but fall well below levels observed in aspirational dominance anti-monopoly policy orientation peers (Figure 21). Moreover, even though Ghana Aspirational Countries Ghana has a more liberal policy stance for several services Low Middle Income Countries Sub–Saharan Africa trade than comparators in the region, there is scope Source: Staff calculations based on World Economic Forum data (2017–2018). to reduce the restrictiveness observed for financial Note: Score ranges between zero and seven. A higher score is associ- and professional services. ated with a better perception by executives. 27 INCREASING INVESTMENT FOR PRODUCTIVITY ENHANCEMENT AND ECONOMIC DIVERSIFICATION 3 The importance of capital accumulation to growth has substantially increased since 2011 (Figure 22a) as has steadily increased over the past three decades the country continues to encourage investment in but investment has been driven by FDI inflows in its hydrocarbon sector through greenfield projects the hydrocarbon sector and domestic investment (Figure 31). This surge in investment was primar- is constrained by the level of interest rate. Over ily driven by FDI inflows; the latter representing the period 1991 to 1998 capital accumulation con- about 54 percent of total investment in 2013–2017 tributed 0.52 percentage points to growth at a time (Figure 22b). Despite these increases, total invest- when growth was driven primarily by TFP and labor ment has been below levels recorded in aspirational growth. Since then, the importance of capital has countries (Table 1). Concomitantly, public investment increased substantially in light of large-scale capital has slowly declined since 2011 as the country made accumulation in natural resource sectors such as oil efforts to restore fiscal sustainability through a fiscal and gas. Between 2012 and 2016, capital contributed consolidation that significantly curtailed domestic- 2.56 percentage points to growth far outpacing con- financed public investment. tributions from labor accumulation (1.59 percentage From the above trends, boosting domestic pri- points) and TFP; the latter, in fact, has been negative vate investment, attracting more FDI in the non- since 2012 (–0.29 percentage points). Capital accu- resource sector, and mobilizing more savings seem mulation has been accompanied by strong increases to be major issues. In fact, with the Government not in total investment since 2011; but this investment having the required fiscal space to further invest, the had only limited impact on economic diversification role of the private sector should be strengthened by as it was primarily driven by FDI inflows in the hydro- helping domestic firms and attracting FDI inflows carbon sector. To maintain high rates of investments, in the non-resource sector. Moreover, while the gap especially domestic private investment, there is a need between investment and savings recently narrowed to to mobilize more domestic savings in the economy. an average of 4.9 percent of GDP 2013–2017 as finan- However, unfavorable interest rates and high col- cial inclusion improved, there is still a need to mobilize lateral requirements constrain access to finance and savings to shore up the capacity of the financial sector represent an impediment to channeling savings into to contribute to development because Ghana savings productive (investment) use; the former being already level is below peer countries (Table 1). relatively low. Constraints to Domestic Private 3.2  3.1  Overall Investment Trends Investment While total investment has increased substan- 3.2.1  Nominal Interest and Lending Rates tially since 2011, it had a limited impact on eco- nomic diversification as it was primarily driven Ghana shows a low level of usage of loans to by FDI inflows in the hydrocarbon sector. After finance capital goods due to unfavorable inter- a decline between 2000 and 2010, total investment est rates and high collateral requirements. While 28 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT FIGURE 22: Trends in Investment a) Trends in Total Investment and Public Investment in b) FDI Inflows, 2000–2016 Ghana, 2000–2017 (in Percentage of GDP) (in Percentage of Total Investment) 35 60 30 50 25 40 30 20 20 15 10 10 0 Indonesia Kenya Côte d’lvoire Cameroon Malaysia Vietnam Chile Ghana 5 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Total Investment Public investment 2008–2012 2013–2017 Source: WDI and IMF. Source: UNCTAD Database. about 30 percent of Ghanaian firms report that they Macroeconomic instability (inflation) and increases did not apply for a loan because they do not need in sovereign risks due to higher public debt can it, the top three reasons for not applying for loans create upward pressures on nominal lending rates are (in descending order of importance): unfavor- (Figure 24a). Specifically, increases in sovereign able interest rates, high collateral requirements, risks due to higher public debt, and increases in and complexity of application procedures. Firms non-performing loans fueled the increase of inter- reporting the above three reasons for not applying est rates (See Appendix 11 for econometric results). for loans also have the lowest level of capital funded Low competition, high credit risks, low efficiency, by financial institutions (ranging between 2.1 and high opportunity costs, and low diversification of 7.4 percent in average). bank income can also contribute to the increase in Nominal lending rates are also high in Ghana in lending rates. Business environment factors that can comparison with lower-middle-income countries, fuel higher nominal lending rates are related to poor and aspirational peers. Nominal lending rates that creditor rights, information asymmetry, and poor commercial banks offer in Ghana have been higher contract enforcement.18 than the ones observed in median LMIC and LIC Challenging macro-financial conditions, due during the period 2006–2017 (Figure 23a). This situ- to sovereign risks and substantial inflationary pres- ation is also observed when comparing Ghana with its sures, contribute to high nominal lending rates. aspirational peers (Figure 23b). The difference between Except for the period 2010–2012, inflationary pres- lending rates offered by commercial banks in Ghana sures have been quite high in Ghana, in comparison and the average rate observed in aspirational peers with LMIC (among which there are some aspirational increased to 17.3 percentage points in 2013–2017 from 15 percentage points in 2008–2012. High interest rates can be explained by 18 For details, see Demirguc-Kunt and Huizinga (1999), Demirguc-Kunt, Laeven and Levine (2003), Poghosyan (2012) and Calice and Zhou macro-financial conditions, the banking sector (2018). The conceptual framework used in this report is extracted from structure, and business environment variables. World Bank (2019c). INCREASING INVESTMENT FOR PRODUCTIVITY ENHANCEMENT AND ECONOMIC DIVERSIFICATION 29 FIGURE 23: Trend Change of Nominal Lending Rates, Ghana and Comparator Countries a) Comparison of Trends in Nominal Lending Rates b) Comparison of Trends in Nominal Lending Rates withIncome Groups, 2006–2017 (%) with Peer Countries, 2008–2017 (%) 35 30 30 25 25 20 20 15 15 10 5 10 0 5 Ghana Vietnam SSA Indonesia Chile Malaysia 0 2006 2008 2010 2012 2014 2016 Ghana Median in LIC Median in LMIC 2008–2012 2013–2017 Source: FinStat 2019, and Central Bank of Ghana. Notes: Acronyms: LIC = Low Income Countries, LMIC = Lower-Middle-Income Countries, and SSA=Sub-Saharan Africa. For group of countries, the median of lending rates is reported. FIGURE 24: Factors of Change in Nominal Lending Rates, Ghana and Comparator Countries a) Contribution of Different Categories of Factors to b) Comparison of Trends in Inflation Rates with Income Changes in Nominal Lending Rates by Sub−Period (%) Groups, 2006–2018 (%) 80% 20 60% 18 40% 16 20% 14 0% 12 –20% 10 –40% 8 −60% 6 −80% 4 −100% 2 2006−2008 2009−2011 2012−2014 2015−2017 0 2006 2008 2010 2012 2014 2016 Macro-financial conditions Banking sector structure Business environment LIC LMIC Ghana Source: Staff calculations based on data from WDI. Notes: Acronyms: LIC = Low Income Countries, and LMIC = Lower-Middle-Income Countries. For group of countries, the median of lending rates is reported. peers) and LIC (Figure 24b). Inflation is fueled by fis- trend, and the same pattern is observed for domes- cal dominance and depreciation of the exchange rate tic debt (Figure 25a). The positive trend of public in Ghana (IMF 2018). Moreover, after being granted debt results from the recurrence of fiscal deficits and a debt-relief in 2006, external debt has an increasing contributed to the rise of sovereign risks as interest 30 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT FIGURE 25: Public Debt and Lending Rates in Ghana a) Trends in Public Debt, 2003–2017 (% of GDP) b) Comparison of Trends in Nominal Lending Rates and Treasury Bill Yield, 2006–2018 (%) 70 35 60 30 50 25 40 20 30 15 20 10 10 5 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2006 2008 2010 2012 2014 2016 2018 External Debt Domestic Debt Treasury Bill-182 day Commercial Bank Lending Rate Source: International Monetary Fund. Source: Bank of Ghana. payments reached 6.4 percent of GDP in 2016 (about challenging; with consequences on collateral 26 percent of total expenditure). This increase in sov- requirements. Ghana has three credit bureaus since ereign risks is also reflected by the level of treasury bill the adoption of the Credit Reporting Act in 2007 yield; the latter being strongly correlated to nominal and they have credit data on about 22.4 percent of lending rate (Figure 25b) and representing a measure adult population, compared with 86.6 percent in of opportunity cost for commercial banks.19 Malaysia, for instance. However, the use of these Credit risks substantially increased as non-per- credit bureaus by commercial banks is limited by: forming loans have been on the rise since 2014, and (i) the data availability and data quality (standardized lower competition levels have weighed on lending datasets proposed by the credit bureaus); and (ii) some rates dynamic. Higher credit risks are reflected by legal issues such as the one related to the possibility the surge in non-performing loans to 22.7 percent in that a consumer can revoke his/her previously given 2017 from 11.3 percent of gross loans in 2014. This consent on credit reporting, or the need to update the increase in credit risks was driven by poor corporate regulation (World Bank 2016a). Contract enforce- policies and practices.20 In addition, credit risks seem ment remains challenging in Ghana as reflected in the to be more important in Ghana than in aspirational fact that the country ranks 116th out of 190 countries peer countries as the non-performing loan (NPL) level in the 2019 Doing Business survey. For instance, the is well above the median observed in LMIC. The time to enforce a contract is 710 days in Ghana while efficiency of the banking sector has improved as it ranges between 400 and 480 days in aspirational operational costs are declining, but poor competition peers, and the quality of the processes fall below (measured by the increase in the concentration of total that observed in aspirational peers. One result of the assets held by the top three banks) is creating upward pressures on nominal lending rates. While progress was made to reduce informa- 19 Ghana had had high risks of external debt distress and has important vulnerabilities related to its domestic debt (World Bank 2017b). tion asymmetry, the credit information coverage 20 https://www.bog.gov.gh/privatecontent/Public_Notices/State%20 remains low, and contract enforcement remains of%20the%20Banking%20System.pdf (Accessed on March 26, 2019). INCREASING INVESTMENT FOR PRODUCTIVITY ENHANCEMENT AND ECONOMIC DIVERSIFICATION 31 Value of Collateral Needed for FIGURE 26:  the macroeconomy. The weighted average interbank a Loan in 2018 (% of the Loan rate, the rate at which commercial banks lend among Amount) themselves, eased further to 16.2 percent in October 300 2018 from 20.9 percent a year ago in line with the monetary policy rate. The average lending rates of 250 banks also declined to 26.9 percent in October 2018 200 from 29.1 percent a year before, consistent with the 150 increase in credit to the private sector. Reducing information asymmetry could be 100 instrumental to the reduction of nominal lend- 50 ing rates as regulatory gaps exist. In fact, despite 0 the efforts that have been made by the government of Ghana to strengthen financial credit bureaus and Malaysia Sub–Saharan Africa Vietnam East Asia & Pacific South Asia Ghana Indonesia Cameroon collateral registry regimes, regulatory gaps persist. The effectiveness of the registry is hampered by deficiencies in the legal framework. Specifically, the Borrowers and Lenders Act fails to harmonize disparate legislation Source: World Bank Enterprise Survey database. governing securities rights and its scope is narrow (i.e., it only applies to regulated institutions). The lack of a unique identification system to facilitate the match- above-mentioned challenges is the level of collateral ing of information from various data providers also requirements which stands around 240 percent of loan constrains the functioning of the collateral registry amount (Figure 26). and credit bureaus (World Bank 2018). But Ghana’s commercial banks could further Options to Lower Interest Rates 3.2.2   improve their operational efficiency as it is still below several benchmarks, and digital technol- With easing inflation since 2018, the Bank of ogy could be a plinth to achieve such an objective. Ghana was able to gradually reduce lending rates. Commercial banks operation improved as overhead Ghana achieved, for the first time in the last five years, costs declined to 6.3 percent of total asset in 2017 single-digit inflation in 2018 (9.8 percent, down from from 8.4 percent in 2003. However, the level of over- 12.4 percent in 2017). This was the result of the tighter head cost remains above the one observed in lower- monetary policy stance and lower non-food inflation. middle-income countries and low-income countries The Bank of Ghana practiced monetary restraints (Figure 27a). With Ghana having a low density of including the placement of a moratorium on Central bank branches (6.1 branches per 100,000 adults) in Bank financing of the Government between 2015 comparison with the African average (8.1 branches and 2018, as part of the program with the IMF. The per 100,000 adults), digital technology could help moderation in inflation created room for monetary further efforts to reduce operational costs that weigh policy easing. Consequently, the Central Bank cut on nominal lending rates. In fact, a correlation analy- its policy rate from 21.5 percent in July 2017 to 20 sis shows that countries with a high percentage of percent in September 2017, and further to 17 percent individuals using Internet have lower overhead costs in March 2018. In January 2019, the Central Bank (Figure 27b) [See Box 1 for a discussion]. reduced the rate to 16 percent—the lowest rate since While Ghana made remarkable progress in ICT 2013—and an appropriate level at the current state of and at creating an attractive ecosystem for tech 32 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT FIGURE 27: Trends in Overhead Cost, Ghana and Selected Countries a) Comparison of Trends in Overhead Cost, 2003–2017 b) Scatter Plot: Overhead Cost Declined with (% of Total Assets) Access to Internet, 2013–2017 10 3.5 9 3.0 Overhead cost (% of Asset) (Ln) 8 2.5 7 2.0 6 1.5 5 1.0 4 0.5 3 0 2 −0.5 1 −1.0 0 −1.5 2003 2005 2007 2009 2011 2013 2015 2017 1 2 3 4 5 Ghana LIC LMIC Individual using Internet (Ln) Source: Finstat 2019. Source: Finstat 2019 and WDI. entrepreneurs, the sector growth is facing several to MSMEs declined in some cases, or commercial constraints. First, previously issues with electric- banks compensated for losses by charging higher rates ity supply have impeded development of the sector. on non-targeted sectors. With such adverse conse- Second, the lack of highly skilled ICT specialists tends quences, some countries had to abolish the interest to push the cost of salaries upward and creates develop- cap law, including Laos PDR in March 2019, while ment bottlenecks. In addition, young ICT specialists others, including Indonesia, adopted additional strate- often prefer to work for established companies—ones gies to deal with some negative externalities. that offer better benefits—instead of riskier start-ups. Indonesia fostered the dialogue with banks on Finally, access to finance is an issue of importance for the issue and used specific targets to foster credit ICT firms; particularly start-ups that could develop to some sectors. Despite differences in their prod- more solutions that are adapted to the local demand. ucts, services, clientele, risk appetite, and sectoral Other countries with high lending rates have know-how, Bank of Indonesia (BI) requires all banks used different types of direct policy interventions to meet minimum MSME exposure targets. To fos- but they yielded mixed results. Governments in ter credit to MSMEs, the government extended its emerging and developing economies with high lend- credit guarantee and interest rate subsidy programs to ing rates have mostly used direct policy interventions MSME and micro lending. The Indonesian Financial to address this issue. Direct policy interventions were Authority (OJK) fostered also dialogue with banks, related to interest rate caps, credit guarantee mecha- and it used moral suasion to induce all banks to lower nisms, or interest rates subsidies in Brazil, several lending rates to single-digit levels, particularly for the transition economies in the European and Central corporate and mortgage segments. Asian countries, Indonesia, Laos PDR, and in sev- A cluster analysis of top reforming countries eral countries in the Middle East and North Africa suggests that sovereign risks and credit risks are (MENA) region. However, while these policy inter- strongly correlated with nominal lending rate and ventions could reduce lending rates for some categories lending-deposit spreads. Based on an analysis of of projects, it created some distortions as credit growth clusters of top developing countries that significantly INCREASING INVESTMENT FOR PRODUCTIVITY ENHANCEMENT AND ECONOMIC DIVERSIFICATION 33 BOX 1: The Potential of Digital Technology to Reduce Operational Cost in Ghana In recent years, digital technologies have spread globally at a faster pace than previous waves of technological innovation, and are re-shaping consumer behavior, social interaction, business models, and the way government is working (Dahlman et al. 2016; World Bank 2016; World Bank 2018d). They are also disrupting the traditional industrial models as we know it, with an impact at a global scale. However, along with disrupting traditional models, digital technologies encompass a wide range of new applications of information technology in business models and products, thereby enabling growth and change. There can be major consequences for countries’ growth prospects and productivity by allowing them to: (i) exploit economies of scale and network effects; (ii) raise productivity; and (iii) facilitate access to global value chains. Digital technologies may also contribute to greater inclusion by lowering transaction costs and addressing information asymmetries associated with certain activities (for example access to finance) (Dahlman et al. 2016). Ghana has the potential to use digital technology as a plinth to enhance access to financial services, including the reduction of overhead costs because of the current trends in the usage of ICT services and mobile payment solutions. While initial investment in the development of digital banking could have a significant sunk cost for banks, a national strategy that is implemented by both the government and the private sector could help reduce such cost. Ghana’s progress in the ICT sector is remarkable. From March to September 2018, the number of mobile subscriptions increased by more than 1 million, to 40 million (NCA 2018). Today, by most accounts, Ghana ranks among the best performers in West Africa. ICT indicators confirm the country’s leading regional position for mobile cellular subscriptions (127 per 100 persons), while internet usage and the large user base of social media are among the highest in the region. Mobile payments solutions have been expanding. The total number of mobile voice subscriptions grew by 39 percent from 25.6 to 37.4 million between 2012 and 2017. Similarly, registered mobile money accounts increased more than sixfold between 2012 and 2017, from 3.8 million to 23.9 million. Active mobile money accounts also increased significantly from 345,434 to 11.2 million between 2012 and 2017. As a result, the volume and value of mobile money transactions dramatically increased since 2012—to GH¢982 million and GH¢156 billion in 2017, respectively (World Bank 2018c). The deep penetration of mobile technology in Ghana has made it a great medium for innovation in service delivery. Since it was introduced to the Ghanaian market in 2009, mobile money has played a key role in the push for financial inclusion. According to a study conducted by the Consultative Group to Assist the Poor (CGAP), in 2010 a relatively large segment of the Ghanaian population (44.0 percent) was excluded from the financial services sector altogether. By 2015 following the introduction of mobile money services, the segment of the population excluded from financial services fell to 25 percent. The mobile money sub-sector is set to experience faster growth in the years ahead because of favorable regulatory environment and pro-financial inclusion policies. Interoperability of mobile payments is one of the key priorities for Ghana. The overall objective is to reduce transaction costs, engender competition, and promote all-inclusive financial growth. The growth of the ICT sector in Ghana was supported by the emergence of the middle class. In addition, the increasing availability of applications and content of interest for local clients is also sustaining demand. Indeed, growing online local language content and apps with practical uses are encouraging more and more people to sign up for mobile subscriptions, acquire or use smartphones, and use mobile internet (Oxford Business Group, 2018). In April 2019, Google opened its first AI research center in Africa with 10 staff—a true revolution for the continent. The center will host engineers and researchers together to work on AI-dedicated projects. It will partner with local universities and institutions as well as policy-makers. Following the strategic decision of an expansion on the African continent, Ghana was chosen because of a reliable security and stability, the business environment, and internet infrastructure. AI is to be applied in sectors such as agriculture, health, and education. For example, thanks to AI small farmers could detect problems with their production or evaluate prices in online markets. The center will also focus on enhancing Google Translate’s ability to capture African languages more precisely. The center will also establish links with local universities to help foster a supply of qualified young graduates. Source: Staff compilation based on Ghana Investment Promotion Centre/Bank of Ghana. reduced nominal lending rates and lending-deposit between 2003 and 2017, one can find a strong cor- spreads between 2003 and 2017, it can be concluded relation between both changes in external debt and that lower sovereign and credit risks were strong char- changes in NPLs, and changes in nominal lending acteristics of this group of countries. For instance, rates (Figure 28). 34 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT FIGURE 28: Changes in Debt, Lending Rates and NPLs, Selected Countries a) Changes in External Debt and Changes in Nominal Lending b) Changes in Non-Performing Loans and Changes in Nominal Rates in Top Reforming Countries, 2004–2017 Lending Rates in Top Reforming Countries, 2004–2017 12 0.5 2.0 0.5 10 1.5 0 0 8 1.0 Non−performing loans 6 −0.5 −0.5 External debt 0.5 Lending rate Lending rate 4 −1.0 0 −1.0 2 –0.5 0 −1.5 −1.5 −2 −1.0 −2.0 −2.0 −4 −1.5 −6 −2.5 −2.0 −2.5 2004 2006 2008 2010 2012 2014 2016 2004 2006 2008 2010 2012 2014 2016 External Debt (% GDP) [Left axis] Non–performing loans (% gross loans) [Left axis] Nominal lending rates (percentage points) [Right axis] Nominal lending rates (percentage point) [Right axis] Source: Staff calculations based on data from WDI, and FinStat 2019. Foreign Direct Investment (FDI) in 3.3  of inward FDI were correlated with strong growth until the Non-Resource Sector 2013. Since 2013, FDI has continued to accumulate, although Ghana’s per capita growth has been declining. Overall Trends in FDI in Ghana 3.3.1   Over the same period, the high FDI stock and limited growth has resulted in an FDI performance that is FDI is playing a powerful role in stimulat- above parity for Ghana. In other words, Ghana’s share ing growth, productivity, and diversification in of global FDI inflows exceeded the amount that would resource-rich countries such as Ghana. Between be expected of an economy of its size. Ghana’s FDI 2006 to 2017, Ghana saw volatile (though increas- performance often exceeds top comparators, Chile and ing) FDI inflows, while simultaneously experiencing Vietnam. With rising macroeconomic pressures and a an increasing rise in its inward stock of FDI. FDI (as growing labor force (that is predominantly young) it a share of GDP) climbed from four percent in 2007 remains critical that Ghana pursue policies that will to 11 percent by 2009, before falling to about eight diversify its economy through FDI. percent of GDP in 2010, where it has remained (on Though Ghana has received high amounts of average) since 2011 (Figure 29). FDI stock increased inward FDI, the components of this FDI have not from 14 percent of GDP in 2007 to 70 percent of been diverse. FDI has primarily consisted of new GDP by 2016, signaling the significance of foreign equity with some intra-company loans. Since 2010, direct investment in the country. Again, Ghana saw FDI has consisted only of foreign direct investors’ pur- its inward FDI stock grow substantially from 2008 to chases of shares of enterprises in Ghana (Figure 30). 2009, when it effectively doubled (from 16 percent to Intra-company loan investments are common for 29 percent of GDP). capital-intensive sectors, including the extractives To best leverage the FDI that Ghana receives for sectors where Ghana receives the bulk of its capital its national development objectives, Ghana should investments. Likely, the absence of other reinvested articulate a clear investment vision and prioritize tar- earnings and intra-company loans is due to lack geted investment policy reforms. Ghana’s high flows of reporting. For example, the lack of reporting of INCREASING INVESTMENT FOR PRODUCTIVITY ENHANCEMENT AND ECONOMIC DIVERSIFICATION 35 FIGURE 29: FDI in Ghana and Selected Countries a) Ghana’s FDI and GDP Growth Path (2007–2016) b) FDI Performance: Ghana vs. Comparators (2007–2016) 2,000 2013 6.0 2011 2016 1,800 5.0 1,600 2008 2012 4.0 1,400 2010 Per capita GDP 1,200 3.0 1,000 2014 2015 2007 2.0 800 2009 1.0 600 400 0.0 200 −1.0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 20 40 60 80 Ghana Cameroon Malaysia Indonesia Stock of FDI (% of GDP) Chile Kenya Vietnam Cote d'Ivoire Source: Staff calculations based on World Bank FDI Snapshot (2019), Source: Staff calculations based on World Bank FDI Snapshot (2019), using UNCTAD data. using UNCTAD data. Note: This graph shows the extent to which the country’s GDP growth Note: The FDI performance index provides a comparative insight into a path has been domestically driven or driven by FDI. This shows correla- country’s FDI attraction with respect to its relative economic size, dividing tion not causation. its share of global FDI by its share of Global GDP . This provides a mea- sure of a country’s “fair share of global FDI”. FIGURE 30: Ghana’s Composition of Inward FDI Flows, 1997–2016 (in US$Million) 4,000 3,500 3,000 2,500 In million USD 2,000 1,500 1,000 500 0 –500 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Intra-company loans Equity other than reinvested earnings Reinvested earnings Total Source: Staff calculations based on World Bank FDI Snapshot (2019), using IMF BoP data. reinvested earnings could be due to limited data and Most of Ghana’s FDI projects have been green- difficulties in obtaining this information. Analysis of field investments. There are two types of FDI proj- historical data (from the early 1950s) confirms that ects: mergers and acquisitions (M&A) and greenfield. up until 2007. Broadly speaking, M&A investments refer to the 36 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT FIGURE 31: Greenfield FDI in Ghana and Selected Countries a) Total Number of Greenfield FDI Projects: b) Total Number of M&A FDI Projects: Ghana vs. Comparators (2007–2016) Ghana vs. Comparators (2007–2016) 2,500 1,200 2,150 1,055 2,000 1,000 850 1,684 Number of projects Number of projects 800 1,500 698 1,352 600 539 1,000 725 400 500 434 318 200 83 103 66 124 27 54 0 0 Ghana Cameroon Malaysia Indonesia Vietnam Chile Côte d’lvoire Kenya Cameroon Malaysia Indonesia Vietnam Chile Côte d’lvoire Kenya Ghana Source: Staff calculations based on World Bank FDI Snapshot (2019), Source: Staff calculations based on Thomson Reuters database. using Financial Times fDi data. numerous types of transactions that occur as com- financial services. Greenfield projects from top panies merge and acquires assets. Greenfield invest- African investors in Ghana (Nigeria and South ment projects are the brand-new foreign investment Africa) were concentrated in financial service: 79 projects in a country. Thus, greenfield investments percent of total Nigerian projects and 26 percent of provide a good measure of the entry of new FDI in a South African projects (2007–2016). Likewise, most country across time. Between 2007 to 2016, Ghana greenfield projects from the UK (19 percent) and saw about four times as many greenfield projects India (11 percent) were also in financial services. as M&A investments. Relative to its African peers, Ghana also received significant projects from the Ghana received more of both types of foreign invest- United Kingdom (14 percent) and the United States ment projects than both Cameroon and Cote d’Ivoire (17 percent) in business services. combined. Moreover, Ghana received only slightly Since not all FDI is the same, different types of less than the number of projects recorded in Kenya investments present varying challenges and oppor- (Figure 31). tunities for economic growth and development The top sources for such greenfield FDI inflows for Ghana. In Ghana, services contribute nearly 60 into Ghana in the last decade have been Nigeria, percent to domestic value addition, compared to only the United Kingdom, South Africa, the United seven percent from extractives. Moreover, investments States, and India. Ghana’s greenfield trends are in the service sector are important for job creation in consistent with the average trends of Sub-Saharan Ghana. Investments in services sectors, such as finan- African countries. The top greenfield investors in the cial and business services, provide high-knowledge and region (2003 to 2016) were the United States, United technology-intensive jobs. These latter job opportuni- Kingdom, South Africa, India, France, Kenya, and ties, through FDI, would be important for boosting China (Figure 32). Ghana’s competitiveness in global markets. According Greenfield investments from Ghana’s top to the IFC’s Ghana Country Private Sector Diagnostic, source countries have predominantly been in about 80 percent of Ghana’s jobs are in services. INCREASING INVESTMENT FOR PRODUCTIVITY ENHANCEMENT AND ECONOMIC DIVERSIFICATION 37 FIGURE 32: Top Sources of Greenfield FDI in Ghana a) Top Sources of Greenfield FDI for Ghana b) Top Sources of Greenfield FDI for Ghana (2007–2016) (# of projects) (2007–2016) (sum of capex) 60 9,000 8,373 53 8,000 50 7,000 Number of projects 41 41 In USD millions 40 6,000 31 5,000 4,028 4,000 30 4,000 20 17 3,000 2,504 12 11 2,000 1,500 1,3111,072 10 9 8 7 728 532 507 1,000 0 0 United Kingdom Hong Kong SAR,China United States Denmark China India Ireland United Arab Emirates South Africa Nigeria Nigeria United Kingdom South Africa United States India France China United Arab Emirates Germany Australia Source: Staff calculations based on World Bank FDI Snapshot (2019), using Financial Times fDi data. FIGURE 33: Sectors Receiving Greenfield FDI in Ghana a) Sectors receiving Greenfield FDI in Ghana b) Sectors receiving Greenfield FDI in Ghana (2007–2016) (# of projects) (2007–2016) (sum of capex) 70% 70% 64% 58% 60% 60% 57% 60% Share of number of projects Percent of total sum of FDI 50% 50% 46% 45% 40% 40% 35% 30% 30% 26% 30% 26% 24% 21% 20% 20% 17% 20% 19% 14% 13% 10% 6% 5% 10% 8% 5% 1% 1% 0% 0% 0% 2003–2007 2008–2011 2012–2016 2003–2007 2008–2011 2012–2016 Agriculture Extractives Manufacturing Services Agriculture Extractives Manufacturing Services Source: FDI Snapshot, WBG 2019. Using Financial Times fDi Markets data. Over time, Ghana has seen its share of FDI capital-intensive, countries such as Ghana may see shift from natural resources to services. Although the lion’s share of their greenfield investments in a extractives made up the bulk of Ghana’s FDI (2003 few large extractive projects. Following the 2010 to 2016) in terms of new greenfield projects, the larg- commodity boom, there was a two percentage points est number of projects were in services (Figure 33). increase in its share of extractives FDI projects. Commonly, as natural resource investments are However, as the number of greenfield projects is a 38 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT FIGURE 34: FDI Typology and the Situation in Ghana a) FDI Typology: Share of Ghana’s FDI by Type and Subsector b) FDI Typology, Number of Greenfield FDI Projects (2012–2016, Number of Greenfield Projects) by Type: Ghana vs. Comparators (2012–2016) 100% 69 5 7 90% 74 219 56 80% 68 15 70% # of Projects 60% 50% 40% 14.62% 30% 137 29 839 681 796 398 91 246 20% 10% 0% Ghana Cameroon Malaysia Indonesia Vietnam Chile Côte d’lvoire Kenya 72.02% 6.93% 6.43% Efficiency–Seeking Market–Seeking Efficiency–Seeking Market–Seeking Natural Resource–Seeking Tourism Natural Resource–Seeking Tourism Source: Staff calculations based on World Bank FDI Snapshot (2019), using UN COMTRADE and Financial Times fDi data. Note: Numbers in bar are numbers of projects. signal of new investor interest, the shift from natural Efficiency-seeking investment, on the other resource to services FDI in Ghana over time, tells hand, is export-oriented and can be determined a story of structural transformation through FDI. by relatively short-term policy changes. Such FDI, Services projects have over time increased (from 45 if attracted, has the potential to help Ghana improve percent in 2003 to 2007 to 64 percent in recent the productivity of its workforce and connect domestic years), while projects in extractives have diminished suppliers to Global Value Chains. This type of FDI from a quarter of projects in 2003 to 2007, to only a occurs when investors seek to increase cost-efficiency fifth in recent years. Financial services projects have of production, by taking advantage of various location- been concentrated in the upper West, upper East and specific competitive factors, such as knowledgeable northern regions of the country. All in all, this tells workforce and supply of key inputs like transport a story of FDI-led diversification in Ghana. or logistics, etc. Given the mobility of efficiency- Most of Ghana’s foreign greenfield investments seeking investment, global competition for this type have been market-seeking (See Figure 34 for refer- of FDI can be fierce and attracting it can be difficult. ence). Specifically, 64 percent of Ghana’s greenfield As such, efficiency-seeking FDI generally relies on a projects are categorized as market-seeking invest- strong investment climate in the host country. The ments.21 Ghana has received this type of investment 2017/2018 Global Investor Survey found evidence that in financial services, retail, electricity, and telecom, efficiency-seeking investors may be more responsive among others. Market-seeking investment depends on to policies aimed at improving the host country busi- the attractiveness and size of the receiving country’s ness environment. Export-oriented FDI can bring market, and hence is determined by long-term vari- both jobs and technological advancements to Ghana. ables of the economy. Consequently, policy changes 21 Market seeking investment is driven by an investor’s intention to to attract more market-seeking investment require establish production facilities in the host economy, with the ultimate substantial time to kick in. intent of supplying goods and services to the host country’s market. INCREASING INVESTMENT FOR PRODUCTIVITY ENHANCEMENT AND ECONOMIC DIVERSIFICATION 39 About 30 percent of greenfield investment FDI Determinants: How to Attract 3.3.2   projects into Ghana have been efficiency-seeking Non-Resource Inflows? (i.e. non-market seeking in Figure 34a). Of these, 6.4 percent were purely efficiency-seeking FDI Ghana has potential to attract significant FDI inflows and these were entirely concentrated in busi- inflows in the non-resource sector. Figure 35 pres- ness services. Tourism and natural resources account ents a theoretical framework to analyze FDI deter- for the remainder of overall efficiency seeking FDI. minants and to guide the development of sectoral Compared to the rest of SSA, Ghana’s share of these strategies to attract foreign investors according the projects is relatively high. By comparison, over the national development plan. Determinants are orga- same period, Cameroon also saw 31 percent of its nized within the following categories: (i) policy frame- greenfield projects as efficiency-seeking investments work, (ii) economic determinants and (iii) business (non-market-seeking), compared to 20 percent in facilitation. It appears that Ghana can improve as a Vietnam, 17 percent for Kenya and less than 10 destination for FDI by tackling a few selected issues percent each for Malaysia, Indonesia, and Cote in its policy framework and its ability to facilitate d’Ivoire. business (left-hand side of Figure 35). FIGURE 35: Host Country Determinants of FDI: A Theoretical Framework I. Policy framework for FDI, e.g. II. Economic Determinants • Availability of natural resources A. Resource Seeking FDI • Tax Policy (Tax holiday, Tax incentives) • Availability of raw materials • Trade Policy ( import-substitution vs. To secure cheaper supplies of raw • Availability of low-cost labor export-orientation) materials or inputs that are not available • Quality and efficiency of infrastructure • Policies affecting economic, political at home. and social stability (Monetary, fiscal, exchange rate policies) Example: Extracting oil (Nigeria), Gold (Ghana), and diamond  Mainly exists in primary, • Rules regarding entry and operations (Botswana) manufacturing • Sectoralpolicies (e.g., mining) • Market Size B. Market Seeking FDI • Market Growth • Access to regional and global markets Horizontal strategy to open up new • Structure of domestic market markets in the host country or its • Exports neighboring countries. Mainly exists in • Per capita income manufacturing and services sectorB. Host Country • Consumer preferences Market-Seeking FDI Horizontal strategy to Determinants open up new markets in the host country or its neighboring countries. Example: FDI aiming to have access to a large domestic (Brazil,  Mainly exists in manufacturing and China, India) or regional market (EU, NAFTA, ASEAN) services sectors • Cost of local labor • Inflation rate C. Efficiency-Seeking FDI III. Business Facilitation • Cost of production Vertical strategy which seeks to rationalize • Skills of the labor force the value chain. It divides and specializes • Investment promotion • Quality and efficiency of infrastructure production in line with the comparative • Investment Incentives advantages of different locations, usually • Corruption, red tape, etc. is export-oriented FDI. • Support services such as banking, legal accountancy services Example: Regionally integrated markets, such as Europe and  Mainly exists in manufacturing Asia. sector Source: Chen, Geiger, and Fu (2015). 40 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT Ghana is one of the most open economies to foreseeable future. But other facilitating measures to foreign equity ownership in the SSA region as ease the burden for tax administration remain viable restrictions only exist in selected sectors, according policy options for Ghana. to the Investing Across Sectors World Bank database. Red tape and corruption also weigh on pros- Excluding some primary sectors, all of Ghana’s major pects to attract FDI in the non-resource sector. sectors are fully open to foreign capital participation. While institutional factors have been found to be In the mining and oil and gas industries, there are determinants of FDI inflows by several empirical stud- equity restrictions stipulated in the Minerals and ies such as Globerman and Shapiro (2002), Busse and Mining Act (2006, Act 703), and the Petroleum Hefeker (2007), and Kenisarin and Andrews-Speed (Exploration and Production) Law (1994, Act 84). (2008), more than 40 percent of Ghanaian firms rated Both acts mandate a compulsory local participation corruption as a major or severe constraint to their daily in investment projects in the electricity transmission operation (Ghana 2013 Enterprise Survey). Moreover, and distribution sectors; the government automati- the severity of this issue is confirmed by the recurrence cally acquires a minimum equity share of 10 percent of bribes according to data from the World Economic in ventures at no cost. Moreover, the dominance of Forum (2017–2018), and the trend of the corrup- public owned firms in the electricity transmission tion perception index published by Transparency and distribution sectors could represent a poten- International. tial obstacle to foreign equity ownership in those Ghana lags on contract enforcement proce- industries.22 dures; the latter being critical to foster investment. Firm executives doing business in Ghana fre- Ghana ranks 116th out of 190 economies in the quently flag taxation as a major constraint that can Doing Business 2019 while aspirational peers such as affect investment decisions. Despite the existence Malaysia and Vietnam ranks are respectively 33rd and of a substantial number of tax incentives (World 62nd. Ghana could greatly benefit from an improve- Bank 2017), about 52 and 38 percent of Ghanaian ment of contract enforcement procedures despite firms respectively, perceive issues around taxes and limited empirical evidences on the impact of con- the tax administration as major or severe constraints tract enforcement on investment (Aboal, Noya, and for their operation (Ghana 2013 Enterprise Survey). Rius 2014). In fact, the impact of contract enforce- Recent data, from the World Economic Forum, con- ment—and institutions in general—on investment firms the likelihood of these issues (2017–2018). In or economic performance has been found by several fact, this data suggests that, in comparison with an authors such as Djankov, McLiesh, & Ramalho aspirational peer like Malaysia, taxation negatively (2006), Nunn (2007), Quintin (2008), and Haidar affects investment decision and custom procedures (2012). Critical areas of improvement are related are burdensome in Ghana. For instance, for tax and to case management since trial, judgment, and the mandatory payments within a year, firms should make enforcement of the latter are lengthy in Ghana: 365 eight payments in Malaysia and 31 payments in Ghana days are required for trial and judgment in Ghana (Doing Business 2019). Moreover, firms should spend while 270 days are required in Malaysia; and 330 an average of 77.7 hours per payment in Ghana but days are required to enforce judgment in Ghana, only 23.5 hours in Malaysia. To facilitate payment, in comparison with 120 days in Malaysia (Doing the Government of Malaysia relies heavily on online Business 2019). tools for tax payments. Any decision about tax rates, which are part of the policy mix to attract FDI needs 22 This is according to the World Bank’s Investing Across Borders Indi- to be made in the context of each host country’s fis- cators (available at: http://iab.worldbank.org/data/exploreeconomies/ cal space. In Ghana, such space is very limited for the ghana#investing-across-sectors; accessed on May 11, 2019). INCREASING INVESTMENT FOR PRODUCTIVITY ENHANCEMENT AND ECONOMIC DIVERSIFICATION 41 Furthermore, access to land is a major issue that In the ECOWAS region, Ghana has some mar- would limit the occurrence of large investment in ket potential to attract market-seeking FDI, but its productive land, for instance for the development attractiveness is reduced by trade costs and the qual- of agribusiness. Access to land is often reported as ity of infrastructure. Ghana is the second market of an issue by the private sector. As in many countries the ECOWAS region after Nigeria, and it is the third in SSA, the supply of land in Ghana is regulated by economy in terms of GDP per capita (estimated at a dual framework including customary (traditional/ 2011 international constant prices) after Nigeria and religious) and statutory (legal and judicial) systems. Cabo Verde. The above-mentioned characteristics of An estimated 80 percent of the land is governed under the Ghanaian economy and its ECOWAS member- customary law and only 20 percent under statutory ship provide opportunities to attract market-seeking jurisdiction. Although the commercial exploitation FDI inflows. Ghana is one of the countries with the of land in traditional areas is made possible through highest potential to have access to the regional market a variety of customary arrangements, Ghana’s contra- (Figure 36a), particularly among countries that do not dictory institutional and legal arrangements result in share an immediate border with Nigeria (about 190 mil- unclear tenure arrangements, which allow informal lion inhabitants in 2017). Analysis suggests that, consid- acquisition of land. In this context, the ownership ering the current trade cost among ECOWAS countries, and management of land leaves space for opacity and a foreign-owned plant in Ghana could target a maxi- potential conflict especially at the expense of smaller mum of 126 million inhabitants from the ECOWAS operators and smallholders. Challenges in this area region; which is only 37 percent of the regional poten- are reflected in Ghana’s low rank (123rd out of 190 tial. This potential could be significantly improved by countries) on a property registration indicator (Doing reducing the trade cost that represents about 187 percent Business 2019). of the value-added of product (Figure 36b). FIGURE 36: Estimated Regional Market Potential for Ghanaian Products a) Estimated ECOWAS Market Potential in Millions of People, and Percentage of the Regional Population (2017) 45.0 160 126 142 139 40.0 140 123 138 115 35.0 103 120 28.3 30.0 93 100 25.0 24.9 80 20.0 58 60 15.0 43 44 37 40 10.0 20 5.0 12 20 0.0 0 Cabo Verde Gambia, the Guinea Cote d’Ivoire Sierra Leone Nigeria Mali Liberia Burkina Faso Benin Ghana Togo Senegal Niger Market potential (% of regional population) [Left axis] Market potential (million people) [Right axis] (continued on next page) 42 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT FIGURE 36: Estimated Regional Market Potential for Ghanaian Products (continued) b) Estimated ECOWAS Potential in Percentage of the Regional Population and Trade Cost 45.0 400 40.0 350 35.0 300 30.0 250 25.0 200 20.0 150 15.0 100 10.0 5.0 50 0.0 0 Cabo Verde Gambia, the Guinea Cote d’Ivoire Sierra Leone Nigeria Mali Liberia Burkina Faso Benin Ghana Togo Senegal Niger Market potential (% of regional population) [Left axis] Trade cost [Right axis] Source: Staff calculations based on data from ESCAP-World Bank International Trade Costs Database, and WDI. Note: Estimation method adapted from Carstensen K. and Toubal F. (2004). Note: These graphs calculate the regional market potential approximated by ECOWAS. The potential market share is a function of a country’s own population, total ECOWAS population, and trade cost. For each country the share excludes its own population and focuses on non-domestic ECOWAS markets. Consequently, larger countries, like Nigeria, will have a comparatively small regional market share relative to smaller coun- tries, like Liberia. 43 POTENTIAL PATHWAYS FOR ECONOMIC DIVERSIFICATION 4 4.1  Summing It All Up for diversification through agriculture and agribusi- ness. Likewise, if human capital elements from the This final chapter analyses different potential “indirect” approach are applied in a specific sector, pathways to support economic diversification in such as training for specific skills in ICT or chemical Ghana. Opportunities for future growth through industries, a sub-set of that country’s human capital diversification are presented in the short-, medium-, endowment is expanded. and long-term. To help identify short- to medium- Table 3 summarizes the short-, medium-, and term opportunities to expand the production base long-term pathways for a more diversified economy this analysis is based on the concept of “Economic in Ghana. More details are subsequently provided in Fitness,” which is a measure of a country’s capabilities this chapter. In terms of the “indirect” approach, over and is computed as the complexity-weighted diversi- the medium- to long-term, it is found that Ghana fication of its exports relative to 180 countries.23 The needs to reduce macroeconomic volatility, further analysis around “Economic Fitness” fits well into the develop human capital, invest in infrastructure to framework of identify promising segments in the tape into the regional potential market, and improve economy in the spirit of the “direct approach” for the currently weak business environment and insti- diversification.. In addition, the work provides options tutional framework. These elements are cross-cutting for a policy reform agenda that aims to broaden the issues that are crucial to enhance productivity as well endowment of the country, which was earlier labeled as foreign and domestic investment in the non-natural as an “indirect approach” for diversification. Pathways resource sector. In addition, access to finance, a major and priorities that fall under this category have the constraint in Ghana, is analyzed through the lens of potential to make a development impact over the high nominal interest rates in Ghana. The “direct” medium- to long-term; this is because broadening approach provides a glimpse on potential sectors that endowments requires institutions and time. can be considered in an economic diversification strat- Combining the “direct” and the “indirect” egy with a short-to-medium impact.. approach to identify complementary opportuni- ties allows the development of a forward-looking medium-term diversification agenda. The two 23 Economic fitness is based on the concept of hidden capabilities (Tac- approaches are interdependent. The “direct approach” chella et al. 2012). Productive structures are ever-changing interactions of economic, political, social, technology, and other less definable is a means to identify promising sectors that can have indicators. Some are measurable: human capital, resource endowments, targeted interventions to broaden the endowment in and governance. Others are more difficult to define, even conceptually. Instead of trying to estimate each factor that influences competitiveness this sector; as such, these interventions also contrib- and productivity, economic fitness uses economic output as a proxy for ute to the indirect, broadening of the endowments in a country’s capability set. If a country can compete globally with other suppliers, then the country has the skills and inputs to make a given the whole economy. To illustrate: if better access to product. By understanding the combination of goods and services a land is a required element in the institutional frame- country can produce competitively, it is possible to learn how developed its capability stock is without having to measure or define explicitly all work for a more diversified economy, access to land the abilities present within an economy. The analysis is based on trade with irrigation is a very specific, targeted requirement data from 2008 to 2016. 44 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT TABLE 3: Summary of Key Policy Recommendations “Direct Approach” – Identified Sectors “Indirect Approach” – Laying the foundation Interdependences exist between “Direct” and “Indirect” Approach Short-term upgrading potential Reduce macroeconomic volatility Agribusiness • Preventing fiscal cycles • Medium-term Chemicals • Implementing an economic diversification strategy • Long-term Improve human capital Textiles • Allocating substantial resources to address the shortcomings • Medium-term Extractives and processed resources of the education systems, and the Government Education • Medium-term program • Restructuring the TVET system to better align job skills to the market demand Medium-term diversification potential Enhance connectivity Agribusiness • Invest in trade and logistics infrastructure • Medium- to long-term Extractives and processed resources Strengthen the institutional framework • Improve procedures for contract enforcements • Medium-term Plastics and rubber • Reform land administration and systems to ease secured • Long-term Information and Communications access to land • Medium-term Technology • Streamline tax policy and tax administration procedures • Medium-term • Anti-corruption in public service provision Notes: Short-term = 1–3 years; Medium-term = 3–6 years; Long-term = more than 6 years. Short- to Medium-Term: Product 4.2  countries, assess the capabilities needed in specific and Sector Opportunities industries and begin identifying constraints to growth. The outcome is a useful input to policy-making that Economic Fitness predicts long-term growth in would like to embark on immediate policies for the GDP per capita. Economic Fitness is a complexity expansion of the production base using the “direct framework which characterizes an economy’s level of approach” described in Figure 1. diversification and its capabilities to produce more Ghana’s Economic Fitness trajectory has complex products (see Box 2 for a definition of the been unstable between 2008 and 2016, which most important terms used in this framework). It reflects losses in most sectors and the reliance provides a rigorous quantitative basis to develop strate- on natural resource exports. Fitness increased gies for growth. The Country Opportunity Spotlight slightly since 2008, but with heavy fluctuations. (COS) uses Economic Fitness to assess current level In its current position (Figure 37), Ghana is at of capabilities and filters industries with upgrade and risk of continuing its volatile trajectory. Ghana’s diversification potential based on those capabilities. position on the Sector Fitness Chart, and its move- Because country endowments shine a light on what is ment between 2008 and 2016 is characterized by within reach, Economic Fitness predicts a feasibility erratic trajectories with unstable growth in both score for new industries: the likelihood that a country dimensions of GDP per capita and product fitness. will become competitive in an industry in the next Broadening and upgrading the production capabili- five years. COS results serve as a starting point for ties would not only help raise Product Fitness (hori- policymakers to shape and validate priorities, compare zontal axis) but also help to sustain increased GDP POTENTIAL PATHWAYS FOR ECONOMIC DIVERSIFICATION 45 BOX 2: Key Terminology in the Economic Fitness Analysis Economic Fitness is the complexity-weighted diversification of a country’s exports. It serves as a benchmark for the level of productive knowledge available in an economy. This knowledge—the level of a country’s capabilities—is the basis for countries’ patterns of growth: As they industrialize and diversify, they combine and expand their productive know-how, adding new and more innovative capabilities to their tool kit. Sector Fitness is the sector-level equivalent to Economic Fitness. It is the complexity-weighted diversification of a country’s exports in a specific sector. In this way, it captures the country’s level of productive capabilities in different sectors, each of which contribute to overall Economic Fitness. Industry Complexity is the exclusiveness of a product or service weighted by the inverse of the exporting countrys’ Economic Fitness. It captures the level of capabilities that is required to become competitive in a given industry. Industry Complexity tells us how rare or difficult the production of a certain good is. A product that is made by many different countries, including countries with a poor capability stock, will receive a low complexity score. If a product is competitively exported by only few, very sophisticated economies, then it has a high complexity. Upgrade and Diversification Potential correspond to the two factors that drive Economic Fitness: diversity and complexity of production. In this sense, diversification potential refers to the likelihood that a country will become a competitive exporter in a new industry (or product group). Upgrade potential refers to the likelihood to develop more sophisticated capabilities by moving into more complex industries (or product groups). The simplest form of the latter is to add production steps to an existing industry (or product group), thereby increasing the complexity. Economic Complexity in this context is a product-level metric influenced by the number of countries able to competitively export a product and the Fitness of these countries. Intuitively, it captures the level of capabilities required to produce a good. Source: International Finance Corporation, Country Analytics. FIGURE 37: Ghana Economic Fitness: 2008–2016 12 QAT MAC SGP KWT SAU IRL ARE SMR CHE USA 11 ISL SAU NOR AUT NLD BHR AUS CAN DNS KWE BEL DEU OMN NZL GBR FRA JPN MLT ISR SVN CZE ITA TTO CYP ESLSVK PRT KNA SYC KAZ GRC LVA HUN BOL ATG CHL RUS TUR 10 IRN URY MUS TKM AZE BRB MNE ARG MEX BGR SUP CRI THA CHN GDP per capita (log) DZA LCA DOM LBN SRB BRA GRD MNG LKA ZAF ECU DMA ALB BIHTUN EGY IDN PRY GEO BTN JAM ARM UKR 9 GUY BOL BLZ LAO UZB VNM IND TON NGA SDN 2016 NIC WSM MMR PSE MDA HND PAK GHA MRT BGD KHM KGZ CMR TJKSTP 8 2008 BEN TZA SEN KEN NPL KIR MLI ZWE BFA HTIAFG RWA ETH UGA YEM GMB SLE TGO MDG MWI MOZ 7 NER CAF –5.0 –2.5 0.0 2.5 Product Fitness (log) Source: Staff calculations based on data from Centre d’Etudes Prospectives et d’Informations Internationales (CEPII) and WDI. 46 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT per capita (vertical axis) and thereby raise Ghana’s in a variety of different economic sectors despite overall Sector Fitness. having lost significant capabilities in areas, includ- Various product groups, particularly within ing furniture and electronics. Areas with potential to the agriculture sector, show potential for future revive, indicated by only small declines of capabilities growth through diversification. The complexity and between 2011 and 2016, include processed commod- Economic Fitness analysis provide a filter of goods ity sectors such as food and animal products as well and services that are: (i) feasible because the country as textile industries. Areas where the country could already possesses many of the required capabilities, capitalize on already prevalent, yet small Fitness gains and (ii) likely to upgrade the existing capabilities. between 2011 and 2016 include forestry, apparel and These industries have the potential to contribute to a chemicals (Figure 38). country’s future Fitness and consequently affect GDP The agriculture sector is not only a desirable per capita. Ghana’s Sector Fitness indicates potential sector for diversification through the Fitness lens, FIGURE 38: Ghana Sector Fitness, 2011 and 2016 Complexity increasing counter-clockwise from here OIl & Gas Forestry Electronics 1 Apparel Chemicals Fishing 0.75 Machinery Beverage & Tobacco 0.5 Misc. Crops 0.25 Electrical Equipment 0 Wood Metal Products Leather Paper Food Transportation Textile Products Minerals Animal Products Metals Mining Petroleum & Coal Furniture Plastics Textiles Normalized Sector Fitness Rank: 2011 2016 Source: Staff calculations based on data from CEPII and WDI. Note: Sector fitness measures both the level of within-sector diversification and balance of more sophisticated product competitiveness relative to all other countries – top decile (0.9–1) denotes world class and diversified. Two snapshots are provided – 2016 (in red) and 2011 (in black). The sectors are organized from the least complex oil & gas extraction (at 12 noon) counter clockwise in increasing complexity to electronics (the most complex is at 1 pm). POTENTIAL PATHWAYS FOR ECONOMIC DIVERSIFICATION 47 but also due to its capacity for job creation. World and understand the bottom-line impact of decisions. Bank (2017a) highlighted agriculture and agribusiness This management aspect is often lacking in Ghana as key priority sectors for private sector development and is one reason why extension services with techni- due to their high desirability in terms of potential for cal advice do not lead to higher productivity (World development impact. World Bank (2017a) showed Bank 2018). that agribusiness creates 750 jobs for every additional Women entrepreneurs in Ghana face particular US$1 million of output, one of the highest such constraints, especially in agriculture. Reviewing multipliers of all the sectors analyzed in the study. the literature, World Bank (2018) shows evidence Furthermore, agriculture and agribusiness sectors that women farmers are less productive than men. provide important inputs for manufacturing products; Accordingly, in the cocoa sector, women farmers are two-thirds of non-oil manufacturing depends on agri- 25–30 percent less productive than men due to lower culture for raw materials. And agribusiness is itself is access to training, loans, and agricultural inputs such a step toward manufacturing as it has the potential to as fertilizers compared with male farmers. Women upgrade (raw) agriculture exports through processing farmers also have lower yields because they leave land and refinements. fallow for shorter periods. Women are more likely to Even though Ghana provides favorable condi- have their land taken away due to weak tenure rights tions for agribusiness, transformational FDI has yet when they leave it fallow. There is a significant gender to materialize in the sector. Ghana has vast expanses gap in agricultural land ownership, making women in of arable land with access to large resources of fresh- the three Northern regions more vulnerable. Despite water, such as the Volta river, which runs through the this, World Bank (2018) reports that Ghana scores entire length of the country and is a crucial factor for favorably on most indicators with respect to the legal agriculture. In addition, significant improvement in barriers women might face in the private sector, except the business environment over the past 20 years make for building credit. There is a significant gender gap in Ghana a promising place for agribusiness activities investment capital that is often related to challenges (World Bank 2017). But transformational FDI has that women face in intrahousehold resource alloca- yet to materialize in the sector despite the opportuni- tion. World Bank (2018) cites evidence that when ties and a vibrant local entrepreneurial class of actors households include both female- and male-owned involved in commercial agriculture and the distribu- enterprises, microfinance loans tend to be directed to tion of food products. If more and better FDI were the man’s business, even if the woman is the intended to materialize, this would bring tangible benefits in recipient. To overcome this, in-kind grants which can terms of employment, technical know-how and mana- shield women from competing household demands gerial skills, as well as access to new markets (World appear to be more effective than cash at improving Bank 2017). women’s business performance. Offering specific Improved managerial and entrepreneurial services to women to close the gender gap of access skills are critical for farms and agriculture-related to land, market, credit, and extension services would firms to raise their productivity. World Bank hence have a short-term and immediate positive (2018) argues that in agriculture, the development impact on farm productivity (World Bank 2018). of a cadre of skilled farmers is essential if Ghana is to More broadly, targeted support to first-mover expand commercial agriculture. Skills are not simply private sector investors would also help to ‘open’ in the form of technical know-how of seeding rates, new markets and mitigate higher start-up costs and nutrient requirements, or pest control, but they must risks. To illustrate this, World Bank (2017a) pointed also include the capability to manage farms as busi- to support from the Government of Ghana and devel- nesses, carry out farm operations at the right time, opment partners to address land and irrigation needs, 48 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT which triggered investment to develop new and prom- necessarily much upgrade potential, since they signify ising high-value horticulture value chains for export a move to a new industry (or product group) that may markets. In a review of the lessons learned by successful or may not require new, more complex capabilities. private investors who have succeeded in overcoming Upgrade potential refers to the likelihood to develop key constraints in agriculture and agribusiness, World more sophisticated capabilities by moving into more Bank (2017a) pointed to four specific issues: access to complex industries (or product groups). Complex, land, access to skills, access to irrigation, and access established industries (or product groups) have high to finance. The study provides insights on how these upgrade potential, since they strengthen more com- specific issues for agribusiness have been tackled in plex capabilities. But since they are already established the past, through direct efforts from Government industries, they do not contribute to diversification. and Development Partners. These historical activi- One form of upgrading existing industries (or prod- ties described in World Bank (2017a) can be used to uct groups) is to add production steps to an exist- devise a forward-looking, direct agenda in the sector ing industry (or product group), thereby increasing in the future (Box 3). the complexity. Since upgrading is the most feasible The concept of Economic Fitness can also be direct approach in the short-run, the remainder of used to map potential opportunities through either this section aims to identify industries (or product upgrading or diversification possibilities in agri- groups) with immediate potential for upgrading. business and beyond. Upgrade and diversification The Economic Fitness (Capability) analysis potential corresponds to the two factors that drive shows that opportunities exist across a range of Economic Fitness: diversity and complexity of produc- sectors and activities. Figure 40 presents potential tion (Figure 39). In this sense, diversification potential sectoral opportunities for the economic diversifica- refers to the likelihood that a country will become a tion of Ghana. There are opportunities to upgrade competitive exporter in a new industry (or product in Agribusiness, Chemicals, Textiles, and Extractives group). “Green shoots,” for instance, refer to indus- and Processed resources. Given the importance of tries that have high diversification potential, but not agribusiness for jobs creation, this should be an area FIGURE 39: Framework for Mapping Opportunities Non-dominant established industries Green shoots Established industries that are not complex but that Nascent industries that are feasible candidates for contribute to diversification and reduce reliance on diversification, given their relatedness to the single commodity exports. country's endowment set. Upgrade Potential Rebalance of exports Diversification (Complexity) Complex established industries Complex Green Shoots Industries where the country already competes All green shoots support diversification. More globally, but that contribute the most advanced complex industries also upgrade the country's capabilities to a country’s portfolio. capabilities. Capability Upgrade Diversification + Capability Upgrade Diversification Potential Fitness (Progression Probability) Capability upgrade and diversification raise Fitness Source: Roster, Harrington and Cader (2018). POTENTIAL PATHWAYS FOR ECONOMIC DIVERSIFICATION 49 Successful Past Operational Models to Remove Constraints and Support BOX 3:  Transformational Private Sector investment in Agriculture and Agribusiness Access to land. The government, with support from the World Bank, is engaged in improving land markets through the Ghana Commercial Agriculture Development Project, which develops model land leases between local communities and private investors, and through the Land Administration Project. AgDevCo, with the support of the U.K. Department for International Development, has over a period of three years negotiated the provision of 10,000 ha of land with local communities and chiefs and this land is now available to private investors. AgDevCo pointed out that the challenges facing an incoming investor include dealing with Ghana’s informal land tenure system; the lack of commercial farming expertise in the area; the environmental, social and governance risks; community acceptance; and raising of capital. The aim of its Babator Irrigated Farming Hub project is to develop the site to a stage where investors can take over a serviced plot for farming with the immediate risks of a new development reduced. AgDevCo has secured a 50-year lease with an option for renewal on the entire site, which is fully registered with the government’s Land Commission. Of the total site, there is about 5,000 ha of irrigable land on which AgDevCo has completed soil studies, topography, hydrology, irrigation design, and environmental and social impact assessments. Some 1,500 ha is reserved for small-scale farmers who can profit from the services, including irrigation, as well as the cluster. The remaining 3,500 ha will be for commercial farming enterprises to be developed in blocks of 500–2,000 ha. As a proof of concept, a commercial farm, the Babator Farming Company (BFC) of 356 ha of irrigated land, was developed in 2016. This is used to confirm construction costs and to establish processes for managing and staffing the project, securing permits, and engaging with local stakeholders. In early 2017, 170 ha was planted with maize, sorghum and onions, and further plantings were planned for the second quarter. Access to finance. There are currently several initiatives in Ghana that can be leveraged and scaled up to close the financing gap for rural enterprises. These included: (1) The Ghana Grains Council is running warehouse receipts financing in collaboration with a certification agency; (2) The USAID Financing Ghanaian Agriculture Project is a five-year project for improving financing and investment in agribusinesses operating in the maize, soy and rice value chains in northern Ghana. Since its inception in July 2013, the project has been offering technical assistance, either directly or indirectly through its network of business advisory service providers, which identify, prepare and package financing proposals for viable agribusiness opportunities. It has also been providing incentives and technical assistance to help financial intermediaries better understand agribusiness and develop products tailored to the specific financing needs of these businesses; (2) The Kreditanstalt für Wiederaufbau (KfW) and the Ministry of Agriculture have introduced the Outgrower Value Chain Fund, a refinancing vehicle for providing finance to medium- and long-term investment projects through the banking sector. The fund favors the concept of outgrower farming that is based on defined contractual relations between the outgrowers, based on a technical operator, such as processor or trader and a financial operator, such as a participating bank, which provides access to services, inputs and funding; and (4) The Ghana Incentive- Based Risk Sharing for Agri Lending is being developed by the MoFA and the Bank of Ghana to look into how to better spread and manage risk. Access to irrigation. Integrated Water and Agricultural Development Ghana Limited (Iwad), a subsidiary of investment company African Tiger Holding Ltd (ATHL), is focusing on the introduction of large-scale modernized irrigation and mechanized farming in northern Ghana. The Sisili-Kulpawn flagship initiative began in 2013 with the formation of partnership between Iwad and the parent company, ATHL, with Wienco Ghana (a leading agribusiness group), the government’s Savannah Accelerated Development Authority, Wageningen University, and the Rebel Group (an advisory group specializing in the development of large public-private investment projects). Operating in the Sisili-Kulpawn river basin, the initiative targets some 45,000 ha of under-used or abandoned land for developing commercial agricultural practices. Under the first phase of development, Iwad has established a 400-hectare irrigated commercial farm linked currently to 175 outgrowers at Yagaba. An irrigation system of four center pivots covering 260 ha has been set up with a sprinkler irrigation system covering a further 99 ha, plus drip irrigation for 15 ha and finally furrow irrigation on 39 ha. The nucleus farm of 250 ha is testing rice, onions, groundnut, maize, cowpeas and sugar. Ghanaian partners are involved by contributing local knowledge of irrigation, crops and soil, research, and hands-on farm training, such as the University of Development Studies in Tamale, the Savannah Agricultural Research Institute (SARI), and the Damongo training college. From 2016, Iwad signed a cooperative agreement with USAID to co-fund a Power Innovations in Commercial Agriculture (PICA) project to provide efficient alternative power systems to the outgrowers. PICA will construct a solar hybrid power generation system at Yagaba to provide low-cost power for irrigation. It is anticipated that with around 0.8 MW of solar energy, both the nucleus estate and the outgrowers will have access to clean energy at cost savings of about 50 percent. Source: World Bank (2017a). 50 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT FIGURE 40: Potential Opportunities in Ghana by Upgrading and Diversifying Potential Upgrade potential Diversification potential Agribusiness Cocoa shells, Fish products (flour, dried, smoked), Ground nuts, dried and otherwise prepared, Cassava starch, Prepared tomatoes, Ground-nuts in shell, Seeds for sowing, Couscous Vegetable oil-cake, Tapioca Extractives and processed Iron/ steel products (bars, flat-rolled, wire), Plated iron/steel coated with zinc, resources Cement clinkers and hydraulic cements Diamonds, Naphthalene, Liquefied natural gas Hydraulic lime, Axes and other tools Chemicals Personal use (vitamins and skin-care powders), Matches Industrial acidic oils, Hydrogen peroxide, Paints, Lead monoxide, Photographic film Plastics and rubber Rubber (TSNR, latex, other natural rubber), Natural rubber in smoked sheets, Wigs and materials Synthetic hair and human hair wigs Textiles Worn apparel, Synthetic fiber tarpaulins/ sunblinds Fabrics (twine, woven cotton, synthetic weave), Tarpaulins/ sunblinds Wood products Logs and lumber, School books Processed wood (Wood poles, Ply sheet, Densified wood), Paper rolls Misc. manufacturing Spectacle lenses, Percussion musical instruments, Billiards accessories Machinery and Shovels and construction equipment Boring machinery, Transportation equipment Cranes, Graders, levelers, road rollers, Floating platforms, Motorcycles Source: Staff calculations based on data from CEPII and WDI. of focus. Agribusiness is also an area with significant job opportunities; these may be fewer than in other diversification potential in the medium to longer sectors given the high capital intensity of production term. Chemicals and Textiles stand out in that they in this sector (see Appendix 11 for more details on present primarily upgrade potential, and much less this analysis). so diversification potential. Likewise, the plastic and In addition to the above-mentioned products, rubber sector is primarily focused on one dimension, sectoral analyses suggest that Ghana could also in this case diversification potential. Extractives and develop its ICT sector. According to World Bank processed resources show a variety of opportunities in (2017a), the ICT sector is a new driver of growth, both dimensions, but caution is needed to maximize offering unprecedented opportunities for investment POTENTIAL PATHWAYS FOR ECONOMIC DIVERSIFICATION 51 and job creation. Growth of the ICT sector has been addressing the remaining black spots, especially spectacular and far higher than that of the overall in the rural Northern Region, to ensure the ICT economy. The ICT sector contributed 10.6 percent revolution is inclusive. Second, further developing of GDP in 2016, up from just 2.8 percent in 2006. the internet backbone, which currently constrains Average annual growth of the ICT sector over 2009– growth of data-intensive IT services and makes 2014 was 30 percent, led by the revolution in mobile broadband access more expensive. voice telephony. But the ICT sector has yet to real-  ICT skills levels in Ghana are satisfactory, but ize its potential in job creation. While not directly a do not address all market needs. Training was large provider of jobs (1.2 percent of jobs in business largely developed to meet the needs of the first establishments) it is estimated that for each ICT job, ICT revolution in hardware, driven by the needs up to eight other related jobs may be created. The of telecom companies. Some skills needed for the sector is also a positive force for inclusion and has second revolution, in software, are missing, such provided opportunities for women and youth (World as cybersecurity, web-design and marketing, and Bank 2017a). software developers. Moreover, and importantly, in The shift towards a digital economy has been a world of start-ups Ghana misses the entrepreneur- slowed by many constraints, from the cost of access ship and business skills that would allow Ghanaian to data infrastructure, an underdeveloped regula- start-ups to survive in the commercial phase. tory framework, to gaps in some skills and lack  While the ICT ecosystem in Ghana is vibrant, of market opportunities to scale up. For digital with a rising number of start-ups, survival transformation to take place, a number of relevant rates are low. The government needs to encour- building blocks need to be in place, as shown in age the participation of the private sector in the World Bank (2017a). With sectoral interventions to acceleration phase of promising start-ups and by broaden the endowments in the ICT space, the sec- investing in large companies ready to adopt and tor is an embodiment of the power that the combi- sponsor locally-developed e-solutions to business nation of the “direct” and the “indirect” approach to problems—a space that Meltwater and Impact diversification can unfold. Some elements are already Hub are trying to move into already, but on a satisfactorily or partially in place in Ghana’s ICT sec- small scale. tor: for instance, there is a vibrant environment for  Recent years have seen a surge in the develop- start-ups and already decent infrastructure provision. ment of the regulatory framework for the ICT However, other important elements are missing, such sector and the digital economy, but it is fac- as the capacity to transform information technology ing two important challenges. First, important (IT) innovations into viable market solutions, or the regulatory gaps remain, as legislators try to adapt need for more competitive and market-efficient data to new technology and market developments. infrastructure provision. By building the required The prevailing feeling in the private sector is one infrastructure, skills, ecosystem and regulatory frame- of unpredictability and insecurity. Gray areas work, the government can enable private actors in ICT and regulatory gaps concern, for instance, data to deliver transformative effects. Constraints requiring storage, consumer protection and digital laws. intervention include the following four key dimen- Second, implementation of reforms has been weak sions (World Bank 2017a): (for instance, the allocation of licenses) due to a lack of resources and competence. The role of  While ICT infrastructure is broadly adequate, government as a market-maker in the regulation two key infrastructure challenges hamper the of competition and access, and as a provider of sector from achieving its huge potential. First, IT infrastructure and services, can be improved. 52 GHANA – ECONOMIC DIVERSIFICATION THROUGH PRODUCTIVITY ENHANCEMENT Medium- to Long-Term: Laying 4.3  done to invest in both managing the environment the Foundation for Economic and investing in diversification efforts (World Bank Diversification 2018). This can and should be more actively pursued with Ghana’s natural resource wealth funds. This report makes the case for higher productiv- According to World Bank (2018), continuing ity and investment to sustain growth as its current improvements in both the quantity and quality of drivers are unlikely to maintain growth in the education and skills are critical for driving pro- long-term. Growth has been driven by the service ductivity and increasing labor incomes in exist- and natural resource sectors, and there is a need to ing and emerging jobs. Since the 1990s, the labor broaden the base and its capacity to reduce poverty force in Ghana is better educated, and the higher by supporting the development of other sectors. On level of education has already translated into better the demand side, commodity exports dominate while job opportunities and poverty reduction. However, the contribution of investment to growth substan- secondary school enrollment rates remain low among tially declined during the recent years. Moreover, the the poor, there are large regional and gender dispari- contribution of TFP has declined, and it signals a ties in educational attainment, and education quality worrisome shift in the allocation of input factors. In remains an issue. Ghana also lags its international Ghana, the TFP’s negative trend is explained by an structural and aspirational peers in the share of adults increasing concentration of jobs in low-productivity who completed tertiary education (World Bank growth service sectors. 2018). At the same time, schooling is not equivalent Reducing macroeconomic volatility by con- to learning. The quality of preprimary education is taining fiscal cycles would help provide a better still low. Even after several years of basic schooling, and more predictable environment for economic many students lack basic literacy and numeracy skills. activities to flourish. Macroeconomic volatility has Thirty-four percent of youth between the ages of 15 been identified as a challenge for investors and can be and 24 score below the minimum literacy proficiency worsened by volatile fiscal policy. While macroeco- in urban areas, according to the literature review in nomic volatility can stem from shocks in the natural World Bank (2018). Ghana has also seen declin- resource sector, reducing the adverse impact of the ing pass rates on West African Senior Secondary fiscal policy would be important. By containing the Certificate Examination (WASCE) science and math fiscal deficit, the country should also be able to reduce since 2012, with levels in 2016 under 50 percent inflationary pressures that stem from the monetiza- (World Bank 2018). tion of the deficits. Macroeconomic volatility could To achieve this. the education and health sec- be further reduced by designing and implementing a tors need to be adequately resourced to improve targeted economic diversification strategy. This is the human capital. Improvement in human capital more urgent as Ghana’s natural resource rents are time- would be a core element of a productivity-enhancing bound with oil production to start fading out by 2036 strategy and the quest for more non-resource seeking (World Bank 2016c). In addition, the country’s gold FDI inflows. However, the Government is currently deposits are maturing, new mineral finds have been of consolidating its public finance, and there are efficien- a marginal quality, and any further expansion in cocoa cies issues in the education and health sectors that need production acreage has important environmental con- to be addressed (World Bank 2017b). Furthermore, a siderations. Ghana’s rate of adjusted net savings—a reform of the technical and vocational education and measure of an economy’s long-term sustainability, by training (TVET) system, to better align job skills to taking into account natural resource depletion—is market demand, could help in achieving results in the starkly negative, suggesting that more needs to be short term. According to World Bank (2017a), the POTENTIAL PATHWAYS FOR ECONOMIC DIVERSIFICATION 53 Ministry of Education, Science and Technology has the private sector, including having an adequate legal consistently allocated less than 2 percent of its budget and regulatory framework to do so. to the TVET sector. Partnering with corporations in Efforts to improve the institutional framework sectors that are large-scale employers of TVET gradu- could address, as priorities, issues related to taxa- ates could help close the gap. This would be a mutually tion, contract enforcement, red tape, and access beneficial arrangement, because corporations would to land. Taxation remains an issue because firm be able to contribute towards those skills that are most executives flag it as a major constraint that can affect relevant to the TVET curriculum and become invested investment decisions. Red tape weighs on prospects in the successful training of students. Moreover, the to attract FDI inflow into the non-resource sectors. Government would benefit from the financial funding Ghana lags on contract enforcement procedures, and other industry-relevant expertise that corpora- which is critical to foster investment. Furthermore, tions would bring in. Given the growing demand for access to land is a major issue that would limit the post-secondary education and the limited capacity to occurrence of large investment in productive land, absorb students into the traditional higher education for instance, for the development of agribusinesses. system, there is an opportunity to offer employability- The land administration and its governance system linked short-term courses to students. There is also an are complex, and they contribute to an increase in opportunity for the private sector to invest in resource perceived risks for potential investors. centers that provide training equipment and tools to Reducing nominal lending rates could be help improve TVET quality and relevance. achieved by implementing specific macroeconomic Ghana needs to step up its infrastructure invest- policies, improving the institutional framework that ment to improve the quality of logistic services to supports access to loans, and encouraging the use increase access to regional markets. The Ghanaian of digital banking. High nominal lending rates could market is relatively small, in comparison to Nigeria, be reduced by implementing macroeconomic policies but its size can be increased by leveraging its ECOWAS and reforms that aim to reduce the nominal infla- membership. This factor will be particularly important tion rate and reduce the fiscal deficit and public debt for market-seeking investment. Reaping the benefits (sovereign risk). In addition to sovereign risk, finan- from the ECOWAS membership would require invest- cial sector reforms are required to reduce credit risks ing in transport infrastructure and enhancing the (NPLs) as they are substantial in Ghana (22.7 percent operational efficiency of the energy sector. However, in December 2017). Improving contract enforcement infrastructure investment will only be effective and procedures and enhancing the access to credit infor- efficient if there is a regional strategy at the ECOWAS mation could contribute to the reduction of lending level or if there is effective coordination among neigh- rates as Ghana lags in those areas. The use of digital boring countries. With the current budget constraint, banking, and ICT could help reduce banks’ overhead Ghana may need to explore options to engage with costs, and negatively weigh on lending rate dynamics. 55 APPENDIX 1: DISAGGREGATED PRODUCTIVITY DEVELOPMENT PATTERNS (1990-2010) Component due to: Structural change Sector Total Within Static Dynamic Agriculture 1.36 0.00 0.00 Industry 0.42 0.17 0.05 Mining 0.05 0.02 0.01 Manufacturing 0.22 0.00 0.00 Public utilities 0.06 0.00 0.00 Construction 0.09 0.16 0.04 Services 0.59 0.56 –0.20 Market services 0.37 0.47 –0.17 Trade services 0.14 –0.01 –0.12 Transport services 0.27 0.16 0.07 Business services -0.04 0.31 –0.12 Non-market services 0.22 0.06 –0.03 Government services 0.19 0.03 0.01 Other services 0.03 0.03 –0.04 Total economy 2.93 2.38 0.70 –0.15 Source: Geiger et al. (2018). 56 APPENDIX 2: PERCEPTION SCORE ON THE PROVISION OF SELECTED PUBLIC SERVICES IN 2017-2018 Countries/Regions Health Education Roads Ports Electricity Cameroon 4.26 4.09 2.56 3.14 2.22 Chile 6.64 3.82 5.21 4.88 6.11 Ghana 3.98 3.91 3.90 3.64 3.12 Indonesia 4.65 4.53 4.10 3.99 4.43 Kenya 4.28 4.41 4.26 4.47 4.09 Malaysia 5.04 5.22 5.29 5.37 5.88 Vietnam 4.70 3.53 3.37 3.67 4.34 Lower-middle income 4.80 3.62 3.52 3.36 3.93 Sub-Saharan Africa 4.01 3.47 3.34 3.30 3.04 Source: Staff calculations based on World Economic Forum data (2017–2018). Note: Score ranges between zero and seven. A higher score is associated with a better perception by executives. Roads, ports, and electricity refer to the questions on their quality (2.02/2.04/2.07). Education is the average of scores of questions related to the quality of primary educa- tion (4.09), education system (5.03), math and science education (5.04) and management schools (5.05). Health refers to the business impact of malaria (4.02), tuberculosis (4.04), and HIV/AIDS (4.06). 57 APPENDIX 3: FIRM PERFORMANCE MEASURES IN GHANA IN 2009 US$, UNLESS SPECIFIED Labor cost per unit of Labor Labor cost per Capital Sales per value-added Region/Categories productivity worker intensity worker TFP (%) (unit) Ghana 3,969 831 2,857 6,616 3.03 0.181 Small 3,234 714 2,000 4,763 2.95 0.190 Medium 6,704 794 4,167 9,623 3.88 0.151 Large 25,404 6,656 17,105 57,217 2.08 0.083 Accra 3,969 794 2,250 5,293 3.29 0.182 North 2,562 494 5,000 3,780 2.87 0.150 Takoradi 1,764 831 2,333 4,704 2.66 0.409 TEMA 6,704 1,323 4,167 13,231 2.34 0.145 Food 3,710 882 2,083 7,621 2.19 0.372 Garments 2,205 635 833 3,528 2.78 0.409 Wood Products 1,164 635 8,199 4,133 2.04 0.400 Publishing & Printing 2,945 847 4,518 5,976 6.84 0.157 Chemicals 6,127 1,732 10,000 9,623 3.83 0.181 Plastic & Rubber 8,132 1,114 3,750 17,642 2.36 0.106 Non-metallic mineral product 11,511 812 500 12,349 4.94 0.097 Basic metals 26,463 3,352 62,500 76,011 2.08 0.075 Fabricated metal 3,234 635 1,000 4,763 3.17 0.182 Electronics 7,057 1,905 730 13,231 3.68 0.282 Transport 249 171 1,025 503 2.44 0.096 Furniture 2,805 662 2,059 3,780 2.53 0.251 Exporters 10,125 1,210 30,000 13,231 1.85 0.327 Non-exporters 3,555 812 2,750 6,175 3.05 0.168 Foreign-owned 8,901 1,911 10,763 20,056 2.08 0.125 Domestic 3,308 662 2,000 5,293 3.18 0.189 Source: Staff calculations based on data from Ghana Enterprise Survey (2013). 58 APPENDIX 4: DETERMINANTS OF TECHNOLOGY UPGRADING IN DEVELOPING COUNTRIES Technological frontier Foreign Diaspora Transmission Trade direct and other channels investment networks Governance and the business climate Policies Basic technological literacy absorptive capacity • Create competencies Technological • Build infrastructure Finance of innovative firms • Foster an innovation-friendly business climate Pro-active policies Technological Dynamic absorption Effects Spillover Returns Magnify effects to scale Technology Transfer Domestic technological achievement Source: (World Bank 2010, 8). 59 APPENDIX 5: DRIVERS OF PRODUCTIVITY GROWTH Operating environment: resolving market failures and removing distortions Human capital and innovative infrastructure: basic skills; entrepreneurial, managerial, and technological capabilities Innovation shocks Reallocation toward Within-firm Entry of high-productivity, more productive firms performance upgrading exit of low-productivity firms Dynamic effects Total factor productivity growth Source: Cusolito and Maloney 2018, 119. 60 APPENDIX 6: COMPARISON OF FINANCIAL SOURCES FOR THE PURCHASE OF FIXED ASSETS, SELECTED COUNTRIES (IN PERCENTAGE OF TOTAL ASSET) Firm Size Firm Age Ownership Main Market Non-major Domestic Exporters Exporters Youngest medium medium Medium Oldest Major High- Large Small Low- MNE Firm Country Financial Source Ghana Internal funds/Retained 75.6 63.3 67.3 74.9 79.3 61.0 65.1 70.3 70.9 72.5 70.7 earnings Equity 4.4 7.8 3.3 1.4 2.8 6.3 10.2 2.3 6.1 0.0 5.6 Banks and Non-bank 12.5 20.0 24.1 17.8 9.4 20.5 18.9 18.7 15.7 23.8 15.8 finance Supplier credit/ 4.3 7.5 5.3 2.9 6.1 9.6 4.5 7.2 4.8 3.7 5.5 Advances from customers Other 3.3 1.1 0.0 2.9 2.5 2.5 0.9 1.4 2.4 0.0 2.3 Cameroon Internal funds/Retained 30.0 71.7 57.6 53.3 88.7 33.4 57.0 35.4 48.0 67.3 43.8 earnings Equity 4.2 0.0 8.9 2.3 0.0 4.7 1.4 19.6 2.4 2.1 3.1 Banks and Non-bank 45.6 21.3 26.3 18.5 11.0 51.1 25.8 45.0 32.9 28.0 34.3 finance Supplier credit/ 6.6 0.0 5.6 11.7 0.4 0.0 15.7 0.0 8.6 2.7 9.5 Advances from customers Other 13.6 7.0 0.6 14.2 0.0 10.6 0.2 0.0 8.1 0.0 9.4 Indonesia Internal funds/Retained 77.5 69.7 50.3 67.6 61.4 90.8 37.1 48.8 73.2 32.7 75.1 earnings Equity 0.1 3.8 26.8 5.0 0.1 3.0 13.3 21.0 3.8 25.2 3.0 Banks and Non-bank 15.3 9.8 11.8 25.6 0.1 2.2 24.1 10.0 13.9 22.4 12.8 finance Supplier credit/ 7.1 4.8 11.0 1.4 14.2 4.1 25.4 20.3 6.3 19.7 6.1 Advances from customers Other 0.0 11.8 0.1 0.3 24.3 0.0 0.1 0.0 2.9 0.0 2.9 (continued on next page) Appendix 6: COMPARISON OF FINANCIAL SOURCES FOR THE PURCHASE OF FIXED ASSETS, SELECTED COUNTRIES (IN PERCENTAGE OF TOTAL ASSET) 61 (continued) Firm Size Firm Age Ownership Main Market Non-major Domestic Exporters Exporters Youngest medium medium Medium Oldest Major High- Large Small Low- MNE Firm Country Financial Source Malaysia Internal funds/Retained 35.5 48.0 71.6 53.6 39.3 83.0 40.5 47.5 60.7 74.9 39.8 earnings Equity 1.6 25.3 10.8 8.3 25.2 9.1 4.0 26.1 8.4 7.4 14.4 Banks and Non-bank 61.4 18.8 8.9 14.3 21.7 5.2 53.4 13.3 25.1 7.8 42.8 finance Supplier credit/ 1.5 6.3 5.9 21.2 8.7 1.6 1.4 8.1 4.4 7.0 2.3 Advances from customers Other 0.0 1.6 2.8 2.5 5.2 1.0 0.8 4.9 1.5 3.0 0.6 Vietnam Internal funds/Retained 79.4 77.0 47.8 73.1 58.3 73.1 71.7 79.5 68.9 73.8 69.2 earnings Equity 1.9 3.6 14.3 7.9 7.1 2.8 6.0 8.7 5.6 2.6 6.6 Banks and Non-bank 8.2 14.1 26.4 7.9 31.2 13.5 17.1 8.2 16.7 18.7 15.3 finance Supplier credit/ 6.4 1.6 6.9 3.6 1.6 7.5 3.3 2.1 4.4 2.7 4.5 Advances from customers Other 3.7 3.7 4.6 7.4 1.8 3.1 1.9 1.6 4.2 2.3 4.3 62 APPENDIX 7: HUMAN CAPITAL INDEX VARIABLES Expected Years Harmonized Test Learning-Adjusted Countries of School Scores Years of School Adult Survival Rate HCI Cameroon 9.1 378.9 5.5 0.7 0.4 Ghana 11.6 307.3 5.7 0.8 0.4 Indonesia 12.3 402.9 7.9 0.8 0.5 Malaysia 12.2 468.1 9.1 0.9 0.6 Vietnam 12.3 519.1 10.2 0.9 0.7 Source: World Bank Human Capital Project. 63 APPENDIX 8: HEATMAP ON THE PERCEPTION OF DIFFERENT FACTORS AS SEVERE OR MAJOR OBSTACLE TO BUSINESS IN GHANA Female in exporting Domestic Exporters Female- Medium minority Ghana owned Large Small Non- MNE Constraints Electricity 60.9 63.0 60.5 42.1 62.2 59.0 65.6 62.6 55.8 61.8 Telecommunication 14.9 16.2 14.7 24.2 14.3 14.4 15.5 17.7 11.8 15.4 Transport 21.8 15.2 23.1 16.7 22.1 23.8 20.9 32.5 27.5 20.9 Custom trade and 23.8 43.1 20.1 35.1 23.0 18.4 32.2 42.3 17.6 24.8 regulations Informal sector 29.3 18.9 31.3 27.5 29.4 32.0 23.7 24.9 28.6 29.4 Access to land 43.6 27.2 46.8 17.4 45.3 47.4 41.8 18.2 35.9 44.9 Crime 9.9 13.4 9.2 13.0 10.1 10.8 4.6 18.1 3.8 10.9 Access to finance 62.2 39.4 66.5 59.4 62.4 68.7 57.7 20.7 56.8 63.1 Tax rates 52.2 47.5 53.1 40.8 52.9 52.3 54.1 45.4 56.0 51.5 Tax administration 38.0 36.0 38.3 28.2 38.6 39.1 40.2 51.7 37.1 38.1 Business licensing 16.4 17.8 16.1 15.8 16.4 15.5 19.1 37.3 23.0 15.3 and permits Corruption 42.5 40.3 42.9 30.1 43.3 43.6 43.4 30.7 38.5 43.2 Courts 9.4 9.2 9.4 3.9 9.8 9.2 11.9 19.9 10.5 9.2 Source: Staff calculations based on data from Ghana Enterprise Survey (2013). Note: Data represents the percentage of firms rating the constraints as “severe” or “major” for their operation. Yellow cells refer to percentage above 50 percent and red cells present percentage below 50 percent and above 32.7 percent. 64 APPENDIX 9: FIRMS’ PERFORMANCE IMPACT OF ALLEVIATING OBSTACLES IN SERVICES SUPPLY Percentage points change in TFP given a 1 level reduction in obstacle Obstacle All sample Lower-middle income Sub-Saharan Africa Electricity 0.005 0.034* –0.083 Telecommunications 0.037 0.092** 0.220* Transport 0.037* 0.051** –0.001 Access to finance 0.076*** 0.094*** –0.022 Source: Staff calculations based on Enterprise Surveys, World Bank. 65 APPENDIX 10: REGRESSION RESULTS - DRIVERS OF NOMINAL LENDING RATES Variables (1) (2) (3) Categories Dependent variables Nominal lending rates Nominal lending rates Nominal lending rates Macro- External debt 0.024*** 0.023*** 0.020** financial (2.878) (2.693) (2.325) conditions Outstanding loans to 0.042 0.045 0.041 government and SOEs (1.016) (1.077) (0.992) GDP per capita –0.000 –0.000 –0.000 (–0.734) (–0.714) (–0.576) Savings 0.019 0.027 0.027 (0.831) (1.079) (1.067) Inflation 0.124*** 0.113*** 0.104*** (5.102) (4.339) (4.176) Standard deviation [end- 0.047 year] (1.205) Standard deviation 0.194*** [average] (3.789) Banking Overhead cost 0.328*** 0.345*** 0.357*** sector (3.623) (3.727) (3.908) structure Bank asset concentration 0.021 0.020 0.020 (1.548) (1.464) (1.477) Non-performing loans 0.076* 0.079** 0.076* (1.946) (1.983) (1.922) Non-interest income –0.022** –0.023** –0.024*** (–2.437) (–2.558) (–2.706) Business Credit bureau coverage –0.017** –0.017** –0.017** environment (–2.373) (–2.312) (–2.343) Rule of law index Other Private credit [Lag 1] 0.030* 0.029* 0.031* variables (1.853) (1.765) (1.882) Dummy variable – 0.930*** 0.897*** 0.736*** Global financial crisis (4.153) (3.928) (3.199) Constant 6.500*** 6.399*** 6.274*** (9.830) (9.429) (9.389) Observations 661 644 644   Number of countries 76 74 74 t-statistics in parentheses *** p<0.01, ** p<0.05, * p<0.1 66 APPENDIX 11: EMPIRICAL STRATEGY OF THE ECONOMETRIC ANALYSIS ON INVESTMENT Scope of the analysis: The analysis of determinants of Additional variables are as follows: (i) dummy vari- lending rates and lending-deposit spreads is based on ables to capture the global financial crisis; (ii) one lag a set of regressions with countries as primary observa- of the total private credit (in percentage of GDP) is tion units during the period 2003-2017. Due to data added as an instrument to control for the size of the availability, the dataset used for the regression includes banking system, and to proxy the size of operations; about 75 countries. and (iii) GDP per capita is added to control the level of economic development of countries. For robustness Dependent variable: Lending rates are measured purposes, we also test inflation volatility which is mea- as “weighted average of the rates charged by banks on sured as the standard deviation of monthly inflation loans with fixed interest rates and with own funds to rates (computed by using rolling windows to move individuals and corporations. The rate is weighted by from monthly to annual data). loan amounts.”24 The calculation of determinants’ contribution is Independent variables: For both variables, the basic performed at the regional or income group level. model includes the following variables (organized The impact of a variable on the dependent variable by categories extracted from the above conceptual during the period 2003-2017 is equal to the product framework): of the estimated coefficient, and the average of changes by sub-period.  Macro-financial conditions: inflation rate, exter- nal debt, domestic loans to government and state- Caveats: While results from the above presented owned enterprises, and savings. empirical strategy are consistent with the ones pre-  Banking sector structure: overhead cost, non- sented in the literature, they are based on country-level performing loans, non-interest income, and bank data and aim at analyzing patterns and trends by major asset concentration of three major banks. groupings. For deeper country analyses, using bank-  Business environment: credit bureau coverage, level data could help having a better understanding and rule of law index. of national challenges. Moreover, estimated contribu- tions are only based on the explained component of Estimation method: For each dependent variable, a interest rates. fixed effect model with correction of autocorrelation is estimated, and we use the method of Baltagi & Wu (1999) to estimate coefficients. 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