“Because uncertainties are so pervasive and unfathomable, the most dynamic and prosperous societies are those that try many, many different things.”
-Mancur Olson, Power and Prosperity (2000, 188-89)
It’s hard to believe that the industrial giant South Korea was once a weak economy with a GDP per capita under US$150. How did it grow to a point where GDP per capita is upwards of $30,000 today?
The answer lies in how it systematically changed its economic priorities by moving labour and capital from low value-added agriculture to high value-added manufacturing. This process, characterised by productivity growth, has seen many East Asian economies not only improve economic output and standards of living but also allowed the development of more structurally complex export products to secure higher incomes.
A critical question that many development practitioners have wrestled with for decades is, “Why is manufacturing-led growth –which can soak up labour – so elusive in Africa?”
For one, unlike when East Asian countries emerged as manufacturing hubs decades ago, African industries face an established, highly productive and relatively low wage competitor with often better institutional and governance environments.
Second, the economies of Sub-Saharan Africa have low levels of complexity. Economic complexity is a measure of the productive know-how in an economy. In other words, it is measure of the tacit knowledge in a society as expressed in the products it makes. Over time, specialization in certain goods, and some forms of structural, and technological change, do contribute over and above others to advances in “productivity, income and wages, the generation of more productive and higher quality jobs, and opportunities for learning in the production process”.
In essence, growing an economy is not necessarily about producing more of the same but, instead, producing a diversity of products, learning from these processes, and applying the collective learning surplus to make or create more complex variations, or novel products. It embodies what one may call a process of iterative learning. But, for a country to diversify into more complex productive activities, it needs to accumulate the productive know-how. How then does one accumulate capabilities to produce new products that require capabilities that do not yet exist in the population? In addition, there is little incentive to amass productive capabilities if the industries that demand them do not yet exist. This is especially true if those needed productive capabilities for the new product are very dissimilar from those already present in the country’s workforce. Classic check and egg issue.
Take Ghana’s economy as an example. Using data and insights from the Atlas of Economic Complexity toolkit, Ghana ranks the 103/133 in the Economic Complexity Index (ECI) ranking, almost ten points lower than it was a decade ago. It implies that for its income level, Ghana’s economy is much less complex than it should be.
Since 2002, Ghana has only added ten new export products to its suite. These include mainly Minerals: Petroleum, oils and Crude (98.63%); Metals: Other bars of iron, not further worked than forged (0.58%) and unwrought refined lead (0.19%); Agriculture: fresh fruit (0.44%) and Coffee extract (0.19%). A lack of diversification in exports has steered Ghana’s declining complexity. For decades, cocoa and gold have been the bedrock of Ghana’s export with petroleum carving a piece in this space in the last decade. Compared to countries like South Korea who have added over 20 export products in the same period, Ghana certainly has a long way to go.
Ghana Export Complexity Map, 2018. Visualizations provided by The Growth Lab at Harvard University. The Atlas of Economic Complexity. https://atlas.cid.harvard.edu/countries/83/export-complexity.
Ghana’s most significant exports are mostly still in low complexity products, as indicated above. Diversifying know-how to produce broader, and progressively more complex sets of goods and services can set countries up on a path for growth. Inadvertently, building complexity creates jobs – more jobs.
Ghana’s product space (see above) offers critical insights on how the nation could consider diversifying its manufacturing base. The core (center blue ring) of the product space shows more closely linked and interlinked products. This core region encompasses relatively more proximate and connected products, typically high value manufactured products, while the products on the periphery show relatively less proximate and connected products (usually primary products). Ghana’s productive structure, as represented by the product space image above, is peripheral and rooted in commodities (see large rings for gold, cocoa beans, and petroleum). Evidently, Ghana lacks economic complexity and thus, diversification toward more complex manufacturing products such as industrial machinery, metal accessories, plastics, and lubricants in the core will be crucial to its economic growth.
Diagram that shows the relatedness of Ghana’s export products and potential paths to diversify its economy. Grey nodes are products Ghana doesn’t export and colored nodes are those it currently exports. Visualization provided by The Growth Lab at Harvard University. The Atlas of Economic Complexity. http://www.atlas.cid.harvard.edu
How will Ghana realistically tackle this? Better still, how should it?
The answer is not more government but more private sector activity. Government’s role is to set the vision and only act as an enabler. Its policy approach should thus be to create a business environment that allows private sector actors to occupy these key industries where Ghana can develop more complex and diverse products. As more actors enter the playing field, the demands of business will cause them to innovate and compete into high levels of productivity, building knowledge over the years.
Government’s support should be evident through prioritising employment generation. Subsidies, grants, and assistance should be attached to businesses that have the potential to make the most impact on job creation. By 2030, Ghana’s population will grow by 17%, from 28 million in 2018 to 33 million and the number of people in the workforce will continue to soar. Manufacturing for instance is a lead sector. It generates large numbers of productive jobs. Through the direct effects it has on knowledge building, incomes and wages, as well as the indirect effects created by linkages to other sectors, building Ghana’s manufacturing and industrial capacity must be a core priority in economic planning and execution. The recent embracing of, and support for, local manufacturing of masks as well as agreements with global car manufacturers is indeed a step in the right direction.
Second, Ghana needs innovative thinking, something the private sector does well. Driven by efficiency, government’s effective collaboration with private sector agents, outside of the elite friends of government, will be instrumental in uncovering some market-generating innovations that could propel the economy into success. Creating stability and certainty in the policy, regulatory and legal domains will be key to successful investment attraction from the private sector – both domestic and foreign investors. Nevertheless, development is not an issue for the public sector only, nor is it for the private sector to solve alone. It is an issue that lies at the intersection of private, public and civil society. Therefore, the more collaborations government can foster, the better Ghana’s chances at growing – economically, socially, politically.
Third, as much as Ghana desires foreign direct investment (read Western and Eastern), much attention needs to be paid to the domestic and regional investment opportunities. Success and sustainability will involve major cooperation with local entities who must understand and be committed to pursuing the vision of high-productivity growth. Economic strategies often remain at the upper echelons of government. A much better job needs to be done translating and transmitting these visions to domestic businesses, and the general population, to allow homegrown solutions and investments to thrive as well. Similarly, the pleasantries and accommodation offered to Western and Eastern rich investors, should filter down to the local population who are also vested in the economic well-being of the country. In their learning comes greater opportunities for building a culture of innovation, efficiency and economic complexity in the domestic economy.
Fifth, much simpler, clearer and more consistent rules on economic policies would serve Ghana well. Policymakers and implementers must speak to each other to ensure harmonization in the execution of plans. For instance, in 2018/19, reduction in Ghana’s VAT was met with a lot of excitement but its implementation left much to be desired. How and where in an organization’s cost accounting these deductions were to be made became the bane of organization’s existence with conflicting information coming from different government officials.
Considering Ghana’s income level and comparatively less-abrasive historical past, there is a justified sense, among citizens, of exasperation with Ghana’s pace of progress and the future of the nation. But the truth is that it will take a lot of hard work over a long period to set Ghana solidly on the path to sustainable growth. The above points are no silver bullet to addressing Ghana’s economic complexity woes, but with pragmatism and commitment, they do offer some insight into how decision-makers can start to challenge the country’s history of economic growth, or lack thereof. Ghana must be willing to try new things, especially those that have worked well for others.
The sooner the nation places a laser-like focus on the goal of job and prosperity creation, the higher the likelihood of it changing the economic destiny of the next generation. Otherwise, we may very well have to deal with a large number of penurious, connected and urban youthful population who will repurpose their zeal and entrepreneurial energy to causes and activities that pose real risks to the leaders who they believe failed them.