The role of government in an economy

President Akufo-Addo

It is far better to be free to govern or misgovern yourself than to be governed by anybody else: Kwame Nkrumah – in the Autobiography of Kwame Nkrumah, 1957.


One of the longest running debates in economics is the role of government. And like every debate, there are sides to it. The two sides to the role of government debate are largely what has given rise to the left and right side of politics in the world.  In all countries across the globe, outcomes of national elections are strictly influenced by this debate – i.e., what should the role of government be in an economy?

In its basic form, the two sides are whether government should be small or large – with the former implying a small government expenditure and the latter a large government expenditure. The academic literature on fiscal policy – i.e. government expenditure and taxation – is largely dependent on these two sides of the debate.

And when an economy is in a recession, there are economists who believe that government expenditure should either remain the same or be reduced and those who believe government should increase expenditure to ameliorate the effects of economic recession. It is important to note that these debates are often not half-hearted. In fact, they are carried out with such zeal they are sometimes to the detriment of economic data, evidence and economic reality.

A few days ago, it was widely reported that the International Monetary Fund (IMF) had expressed concern about high expenditure projects being carried out by the government of Ghana. This was supposedly contained in the most recent Article IV (article 4) consultation, which is an annual consultation with countries all over the world.

Article 4 consultations are carried out to ensure a country is complying with the articles under which the International Monetary Fund was established, and that it is ensuring exchange rate convertibility for international trade purposes and maintaining global aggregate demand – with the IMF seemingly reneging on the latter in most developing economies. The International Monetary Fund was founded primarily as a public institution – financed by taxpayers in member-countries – that would put international pressure on countries to maintain global aggregate demand through expansionary fiscal policies, reducing taxes and the reduction of interest rates to stimulate the economy.

It is important to note that not all countries adhere to the provisions which stem from these consultations. Advanced and powerful economies such as the United States do not abide by them. And while the IMF has largely been a force for good, there is overwhelming evidence that developing countries such as Ghana have not always benefited from directives of the IMF article 4 consultations.

An interesting fact one learns from studying economics is that there are no hard and fast rules – which is why economic policies and social interventions that are data-dependent and tuned to the needs and wants of local inhabitants tend to produce the right outcomes. This is a point the IMF seems not to factor into the advice given to developing countries.

There are several stages of economic development, and in many ways Ghana is still classed as a developing country. The role of the central government in a developing economy is crucial. This is due to the fact in a country like Ghana there might be an absence of the right market institutions, competitive markets, safety nets, laws that deal with bankruptcies and incentives which would cause private individuals to engage in some of the economic activities the President Nana Addo Dankwa Akuffo-Addo-led government is embarking upon, or has promised to provide.

For example, economic research shows that individuals exhibit a lack of foresight and careful planning; therefore, government has to provide pension services as opposed to individuals being asked to save for retirement. The governments of advanced economies played this crucial role before markets were created for annuities.

For example, when European economies created social welfare programmes such as unemployment and disability insurance, there were no private markets for annuities – and this example applies to several sectors of their economies which space will not permit me to list all. The government held the fort and in many instances, for example, provided the market before allowing or encouraging private participation.

Market liberalisation – the most-often prescribed economic policy by the IMF – began as recently as the 1970s in the United States, while that of the United Kingdom began in the 1980s. Prior to that, governments of the said countries were deeply involved in every aspect of their country’s economy; and available data shows that inequality was greatly reduced at the time, while the citizens of those countries enjoyed better economic outcomes and welfare.

Ghana’s economy is one in transition as the country moves forward with its industrialisation agenda. Even though this requires a lot of money for investment, it is an economic policy that will provide jobs and economic welfare for the people of Ghana. It is also the one economic policy that has the potential to ensure Ghana’s economic development is geographically broad-based, reducing the ever-increasing rural to urban migration in the process.

Government expenditure of any sort, be it high or low, is a problem only when this expenditure is not used for utility-generating economic activities such as investments in education, social security and job-creation programmes. In such an instance, it is unlikely that this government expenditure will get onto the economic production function leading to economic expansion. When this happens, then money spent or ‘invested’ will not generate any revenue – leading a widening deficit.

As an economist, I wrote about deficits run by the previous government because even though government can run a temporary deficit, this temporary deficit must lead to an economic expansion. It is a problem if persistent deficits do not lead to an economic expansion, as was the case in the previous administration. But the data shows an improvement in Ghana’s financial variables for 2017, and therefore I believe as long as government expenditure is judiciously used toward the One District, One Factory policy, free Senior High School intervention, National Health Insurance Scheme and other utility generating economic activities, then Ghana should opt to be free to govern itself in a manner that benefits Ghanaians.

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