“Economic hardship”: …Moving the debate from equalisation to solutions

Undoubtedly, there is economic hardship in Ghana. But is it new? Certainly not. Ghanaians, like people in many other developing countries, have faced “economic hardship” over a long period of time. This is simply because incomes by far lag behind living costs in these countries. And the situation will persist until we are able to sustain high levels of growth and distribute the benefits more equitably.

Instead of recognizing the realities of persisting economic hardship and finding solutions to it, unfortunately, the debate, as always, has been conducted in terms of equalisation, which has become an unfruitful political discourse in the country. But the debate should not simply be about whether there is economic hardship or not—for there has always been. The debate should rather be whether the hardship has been getting worse or not. In other words, as a country, we should be concerned about whether we are progressing or retrogressing. As economists, I think we owe it as a duty to step in from time to time to help clarify some of these issues that often get distorted by politicians and confuse majority of Ghanaians. It is for this reason that I have decided to contribute to the current debate on economic hardship. But, more importantly, I go further to suggest measures to help alleviate the situation.

I wish to use a simple indicator of “economic hardship” and compare its value for the first 9 months of 2018—the most current period for which data is available—with its value during the corresponding period of 2016. As a proxy for “economic hardship,” I use the ratio of the cost of living (proxied by the CPI index) to income (proxied by the minimum wage). This is like reversing the real value or purchasing power of the minimum wage. I use the minimum wage here so as to focus the debate on the very poor who are expected to suffer economic hardship most. It has to be said, however, that it will apply equally to all those whose wages are usually adjusted in proportion to changes in the minimum wage.

In 2016, the average CPI index for Jan-Sep was 175.3, while the minimum wage was GHc8.00. This gives an economic hardship measure—call it ECONOMIC HARDSHIP INDEX (EHI)—of 21.9. In 2018, the average CPI index for Jan-Sep was 217.1, while the minimum wage was GHc10.65. This gives an EHI of 20.4. This simple, back-of-the-envelope calculation shows that the EHI for Jan-Sep 2018 was 6.85% less than the EHI for Jan-Sep 2016. The decline in the EHI between the two periods resulted from an increase of 23.8% (217.1/175.3) in the CPI that was more than offset by the increase of 33.1% (10.65/8.00) in the minimum wage. I have to point out that, in absolute terms, both the CPI and minimum wage will usually increase over time. Therefore, it is their relative rates of increase that will determine whether the EHI increases or decreases. It should also be clear that if inflation is reduced on a sustainable basis, it will help dampen the overall cost of living (i.e. the CPI) so that the minimum wage may not have to increase significantly to reduce economic hardship (EHI). That is why it makes sense for us to work towards taming inflation on a sustainable basis in this country so that the cost of living and economic hardship can be equally tamed on a durable basis.

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Against the above backdrop, let me say that both the current daily minimum wage of GHc10.65 and the incidence of poverty in Ghana (whereby millions live on less than $2 a day) attest to the extent of deprivation—and economic hardship—in the country. Basic items like food, transport, petrol, medicals, clothing, household goods and utilities, do not come cheap and many Ghanaians struggle daily to make ends meet. Interventions like NHIS, FSHSP, LEAP, etc., help to alleviate the financial burden of beneficiaries, but only to a limited extent.

The more important contribution I want to make to the economic hardship issue is to suggest measures to alleviate the problem. And I have three suggestions to this end.

Naturally, I want to start with the most important human need—aside of air, which is free anyway—i.e. food. If you have enough food to eat, your economic hardship will be drastically reduced. Unfortunately, millions of Ghanaians cannot afford two square meals a day; and millions go to bed daily hungry. Meanwhile, Ghana still spends a lot of its hard-earned currency to import food (such as rice, poultry, etc.). It means that, as country, we cannot feed ourselves and we face perennial food insecurity.  Further, Ghanaians, on average, spend 44% of their budget on food (as determined by the weight of food in the CPI). This is atrociously high. In most advanced countries, this will be less than 10%. It tells you that food prices are excessively high in Ghana. Thus, there is urgent need to produce more food locally to reduce food imports and also lower food prices. We actually need an “agricultural revolution” in this country aimed at producing more food—desirably, productively. I am not an expert in these matters, so I will leave them to the experts, especially our many trained agriculturalists. I only want to say that there is a need for serious interventions along the entire value-chain—from irrigation to extension services to credit to storage/preservation to marketing. I believe that the Planting-for-Food-and-Jobs (PFJ), 1 Village-1 Dam and 1 District-1 Warehouse programs are all important components of this process. They should, however, be appropriately coordinated and reinforced to increase their effectiveness and impact. The PFJ, in particular, should be accompanied by a call for mass action to produce food in backyards across the country on the scale of the quite successful Operation Feed Yourself campaign of old, which saw Ghana, for the first time, producing enough food to feed itself and to export to other countries.

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My second suggestion relates to petrol prices, which have gone up quite a bit with the pass-through of higher world prices and higher dollar/cedi rate under the de-regulated regime. As we know, changes in petrol prices affect almost every other price in the economy—either directly or indirectly. Also, petrol is probably the most levied/taxed commodity in the country—partly because it is easier and more convenient to levy/tax it. Government can do two things to alleviate the hardship arising from high petrol prices. The first is to reduce or eliminate some of the levies/taxes. The negative effect of such an action on the budget may be offset by taking compensating tax measures, including continuing to widen the tax net through digitization and formalization, reducing tax exemptions, checking tax evasion, reviewing tax rebates granted to extractives and free-zones companies, levying commercial rates on real properties, and checking tax fraud and corruption. The second is to expand and subsidise public transportation to increase access for, and alleviate the burden of, ordinary commuters.

My third suggestion relates to utility tariffs. Despite recent modest reduction in electricity tariffs, the cost of energy to both households and industry remains high. The high cost to households compounds their economic hardship while the high cost to industry makes the sector uncompetitive internationally. Consideration should be given to reducing some of the levies in the tariff buildup to relieve the burden on consumers. The reduction in levies could be offset by alternative tax measures as mentioned above. The high utility tariffs also reflect the high operational costs of the utility companies, which are known to exceed industrial standards by a wide margin. The PURC should exercise stricter scrutiny over these costs and ensure that they are reasonable in order that they are not unduly passed on to consumers in high tariffs. It will also make economic sense to open up the industry to participation to engender competitive—and hopefully lower—tariffs.

The author is from IFS and was previously at BoG, IMF and IEA.

Email: j_kwakye@yahoo.com

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