Ghana… We boast of being the first sub-Saharan African nation to gain independence. This is a feat our forefathers lived for, fought for and died for – A feat we will celebrate forever. 64 years down the line, political independence has become banal with a larger cross-section of the populace having only known post-colonial Ghana and wanting a standard of living more fit and proper to show for.
It appears that while we did gain political independence, we have never pushed hard enough for our economic independence, which is simply the economic freedom that gives us the impetus to boldly put in place economic policies that make living worthwhile for our citizens without necessarily worrying about the reaction of other geopolitical superpowers. To borrow the words of our leaders (current and past): The political independence of Ghana is meaningless unless it is linked with economic freedom.
This article describes how we may have lost our economic sovereignty under the IMF’s structural adjustment program and then offers a different set of economic tools that challenge conventional economic thinking as compelling alternatives to four decades of the status quo.
Why we are not independent
- We are not food sufficient (we import a lot of our food such as chicken, eggs, goats, rice, tomatoes and confectioneries)
- We are not energy sufficient (we import refined petroleum products to power our economy)
- Our industrial sector is so deficient we export mainly lower-value raw materials and import higher value-added capital and consumer goods (medicine, equipment, technology, furniture, fittings and fixtures etc.)
- We earn a paltry 3% to 7% on the export revenue of our oil and precious minerals as royalties and/or dividends.
Ghana is stuck in a quagmire of borrowing foreign currency and desperately incentivizing foreign direct investment by keeping our domestic interest rates artificially high and giving huge tax exemptions to non-resident investors to attract foreign exchange and manage the exchange rate to make imports affordable to citizens and keep our economy going.
Most of our policies (tax and interest rates), and by extension our economy, are still specifically structured to cater to the whims of speculators sitting at trading desks in London, New York, Tokyo, Frankfurt, Hong Kong etc.
How did we get here?
Since the 1970s we have had to seek intervention from the World Bank and IMF at least three times. However, after dancing with the IMF and World Bank three times in the space of 40 years, we are still punching far below our development potential. The snail’s pace of our economic improvement lends credence to arguments that the World Bank and IMF have done more harm than good (if any) towards setting Ghana on a sustainable path to economic growth and improvement in the lives of its free people.
For example, during the IMF and World Bank’s Structural Adjustment Program (Economic Recovery Program) from 1983 to 1998, due to misdiagnosis (which some suggest was intentional) of the root cause of Ghana’s economic woes in the late 1970s and early 1980s, the IMF and World Bank offered Ghana a US$6 billion bail-out loan that was conditional on;
- Import liberalization, which came at the detriment of local consumer protection. This decision to remove policies that protected our local industry whiles opening up our borders fully to imports, left local manufacturers unable to compete with lower-cost imports from the West and Asia. Especially at a time of hyperinflation.
- Cutting government subsidies on essential social services. The effect of the cessation of some government subsidies led to a rise of prices of essential services, for example, prices of water rose by between 150 per cent to 11,150 per cent, electricity rose by 47 per cent to 80 per cent and health services by 800 per cent to 1,000 per cent. In the end, the vast majority of Ghanaian households were unable to afford these basic social needs.
- The privatization of some state-owned enterprises. During this period, critical state-owned companies were sold to mostly foreign investors. These foreign nationals assumed majority control of these companies and operated them primarily to the benefit of their foreign shareholders and their governments.
- Focusing keenly on the export of primary goods. With this focus, the gold, timber, cocoa and other commodities, Ghana exported, provided cheap raw materials for the economies of major western powers that were also reeling from the inflation associated with the persistent oil price hikes during that period. The export revenue went into the importation of consumer goods from the west and the repayment of the US$6billion bailout loan.
Notwithstanding, there were marked improvements in the financial macroeconomic indicators. Average annual inflation fell from 143 per cent in the 1980s to 10 per cent in the 1990s. But the improvement in inflation figures did not happen without job losses to at least 248,000 formal workers in the government and private sector (the real macroeconomic indicators) and an incredibly high-interest rate regime with Treasury bill rates as high as 42.77% at some point in 1997. Real GDP grew by an average of 5% per year. The GDP growth came primarily from the mining and export sectors.
During this period, direct employment in these sectors accounted for an insignificant proportion of the labour force available in the country. The staffing in the mining sector was dominated by foreign nationals as top-level staff and the few Ghanaians who were directly employed were mostly low-level jobs.
Effectively, the general Ghanaian populace did not feel the desired improvement in their living conditions as the multiplier effect of growth in mining and exports on the economy was hardly felt across the general economy.
The IMF and World Bank misdiagnosed Ghana’s hyperinflation and dire economic situation. Their version of the root cause was essentially that the government had consistently run large budget deficits by overspending on subsidies for social services and needed to institute austerity measures to get back on track.
Hyperinflation is not caused by large government deficits. On the contrary, an increase in government spending especially towards subsidising critical social services is a genuine reaction to an economic crisis. Case in point, during the peak of the Covid-19 crisis many governments including Ghana’s increased their spending on social services as an automatic stabilizer for their economies.
A proper diagnosis of Ghana’s economic problems in the 1970s and 1980s
World crude oil prices skyrocketed by up to 1000 per cent from the mid-70s to 1980, just as Ghana was emerging from a period of drought. Mind you, during this period, many parts of the world including the USA and UK were also in an economic crisis. Fuel prices responded to the price hikes and as the price of such a critical resource rose rapidly, Ghana’s economy was severely harmed and this affected the ability of the economy to produce necessities such as electricity, food, and consumer goods.
As the country struggled to recover from the impact of the oil price shock, it was once again hit by drought; its worst-ever drought. It lasted from 1980 to 1984. The misfortunes were compounded by political instability as Ghana experienced four coups between 1970 and 1984. Cumulatively, these events had a debilitating impact on the economy’s supply-side (land, labour, capital and enterprise). This was the root cause of our economic woes in the 1970s and 1980s.
Unfortunately, we agreed to the wrong treatment plan. While the IMF’s policy prescriptions were somewhat effective in eliminating the symptoms of our ailing economy, it did so at the dreadful cost of turning Ghana into a drug-dependent economy that now depends on even more drugs (foreign loans and grants) to survive.
It is no wonder that Ghana has needed at least two more IMF interventions since then. Even worse, the IMF’s program in Ghana was hailed a success and then it was subsequently replicated in other developing economies with equally tragic consequences to them.
How do we achieve economic independence?
As the saying goes, “if you are in a deep hole the first thing you do, is you stop digging”. You stop using the same old tools that got you deeper into the hole. The objective remains the same. Food and Energy sufficiency, industrialization and investment into research and technological development, particularly as Ghana is currently faced with a looming youth unemployment crisis. However, we need new tools to get Ghana out of this hole.
The Modern Monetary Theory explains the nature of the monetary system and the mechanics of government financing. It also provides a framework of macroeconomic analysis with insights that contrast with the mainstream (mostly neoclassical economics) understanding of the macroeconomics of a sovereign fiat currency-issuing country.
A Government’s ability to fund its domestic policies in the domestic currency is not constrained by financial considerations. Unlike a household or a business that must earn the currency or borrow to be able to spend, the Government of Ghana does not have the same limitation when it comes to financing its cedi denominated projects or obligations.
Christine Lagarde, the president of the European Central Bank (ECB) made profound statements in 2020 about the fiscal ‘power’ of a sovereign currency-issuing government, she said, “As the sole issuer of the euro-denominated central bank money, the Eurosystem (zone) will always be able to generate additional liquidity (money) as needed. So by definition, it will neither go broke or bankrupt.” This was in response to a question in the Euro parliament.
However, there is a limit to the government’s ability to spend without causing runaway inflation. A sovereign government is limited only, by the real resources available to the country (land, labour, capital and enterprise). If these resources are fully employed, any extra spending in the economy by the government may be inflationary (demand-pull). Understanding this reality means, there are aspects of our Public Finance Management Act, 2016 that are counter-productive and need redress.
Taxes play an important function in the economy but a revenue source is not one of them. The cedi is of no financial value to its sole issuer (the government). The government does not need your taxes to finance its spending. The sequence of the accounting entries at the Central Bank does not support the tax revenue myth. Tax obligations are policy decisions by a government to among others, create demand for the use of the otherwise worthless fiat currency (cedi, dollar, euro, naira, etc), discourage undesired behaviour and redistribute financial wealth. Taxes essentially reduce the financial wealth of the non-governmental sector (household and firms) of the economy.
Ben Shalom Bernanke, a former US Federal Reserve Chair (2006 to 2014) explaining in an interview how the USA bailed out its banks during the 2008 financial crisis said, “It’s not tax money, the banks have accounts with the Fed (Central Bank), much the same way you have an account in a commercial bank. So to lend to a bank, we simply use a computer to mark up the size of the account they have with the Fed.”
The Government of Ghana’s bailout payments to customers of the banks that went under during the banking sector clean up did not cause inflation. So then, why do we need a banking sector clean up tax?
Government borrowing and interest rates
A currency issuer with a floating exchange rate policy has a monopoly over the supply of the currency. The currency is of no financial value to the issuer. The monopolist sets the price. The interest rate is simply the price of money. Thus, the Government of Ghana is an interest rate setter and not the taker. At the treasury and monetary operations at the Bank of Ghana, Treasury and Bank of Ghana (BoG) bills and bonds are a mere asset swap.
Swapping no or low interest bearing excess bank reserves for interest or higher interest-bearing assets at the central bank. In effect, it is moving excess funds from banks’ reserve (current) accounts to their securities (savings) accounts at the central bank (BoG) to achieve an interest rate target for BoG. In this sense, government securities issuance on the fixed income market is a matter of policy (interest and exchange rate) and not a real necessity. The fact is the Government of Ghana does not need to borrow from the public to finance its budget.
The loanable funds theory is obsolete and the crowding-out effect of government securities is a myth with a floating exchange rate policy. The accounting entries on banks’ balance sheets when they give credit do not support it. Banks do not create loans with deposits.
They create loans ‘ex nihilo’ and then the loans become deposits on their balance sheets. Raising the policy rate and T-bill rates do not control inflation. Rather, they can be inflationary. Why? Because money is capital for production and therefore higher interest rates mean a higher cost of capital for businesses. Thus, persistent increases in treasury interest rates and the monetary policy rate will instead have an upward effect on cost-push inflation.
The renowned New Zealander Economist William Phillips developed a concept called the Phillips curve, where he claimed some level of involuntary unemployment is a necessary evil to keep prices stable. This concept has been the bedrock of Monetary Policy for many central banks worldwide. This economic concept must be reassessed, as labour is too critical a resource to an economy to be left unused or underdeveloped.
Unfortunately, we see the social, economic and political problem of youth unemployment fester in Ghana and many other parts of Africa. As the sole issuer of the cedi, which is not permanently pegged against a stock of gold or another currency, the government of Ghana can always afford to purchase any and every good and service available for sale in cedis. This includes all unemployed labour.
Alan Greenspan, a former chair of the US Federal Reserve (1987- 2006) made a profound statement at a Senate committee hearing in March 2005, also about the fiscal ‘power’ of a sovereign currency-issuing government. He said, “There’s nothing to prevent the government from creating as much money as it wants and paying it to someone.” If his response is fact, then the Government of Ghana can play the role of the Employer of Last Resort by employing all involuntarily unemployed labour at a living wage to be a buffer stock of productively engaged labour.
This stock of excess labour will be released into the private sector when there is a glut of employment opportunities in the private sector during an economic boom and then be absorbed out of the private sector when the economy contracts and employment opportunities are scarce. This buffer stock approach is common with food commodities as a means of preventing a total collapse in food prices during periods of the glut to protect farmers and preventing excessively high food prices during periods of scarcity to protect consumers in an economy.
The insights of the Modern Monetary Theory provide policymakers with a range of policy possibilities. Policy options that hitherto were not imagined possible. Getting the economics right and reclaiming our economic sovereignty will not be a silver bullet. However, the obvious benefits of economic independence could be the sturdy foundation upon which we can build a fair, just and disciplined society that will give true meaning to our political independence. A society that provides its free people with the dignified life they aspire to and deserve. Without this, we cannot be independent!
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Disclaimer: Views expressed in this article are the personal views of the author and do not reflect the views of any organization.