“Political economy analysis is concerned with the interaction of political and economic processes within a society: the distribution of power and wealth between different groups and individuals, and the processes that create, sustain and transform these relationships over time.” – Collinson (2003)
With the economic mismanagement and misuse of national resources by our ruling elite, the quality of life in many emerging countries, such as Ghana, is becoming increasingly terrible. The historical record demonstrates that most of the world’s poor countries remained poor despite having significant people and material resources, large foreign loans, and contributions from international donor countries.
The economic performance is embarrassingly low on multiple counts, including the ruling authorities’ failure to align national priorities with the basic requirements of majority of their population. Ghana’s provisional real Gross Domestic Product (GDP) in volume terms was estimated to have increased by 6.6% in quarter three (July to September) of 2021 compared to the same period in 2020. When seasonally adjusted, Ghana’s real GDP increased by 1.6% in quarter three (July to September) of 2021; 0.5 percentage points higher than what was recorded in quarter two (April to June) of 2021. The question one will ask is: What economic normalisation strategic mechanisms were instituted to rationalise the flow?
Poverty is on the rise, with an increasing number of individuals in this country falling below the poverty line. The common man is always fighting for survival, while a small part of the population in this country enjoys prosperity and contemporary conveniences. Poverty is terrible in this country because majority of children born into poor households remain poor – generation after generation- trapping them in a never-ending cycle of poverty. The above position is corroborated by a report issued by World Bank; Ghana’s economic slowdown had a considerable impact on households. The poverty rate is estimated to have slightly increased from 25 percent in 2019 to 25.5 percent in 2020.
The ruling class, in collusion with the country’s landlords, businesspeople and external political forces, wants complete control over the use and misuse of the country’s national resources by keeping the mass of the populace illiterate and economically oppressed. The way this country has set its priorities in the distribution of national resources provides supportive evidence. As a result, the average person’s access to basic healthcare and employment is restricted, and he is obliged to continue fighting for existence with no end in sight.
According to a report issued by Africa Economic Outlook (AEO, 2021) Growth was projected to increase to 4% in 2021 and 4.1% in 2022. Inflation was expected to ease to 8.2% in 2021 and 8% in 2022—in the midpoint of the Bank of Ghana’s target band of 6%–10%. The fiscal deficit was projected to narrow to 7.2% in 2021 and 5.7% in 2022, driven by an expected increase in revenue collection in a recovering economy. However, the current account deficit was expected to widen to 2.8% of GDP in 2021 and 3.2% in 2022 as import volumes resume their pre-pandemic levels. Downside risks to the outlook emanate from a possible second wave of the virus and heightened fiscal and debt pressures.
From the World Bank’s report, Ghana’s economy is projected to recover gradually over the medium term, but for commodity price growth and strong domestic demand. Ghana received US$1billion equivalent from IMF SDRs allocation, part of which will go to support economic recovery. Growth is expected to average 5.1 percent yearly in 2021-23. After declining by 1.7 percent in 2020, real per capita GDP was projected to return to its pre-COVID-19 level in 2021.
The fiscal deficit is expected to remain high as government implements its economic support programme. It is projected to narrow to 14 percent of GDP in 2021 and 9.5 percent by 2023 – still above Ghana’s 5 percent ceiling.
Fiscal and debt problems are projected to limit Ghana’s capacity to propel economic growth back to pre-crisis levels. Only in 2024, is it projected that the country would revert to its fiscal responsibility budget deficit target of 5% of GDP. Because nearly half of all foreign debt was commercial, the public debt posed cost escalation risks by the end of 2019. Because 90% of domestic debt has short to medium-term maturities, and 70% of foreign currency debt is denominated in US Dollars, it also revealed refinancing and foreign exchange rate risks. Domestic resource mobilisation must be supplemented with external financial support, particularly concessional loans, to mitigate these risks. While keeping the foreign exchange reserves buffer, government should actively engage its creditors in exploring additional financing options such as debt renegotiating and restructuring, and debt service suspension.
Many policy analysts, researchers, entrepreneurs, development practitioners and individuals are dissatisfied with the state’s or its agencies’ failure to do what they believe they should do. Policy design and service delivery are the two key areas where states are perceived as failing. This article examines how important schools of economic thinking see the state’s function, and investigates the causes of so-called state failure. The author goes on to explain the fundamentals of political economy analysis – which looks at how political and economic processes interact within a society – to give light on why states operate the way they do (and why they create the policies they do).
Most Economics and Development students would agree that the state’s performance is crucial to development outcomes in some way. While economic theory typically describes the state’s job to compensate for market failure, technocrats are frequently disappointed by what they perceive to be state failure, or governments’ failure to devise or implement policies that promote growth, welfare or poverty reduction.
It would be unusual if you did not have anecdotes concerning the bad performance of some state agency or another, whether you work in the private sector, for a non-governmental organisation (NGO) or a state (or other public) agency. Your experiences as a professional may not be the only source of your stories; you may also have stories to tell in your ‘private’ position as a citizen and taxpayer. All of this is likely to be true regardless of whether you live in a developed or developing country.
Perhaps the failure in question stems from a policy choice or design that was ineffective or perhaps harmful. Were key stakeholders excluded from policy design discussions or decision-making? Perhaps it has something to do with the inability to carry out a policy in the way that it was intended. You may have been frustrated or angered by the delivery of a public service that was unjust, unresponsive or inefficient. Worse, you might believe that the source of the poor service delivery was corruption within the delivery agency.
These possibilities underscore the reality that, states, which are complex ‘organisations’ made up of various agencies that are rarely completely coordinated, adopt policies that affect other players and offer (or fail to perform) a wide range of services. Basic economic theory, on the other hand, tends to abstract from these facts, seeing the state as a ‘black box’, albeit one with a key function: to remedy the market failures.
Sources Of Economic Failure
As a result of this analysis, ‘normative’ prescriptions for what the government should do to address market failures emerge. Technocrats can grow disillusioned at this point if government does not implement their advice.
There are a variety of reasons why states do not heed the advice of independent policy analysts or researchers. (For the time being, imagine that if these recommendations were completely executed, they would maximise economic growth, poverty reduction, welfare or some other public/national goal.) The following are some of the causes.
Limited information.
We’ve already mentioned that states require high-quality data to implement policies that successfully repair market failures. States can sometimes compel private actors to provide information to regulators. Private market participants, on the other hand, are generally better knowledgeable about their intents, actions, expenses and profits than their counterparts in state agencies, and they frequently have motivations to hide much of this information from the state. This tendency is likely to be exacerbated in situations where there has been a long-standing lack of trust between the public and private sectors. Independent policy analysts and researchers are sometimes more educated about the private sector’s situation than the government is.
Weak policy-making capacity
While outside policy analysts, researchers, or assistance donors may make policy recommendations to a government, real policy is often developed by civil officials inside the relevant ministries. In-house policy analysts may be less-talented or ill-equipped with software or data than independent analysts. As a result, they may design sub-optimal policies. At the same time, the policy process may prevent external actors from contributing effectively to policy creation. This is covered in detail further down. For the time being, let’s assume that what is stated above is to keep things simple and focused on the technical capacity issue – in-house analysts are hesitant to engage with external agents to refine their policy ideas because doing so exposes them to criticism.
It should be obvious that this is a stylised and somewhat naive explanation for bad policy. However, there may be some truth behind it on occasion. During the structural adjustment period, international financial institutions abandoned most efforts to reform African state agencies, preferring instead to get the state out and let the market take over, but they continued to invest in the technical (policy analysis) capacity of ministries of finance or other central agencies responsible for delivering macroeconomic stability in several low-income countries. Meanwhile, dramatic economic reforms were driven by US-trained economists who returned to seek posts inside their national governments or civil services in some Latin American countries, including Chile (to name a disputed example).
Poor public sector management
Lack of knowledge or trained employees may stymie state agencies. They may fail to make the most of what they have. One of the reasons why market aficionados adore competitive markets is because the profit motive – and conversely, the risk of bankruptcy – creates strong incentives for individual players to work hard and innovate in response to possibilities and threats. Performance incentives within state agencies, on the other hand, can be relatively poor. The agencies are frequently monopolies in their fields – shielded from competition and the voices of the stakeholders they are supposed to serve- and they have an information asymmetry advantage over their political masters who are supposed to oversee their performance. Meanwhile, individual employees’ compensation and promotion chances may be determined more by who they know than by their performance.
Poor public sector management can have an impact on policy development, but it is even more likely to have an impact on policy execution. It has also been linked to corruption. Staff who believe that their job security is based on their ability to maintain the support of a particular political patron, are more likely to engage in corruption than those who believe that their job security is based on their ability to perform well (as judged by clients or other stakeholders), and that their behaviour is closely monitored and assessed by their superiors.
Political Economy Analysis Traits
The study of how political factors influence the economy and its economic consequences are known as political economy. The interactions, on the other hand, are bidirectional; and political economy is interested in both. As a result, economic activity is what creates the resources needed to support political action, such as election campaigns. Furthermore, while the policy may lead to a particular economic activity prospering, this success might produce a political constituency interested in continuing the economic activity because it now benefits a large number of people. As previously stated, the distribution of rewards from economic activity is often overlooked in pure economic analysis. However, it takes centre stage in the political economy study. Political economists are fascinated by who benefits and who loses as a result of a policy. This is likely to reveal vital information on which groups or individuals support the policy’s continuation, as well as which groups might be pulled into a coalition to modify it.
Another feature of the political economy analysis is that it examines political phenomena using economic techniques. The premise that human (political) agents are both self-seeking and rational is a feature of political economy analysis, just as it is in economics. By producing goods and services and participating in markets, economists look at how rational individuals use the resources at their disposal (capital, labour, land and so on) to maximise some utility functions (for example, profits, income or consumption). Political economy, in a similar vein, investigates how such individuals maximise their value by engaging in political engagement. They have capital and labour (time) at their disposal once again, which they may employ to influence political processes and produce policy outcomes that benefit them (most notably, through producing rents).
The same basic political economics model can be used to analyse all political-economic systems. This is not meant to negate the historical, cultural or economic characteristics that are unmistakably present in any given situation. Rather, it contends that the way these factors influence the selection of leaders and policies in all countries can be studied using the same ‘toolkit’.
Political players, their interests or purposes, and the political mechanisms and limits (i.e., institutions) that are in existence; are the three primary building components.
Constraints and political mechanisms
Following the line of argument that there are two basic types of political economy decisions, political economists must investigate two sets of institutional mechanisms and constraints: those that set the ‘rules of the game’ for the selection of leaders, and those that structure the policy-making process.
The mechanisms for selecting leaders include not only the formal rules governing voting, but also the informal mechanisms that candidates use to gain support, such as promising policies that will benefit specific supporter-groups or political constituencies, and the direct giving of gifts in exchange for votes (where they can get away with it). The formal rules that govern and control such behaviour are referred to as constraints. Of course, the effectiveness with which these restrictions are enforced must be considered!
In the next section, we’ll take a closer look at the policy-making process. The concept of limits is intimately tied to policymakers’ accountability for their actions in this context. When a leader or candidate seeks for re-election, for example, to what extent are previous policy decisions or voting behaviour taken into account?
“Our use of old words to describe new things can often hide the emerging future from our eyes”. – Charles Handy
References
- Ghana Statistical Service (GSS) Newsletter Quarterly Gross Domestic Product (QGDP) Third Quarter 2021. http://www.statsghana.gov.gh/
- https://www.worldbank.org/en/country/ghana/overview#1
- World Institute for Development Economics Research at United Nations: University:http://articles.moneycentral.msn.com/News/StudyRevealsOverwhelmingWealthGap.asp
- Harrison, Ann. 1996. Openness and Growth: A Time-Series, Cross-Country Analysis for Developing Countries. Journal of Development Economics 48: 419-447.
- International Monetary Fund. 2015 World Economic Outlook Database. https://www.imf.org/external/pubs/ft/weo/2014/02/weodata/index.aspx. (accessed January 31, 2015)
- Kavoussi, Rostam M. 1985. International Trade and Economic Development: The Experience of Developing Countries. Journal of Developing Areas 19: 379-392.
Godwin Gaduga is a Ph.D. candidate, CEPA, Certified Forensic Investigation Professional, Associate Member of ACFE, Researcher, and Accountant for Serviceships Ghana Ltd & Cape Logistics Ltd.
He can be reached on +233 (0) 246390969 or [email protected]
