Author: World Bank Group
Type of publication: Report
Date of publication: 2017
Improving the competitiveness of the private sector is one of the key objectives of Ghana’s National Development Policy Framework. In line with this objective, Ghana’s agenda for private sector development over the last decade has been articulated in two successive private sector development strategies. They both aimed to achieve sustainable and inclusive growth through a holistic approach to economic diversification triggered by a policy mix involving sound economic management, a good business environment, good governance, open trade policy, efficient trade processes, and vertical/sector level policies. The First Private Sector Development Strategy (PSDS I) was implemented between 2005 and 2009 and focused on regulatory reform. It contributed to Ghana’s positive performance in the World Bank’s Doing Business rankings and other international assessments of its investment climate. Ghana was recognized as one of the top 10 Doing Business global reformers, having implemented five regulatory reforms in 2008 and achieved a ranking of 60th out of 178 economies in overall ease of doing business. However, Ghana’s ranking in the Doing Business report has since dropped to 108th out of 190 economies.
The Second Private Sector Development Strategy (PSDS II), implemented between 2010 and 2016, aimed at transforming Ghana into a more productive, diversified, and internationally competitive economy. Yet this second phase of reforms was characterized by weak coordination, a lack of political commitment, a breakdown in communication among stakeholders, and inadequate budget allocation. As a result, key aspects of the private sector development agenda remained unfulfilled. Without further progress, the business environment deteriorated over the next several years, as recorded in subsequent Doing Business reports, and both development partners and the private sector lost confidence in the government’s ability to facilitate private sector growth.
Jobs and Private Sector Development
Ghana’s growth is centered around agriculture and natural resources, with exports concentrated primarily in oil, gold, and cocoa. Construction and services now account for more than half of the country’s output, and the majority of jobs are in the informal sector. Most jobs are 24 also in low-productivity and self-employment sectors, which do not produce substantial earnings. The National Employment Policy notes a substantial lack of decent work in Ghana; most jobs are in economic sectors of low labor productivity, specifically agriculture and trade services, which do not require advanced cognitive and technical skills. Agriculture remains the sector with the highest potential for job creation currently employing nearly half of the workforce. Ghana suffers from high unemployment rates, especially among the youth, which is made worse by the 300,000–400,000 new entrants added to the labor force each year. Neither the oil nor the manufacturing sector has been able to produce the necessary jobs. In 2014, the median Ghanaian manufacturing firm was 7 times less productive than comparable firms in Kenya and 25 times less productive than those in South Africa. The manufacturing sector’s share of GDP also declined from 10 percent of GDP in the 1980s to 5 percent in 2015. Ghana’s labor market suffers from gender and age disparities. Women and youth are less likely to have better, more productive jobs. Specifically, 10 percent of women are employed in wage work compared to a third of men.
Ghana suffers from high unemployment rates, especially among the youth, which is made worse by the 300,000–400,000 new entrants added to the labor force each year
Whether self-employed or wage workers, women generally work in less productive activities and earn less than men. As it pertains to the youth, they make up nearly half of those not working and who are not in school. The government has struggled to bring firms into the formal sector and encourage the growth of small and medium-sized enterprises (SMEs). Formal firms make up only 10 percent of the all established firms in the country. During 2010 and 2012, Ghana experienced growth in employment as well as an increase in labor productivity, but this was driven by large firms and microenterprises. While large firms are more productive, offer higher wages, and account for more jobs, SMEs have struggled to grow in Ghana. As a factor-driven economy, Ghana’s reliance on commodities makes it highly susceptible to world economic cycles, commodity prices, and exchange rate fluctuations. As such, there is a significant need to diversify the economy and move away from primary commodities in order to increase the country’s resilience to terms-of-trade shocks. Over the past five years, low access to credit, unreliable power supply, and high utility tariffs have remained the top constraints to private sector growth. In the last three years, energy rationing, high inflation, high borrowing and energy costs, and higher VAT have crowded out the private sector. This is reflected in Ghana’s volatile sectoral growth since 2013. Furthermore, the government’s ongoing fiscal consolidation efforts have distressed economic activity.
Ghana’s Overall Competitiveness and Regional Trends
Several competitiveness indexes have ranked Ghana as an economy with declining competitiveness over the past several years. At the same time, many countries in the region have been improving their performance and introducing regulatory reforms at a rapid pace. For example, neighboring Cote d’Ivoire has implemented 12 doing business reforms in recent years, including reviewing laws and regulations and simplifying or eliminating more than 30 trade procedures. As a result, Cote d’Ivoire has improved its Doing Business ranking by 35 places over three years, resulting in cost savings estimated at US$12 million for the country’s private enterprises. Nevertheless, Ghana’s relative potential remains high, and it continues to rank among the top 10 economies in SSA in ease of doing business. In terms of global competitiveness, Ghana’s major area of underperformance is its macroeconomic environment, including the availability of electricity, access to finance, payment of taxes, and resolution of insolvency. However, the country continues to score relatively well for important competitiveness indicators, such as quality of higher education, market efficiency, financial market development, market size, and technological readiness, as well as innovation and business sophistication. According to the World Bank’s last two Enterprise Surveys for Ghana (2007 and 2013), the main challenges to the private sector are access to electricity and finance. The electricity constraint eased between the two surveys as FDI began to flow into Ghana’s hydro and gas sectors, making reliable energy more available to businesses – although outages are still frequent and costly. Access to finance, on the other hand, worsened during the period due to rising inflation, high interest rates, and an increase in non-performing loans, which have caused confidence in financial market to decline. Another noncompetitive aspect of Ghana’s macroeconomic environment is its regulatory regime for starting a business, which is obsolete and quite restrictive. The Companies Act of 1963 is still in force but no longer addresses the needs of the business community. Firm-level data suggest that individuals in Ghana encounter constraints in establishing and formalizing a business, which can take more than a year. Informality is prevalent, and competition from informal firms is quite high. The country’s competitiveness is further constrained by the high incidence of bribery involved in obtaining licenses, construction permits, and electrical connections. In the 2013 Enterprise Survey, 47.6 percent of respondents claimed that gifts were expected to obtain a construction permit, and 32.3 percent of firms were expected to give gifts to obtain an electrical connection.
“The main challenges to the private sector are access to electricity and finance”
Commercial dispute and insolvency resolution are also notably weak. The time required to enforce a contract has increased from 552 days to 710 days in the last 10 years – the longest time among comparator countries. The insolvency framework (the Bodies Corporate Act of 1963) is outdated and no longer adequate for rehabilitating viable firms and liquidating nonviable ones. Ghana also ranks low in terms of quality of judicial processes, and performs below average on protecting minority investors and corporate transparency. Overall, Ghana’s performance has deteriorated in the last 5 years because of inconsistent commitment to its reform agenda. At the regional level, Ghana ranks 9th out of the 47 African economies, behind Mauritius, Rwanda, Botswana, South Africa, Kenya, Seychelles, Zambia, and Lesotho. In West Africa, Ghana retains first place among its neighbors.
However, while Ghana’s distance to frontier (DTF) performance reached 58.82 percent in 2017, up 0.95 point over 2016, there has been very little progress over time. The Doing Business index ranks Ghana far below the West African regional average for DTF. The decline in Ghana’s performance has occurred despite it being one of Africa’s most open economies. Almost all of the country’s sectors can attract FDI, and net inflows have increased sharply over the last 10 years, from about 1.6 to 8 percent of GDP. The boom in oil and gas investment has been the key driver for this expansion, with significant contributions also coming from financial services and telecommunications.
Public- Private Dialogue Mechanism
Low levels of consultation, inclusiveness, and transparency have been highlighted as key drivers of Ghana’s inconsistent performance in business reforms. Reforming the business environment is a complex process, and a mechanism is needed through which the public and private sectors can continually prioritize constraints, identify areas for reform, and monitor progress. Creating an effective mechanism for a PPD will increase the inclusiveness and transparency of the decision making process and help to ensure that the government undertakes growth-supporting reforms that are integral to creating a strong business-enabling environment.
Local Firm Linkages with FDI
Promoting domestic participation in value chains is essential for economic diversification, which will help to create new sources of shared growth, including in the services and tradable sectors. With the country’s impressive growth in services, its favorable geographic location, and its advantageous reputation as a safe and secure destination, Ghana can benefit from integrating services exports, such as logistics, in its sustainable growth agenda. A diversified services sector can attract FDI, promote growth in jobs and skills, and strengthen linkages to international supply chains. Ghana’s commercial discoveries of hydrocarbons have attracted the attention of several international oil and gas companies. In order to promote Ghanaian participation in the petroleum value chain, two key pieces of legislation were passed: the Petroleum Commission Act, 2011 (Act 821) and the Petroleum (Local Content and Local Participation) Regulations, 2013 (L.I 2204). These legal acts mandate that every contractor, sub-contractor, licensee, corporation, or other allied entity carrying out petroleum activities has a responsibility to ensure that local content forms a central plank of its operations. Despite these requirements, however, there are few linkages between foreign firms and domestic suppliers due in part to the poor quality of local suppliers. Foreign owned businesses tend to source inputs from abroad, indicating a low level of interaction with local suppliers. Backward and forward linkages between domestic firms and foreign investors are important for spillovers and technology and skills transfer. A competitive local base of suppliers attracts global value chains, allowing local firms to integrate directly or indirectly with foreign firms and benefit from new market opportunities. Ghana is perceived to perform above average on buyer sophistication and value chain breadth, while it performs below average on customer orientation and local supplier quantity.
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