Developing stronger economies for the African continent: the missing link

October 4,2017

Speech Delivered By Dr. Bawumia’s at UCC Advancement Lectures

1. It is an honour and a privilege to be here with you this afternoon. I would like to thank the University of Cape Coast for the kind invitation extended to me to participate and contribute to the 3rd Advancement Lecture Series. I bring you greetings from the President of the Republic of Ghana, Nana Addo Dankwa Akufo- Addo. In the context of this Advancement Lecture Series, would like to state that the University of Cape Coast (UCC) is, itself, a study in Advancement.

2. UCC was established in 1962 and opened its door in 1963 with 256 students (234 male and 22 women). We have come a long way. In 2015/16 academic year the total student body of 19, 353 had 6738 women (about 34.8 percent). UCC has also expanded from the training of teachers to a full-fledged University, now offering medicine and law. I would like to thank those who have led the University and helped build it to today’s UCC. They have done an excellent job.

3. Let me now turn to the topic of this lecture: Developing Stronger Economies for the African Continent: The Missing Link.

4. Mr. Chairman, the question of how countries develop and build strong economies is one that has preoccupied economists since the days of Adam Smith who focused on an “Inquiry into the Nature and Causes of the Wealth of Nations” in 1776. He wanted to know why some countries are rich and others poor. In this book he espoused the power of free markets in the allocation of resources to their optimal uses. This is a subject matter that has been researched by economists and philosophers such as Karl Marx, for over 200 years!

a. This question is akin to the search for the holy grail in development economics. Researchers have variously sought to supply the missing links:

• Better schooling, good health, managed fertility, work ethics and discipline of labour force, higher rates of savings and investment, productivity and technological advances are critical.

• Government actions such as taxation, maintenance of law and order, stable and well functioning financial markets, and macroeconomic stability matter a great deal.

b. Peace and social stability as well as institutions are also paramount to building stronger economies. War and conflicts are disruptive. They destroy wealth created and human capabilities.

c. All of these factors, according to Professor Robert Barro of Harvard University, are of profound importance to everyone concerned with the business of building stronger economies.

5. But this afternoon, in line with the topic of this Lecture, I will focus broadly on only one missing link in developing stronger African economies: Building the Productive Capacities of nations. The argument I will espouse is that countries with stronger productive capacities build stronger economies. I will draw on experiences of Singapore, Switzerland, Norway, and Mauritius to make a number of points. And I will conclude that strong economies are built on the back of strong, and steadily expanding productive capacity of nations on the back of sound economic governance.

History of Africa’s economic growth performance

6. Mr. Chairman, Africa’s economic growth performance historically has been driven by resource exploitation and exports of unprocessed raw materials.

a. The consequences of this dependence on raw materials are as follows :

• First, our economies are vulnerable to commodity price shocks. Sudden and unanticipated declines in prices of our commodity exports trigger revenue shortfalls and undermine our ability to implement budgets and to manage our public finances.

• Second, the low value addition to both our agricultural products and mineral resources means
o our exports are of very low income content and
o we lose the opportunities to create jobs by processing our raw materials.

• Third, by exporting our raw materials we are unable to use these natural resources as the basis to industrialize and to expand productive capacities.

The combination of these four consequences means that we have non-resilient, weak and undiversified economies.

Low Productive Capacities and Development Traps

7. Although Ghana for example graduated from Less Developed Economy status to Lower Middle Income Country (LMIC) status in 2007, the recent fall in world commodity prices (of oil, minerals, and cocoa) remind us how vulnerable our economy is to external shocks. We are faced with the risks of being trapped in this LMIC status if we don’t push our productive capacities beyond the mere extraction and exports of raw commodities.

8. In fact, like many countries in sub-Sahara Africa, there is the danger that Ghana’s (as well as other African countries’) rapid population growth (about 2.2 percent per annum, twice the global average of 1.12 percent) and our demographic dynamics (about 58 percent of the population below 25 years) alone can push us back into a low income development trap because our reliance on natural resources exploitation alone, and our low productivity agriculture will just not be enough to lift average incomes.

Ultimately strong economies are built on the back of strong, and steadily expanding productive capacity and on sound economic governance.

9. Economists have a tool of analysis called the Production Possibilities Frontier (PPF). This is a simple yet powerful tool of long-term growth analysis. In its basic form, this model describes the limits of every economy’s productive capabilities. It tells us the maximum of goods and services that an economy can produce given its endowment.

10. One of the most important questions in first year economics is: What are the factors that expand the frontiers of a country’s production possibilities frontier, therefore the ability to produce more goods and services? Common answers include new discoveries of natural resources, improved human capabilities, increased savings and investment, improved infrastructure, and increased technological innovations. All these factors contribute to building stronger economies.

11. The World Economic Forum reports annually on Global Competitiveness Index developed by Professor Xavier-Sala-i-Martin of Columbia University. The Index reports on how nations are doing on the factors, policies and institutions that determine the level of nations’ productive capacities. It is an indicator of how the productive capacities of nations are changing to make economies stronger or weaker.

12. The Report’s findings are startling. With all our natural resource endowments, with all our farmlands, Africa’s potential to building stronger economies dims considerably compared to countries which don’t have these natural endowments but have pushed harder in building their productive capacities. So what is Productive Capacity?

13. The United Nations defines productive capacity as the “set of capability factors that enable countries to produce more goods and services”, and to do so efficiently, at least cost and of highest quality. It is the combination of human capabilities, natural resources, physical and environmental assets, technological assets, institutional assets that determine the level and the path of a country’s growth; its ability to produce goods and services and enough to improve the well-being of the population.

14. Building productive capacity boils down to three things:

a. Developing the depth and quality of human capabilities;

b. Developing technological capacity in our production processes – at home, at the office and in industry

c. Cultivating the rule of law, high policy and institutional capabilities of government.

Let me expand on these.

15. Developing human capacity is the first step in building skills, knowledge and creative capabilities. It is intrinsic to individuals’ means to higher incomes and more rewarding careers. The American, Canadian and European higher education are noted for their reputation in research capabilities, in invention and creativity. Higher education is also intrinsic to the success of nations. The obsession of countries like the United States, Canada, Germany, Mauritius, Singapore, South Korea and Taiwan, among others, with developing their human capital makes so much sense and that is how they are transforming their economies.

16. For a continent with about 41 percent of its population below the age of 15 years and 60 percent under 25 years, developing the skills and knowledge capacity of children and teenagers in Africa is a matter of urgency if we are to change the course of our economic history.

17. Second, developing technological capacity, much of which depends on our human capacity in scientific thinking is the second pillar to building productive capacities and stronger economies. Germany’s industrial machinery, Japanese scientific thinking and industrial spirit account for their productive capacities. Technological progress is generated by the emergence of new ideas and it is borne out of quality education.

18. Quality education stimulates thinking. It nurtures creativity. Creativity, in turn drives technology and innovation. Any nation that cannot create new ideas, that cannot develop risk-taking entrepreneurial class will never lead the march of progress. In fact, that nation may not even be able to follow the leaders in the catching-up process because its citizens cannot even imitate innovation. This is why some countries are good at copying while others cannot even copy successful models.

19. Look at what creativity and technology can do. Bill Gates of Microsoft in 2016 had net worth of about USD 85.6 billion (more than the GDP of Ghana which is about $40 billion). Mark Zuckerberg, computer programmer and internet entrepreneur, in 2016 has net worth of about USD 71 billion. In 2016, only Nigeria, Egypt, South Africa, Algeria, Sudan and Angola had GDP in excess of USD 70 billion, thanks to their mineral, oil and gas resources. The combined net worth of the two technology giants of nearly USD 157 billion in 2017 is exceeded by only Nigeria (USD 537 billion), Egypt (330 billion), South Africa (266 billion) and Algeria (165 billion). The comparisons are staggering if you divide these numbers by the millions of their population.

20. Some have wondered whether we can build stronger and resilient economies by pushing harder on science, mathematics and technology than by exerting efforts in finding more minerals, oil and gas. That is a question for all of us to answer.

21. In 2006, the World Bank set up a Commission to study countries that have managed to build their economies since 1950. Headed by the Nobel Laureate Michael Spence, the Commission released its finding in 2008 and observed that

”In all cases of sustained, high growth, the (successful) economies have absorbed know-how, technology and more generally knowledge from the rest of the world. These economies did not have to originate much of this knowledge, but they did have to assimilate it at a tremendous pace. …Knowledge acquired from the global economy is thus the fundamental basis of economic catch-up and sustained growth.”

The Japanese understood this very well following the collapse of the Tokugawa isolationist regime in 1867.

22. Empirical evidence also shows that development and maintenance of the rule of law, developing policy capabilities of government, the institutional capacity and high quality of governance is the important third pillar in building stronger economies.

Mr. Chairman, I would now examine three case studies on Singapore, Norway, and Mauritius.

23. The Singapore Story: The country with no natural resources, no farmland, but is obsessed with human capital development and productivity. Singapore moved from labour intensive economy in the 1960s to skills-intensive in the 1970s, technology-intensive in 1980s, innovation-intensive in the 1990s to knowledge-intensive at the turn of the millennium.

24. It has grown from its traditional role as a regional seaport (its only non-human natural asset) to an international manufacturing and knowledge intensive services center. Singapore’s wealth is based on skills, knowledge and technology in its politically stable environment. Its per capita income has grown from $533 in 1965 to $40,920 in 2010 and $52,090 in 2016. Ghana’s GDP per capita in 1965 was $266 and in 2016 2016 was $1513.

25. When it comes to global competitiveness and the determinants of long-term growth, Switzerland, Singapore and the United States have remained the top 3 economies 6 years running. (World Economic Forum). The highest ranking Africa country, Mauritius, was 45th among the list of 138 countries, followed by South Africa (61st), Rwanda (58th), Botswana (63rd), Ghana (114th) and Nigeria (125th). In 2016, Singapore topped improvements in higher education and training, one of the top efficiency enhancers in South Asia and the Pacific. Singapore also runs one of the world most efficient public institutions.

26. Switzerland: According to the World Economic Forum, Switzerland possesses one of the most fertile innovation ecosystems. It mines no gold or diamond or for that matter any of the earth’s rare minerals and has no cocoa farm. But Switzerland combines conducive policy environment and first class infrastructure with academic excellence and unmatched capacity to attract the best talents. It adds value to our raw cocoa and turns it into chocolate. It imports and refines crude oil and exports the finished products profitably to many countries, including Nigeria. Ghana is Switzerland’s largest trading partner in Africa (importing gold and cocoa from Ghana)

27. The Norwegian Story: From fishing to oil and gas, Norway has emerged as a global agent in oil and gas technology. On the back of good governance, stable democracy, and efficient management of its petroleum resources, Norway has emerged as one of the most diversified, and wealthiest economies in the world with very high and sustainable standard of living.

28. The Mauritius Story: Mauritius has progressed from a “three pillar economy”—sugar cane, tourism, and textiles—into a modern strong economy revolving around agriculture, manufacturing, financial sector, ICT, real estate and hospitality to become a “knowledge intensive island”.

29. It has had one of the most impressive growth in per capita GDP over the forty-year period since the 1970s in Africa. Its GDP per capita more than tripled in 30 years from 1981 to 2010. According to African Transformation Report, 2014 published by the African Center for Economic Transformation, Mauritius owes its remarkable economic performance to sound economic governance, steady reforms to sustain long-term growth, effective State-business relations, capable institutions, stable democracy, a good legal system, and macroeconomic discipline.

30. Mauritius has been improving its position in international indexes for the rule of law, investment, and ease-of-doing business. The island is first in Sub-Sahara Africa on the Rule of Law index. It has earned international recognition as a safe and trusted jurisdiction. The government intends to transform the island into a regional ICT hub by constructing technology parks and diversifying into software, and disaster recovery centers. In Mauritius, education is free from kindergarten to university.

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