Modern Ghana: A Post Keynesian Analysis

Ghana, a country located on the west coast of Africa has had an interesting history and most recently interesting economic history. A medium sized economy within the continent Ghana is a darling for aid and investment in Africa due to its stable political climate. Recently oil has been discovered in the country and a new service industry is coming up. These changes have transformed Ghana into a lower middle income country but challenges do exist. Debt in Ghana is high and a population boom is creating a new generation of citizens who need jobs that current industries do not have the ability to create. With all these processes coming to head in Ghana it is important now more than ever to access the future of the country. The following essay looks at Ghana through a Post Keynesian lens. Specifically that means we will be looking at the long term trends and avoid short term cyclical issues. To do that I have used a type of Harrod Domar method modified through post keynesianism. The following paragraphs will detail the post keynesian analysis as well as further information on the country. To begin I will give context as to Ghana’s place both historically and currently in the world highlighting issues and strengths in greater detail. The next paragraph will look at the harrod domar model used and the indicators, going into more detail as to why these indicators are valid points of reference for the country as a whole. The next paragraph will inject the indicators through correlation coefficients and consider the political/societal concerns involved, leading to the conclusion which will consider what other reports notably by the World Bank has to say about Ghana’s future.

History in Ghana goes further back than a lot of places around the world. Home to one of the larger African kingdoms during the middle ages period  the Ashante kingdom much like current day Ghana was a heavy exporter of gold. Later the kingdom would export slaves as well before being renamed the Gold Coast as a colony of Britain. During that time cocoa was introduced as a cash crop and continues to be a large export for the nation. As of 1957 Ghana became the first African nation to reach independence after colonization. Led by Kwame Nkrumah Ghana became a political leader for the continent and newly independent states of the world. Economically Fosu categorizes this time into four periods: The first was from independence in 1957 until the coup of 1966; the second, after the coup when liberalization measures were initiated, till the second coup in 1972; the third, from the second coup until the ERP reform in 1983; the fourth, the period since the reform. Within the first period the Nkrumah government embarked on ISI using the Seven-Year Development Plan: 1963/64-1969/70, which was aimed at modernizing the economy of Ghana through industrialisation. Soon enough it was evident these plans were not working. Ghana registered three consecutive years of zero or negative growth in per capita GDP between 1964 and 1966 and The external reserve position deteriorated considerably between 1957 when net reserves stood at US$269 million, and 1966 when they were negative at -US$391 million. The next phase in 1967 started with a coup and elections of Busia’s government. They liberalized the economy, brought down public investment and depreciated the cedi (domestic currency) all IMF sponsored. GDP growth increased from –4.3% in 1965 to 6.0% by 1969 and averaged 7.0 % during 1969-71. The balance of trade moved into surplus and the current account and government budget deficits were also reduced. By 1972 living standards were deteriorating and growth started to fall again and another coup began. The new period was the worst for Ghana economically, headed by five different governments , the policies of the period emphasized import substitution, underpinned by a restrictive foreign exchange regime, quantitative restrictions upon imports and price controls, with the state playing a major role as producer. The dramatic contraction between 1970 and 1983 entailed a decline in GDP per capita by more than 3% a year, in industrial output by 4.2% a year and in agricultural output by 0.2% a year. Again in 1983 a new coup put the Rawlings government in control. The new government took a protectionist anti west stance. . Price controls, import duties and tariffs were imposed on certain commodities produced in or imported into the country. The PNDC was hostile toward the prescriptions of western financial institutions such as the International Monetary Fund (IMF) and World Bank. Different causes led to poor economic performance and so the government gave in to IMF structural adjustment programs. This began the final period in 1984 with ERP reforms. Under ERP and SAP various sectors of the economy were liberalized. Exchange rate policy, fiscal and monetary policies, privatization, and trade policies all saw dramatic changes with increased liberalization of the economy. The Ghanaian economy recorded a remarkable recovery following the institution of the ERP in 1983. Since 1983, GDP growth rates have averaged 5% per annum, with the output of cocoa, minerals and timber recording significant increases. And inflation has fallen from the very high pre- reform levels (123% in 1983), declining to 10 % in 1992 (Fosu, 2010). Now as of the twenty first century Ghana as well as many other developing countries have experienced rapid growth. It is safe to say a new period is beginning. The liberal reforms have allowed capital markets to reach Ghana as well as new inflows of aid and loans. Ghana recorded about 5.2 % annual average growth between 1984 and 2010 and became a lower middle income country after a rebasing of its national accounts in 2010 with a change in the base year from 1993 to 2006. The rebasing pushed the country’s annual average growth to 8.3 % between 2007 and 2012. In 2011, the country commenced commercial production of oil. This development contributed 5.4 percentage points (oil-GDP) to the 15.0 % real GDP growth in that year; he measured growth figures that had little meaning for the livelihoods of Ghanaians. Employment generation trails economic growth with most jobs created in the informal sector where earnings are low. Growth as well has been all around but at different levels. The manufacturing sector, the employment generator, has witnessed weak growth which has reflected in the declining share of the sub-sector from 10.2% in 1993-96 to 6.9% in 2012. Growth has been relatively stronger in services and industry, and the outcome of this development is the shift in sectoral dominance from agriculture to services. Estimates indicate an annual average growth rate of agriculture of about 3.3% between 1984 and 2012 compared with 7.8% for industry and 6.7% for services. Public debt reached 50% in 2012 and has climbed more (Alagidede, 2013). These are the current issues that Ghana has to deal with and will be the backdrop for the rest of the analysis. 

Post Keynesian analysis is a relatively new school of thought but holds sway in academic circles today. Why this type of analysis is warranted for Ghana is because it depicts the economy in the context of history, as it transforms over time. As the previous paragraph showed Ghana has an interesting past and it would be detrimental to not take that into account to predicting the future. The past and future are determined by savings and investment, along with other indicators. The Harrod Domar formula while from an earlier period does well with post keynesian literature. The idea that the growth rate is equal to the average propensity to save divided by the capital output ratio is a standard bearer not just for post keynesianism but neoclassical as well. The post-Keynesian approach modifies the assumption that the average propensity to save in the equation is constant by allowing changes in the distribution of income and differences in the propensity to save out of different incomes to affect aggregate savings ratios. From that different rates of growth are garnered:

“post-Keynesians first consider explicitly the conditions required for a steady rate of expansion, based on the warranted growth rate given by the Harrod-Domar formula. Once this has been done, the actual observed rate of growth can be analyzed in terms of (1) a change in the warranted growth rate due to a change in one of its underlying determinants and (2) the forces operating in the short run to divert the economy from its warranted growth path. This approach looks at long term growth as opposed to short term to give an accurate picture on any disequilibrium in the economy.” ( Eichner, 1975)

In that we consider the warranted growth rate and natural growth rate. Wall updates this theory by adding the balance of payments equilibrium growth rate into the equation, accounting for an open economy (Wall, 2001).  We can understand the actual growth rate as well, for added reality as change in national income, what is the predominant method of measuring economic growth and development. Data from the World Bank will be used in the analysis and is relatively straight forward. The warranted growth rate is the full capacity rate of growth of income which will fully utilize a growing stock of capital that will satisfy the entrepreneurs with the amount of investment actually made. The equation states that if the economy is to advance at the steady rate of Gw that will fully utilize its capacity, income must grow at the rate of s/Cr per year. This is the savings rate divided by the capital output ratio, which itself is derived from the investment rate. Due to a lack of proper information on Ghana, instead of dividing figures I will simply subtract the savings rate from investment rate Gw=(S-I). The natural growth rate is the potential growth rate of a nation given its resources such as labor and technological progress. The growth rate given full employment. Technological progress is hard to pinpoint so we will compare it to regional partners. This will be calculated by taking the change in working age populations in Ghana multiplied by a rough estimate of the productivity rate by the African Economic Outlook Report Gn=Pw(Pr) (Eichner, 1975). Finally the balance of payments equilibrium growth rate measures the growth in money coming into our country. To do so we will divide the balance of payments from the year prior to the next. That includes subtracting the capital account from the current account, so the equation will be Gb=(Cu1-Ca1)/(Cu-Ca) (Wall, 2001). The Post-Keynesian literature looks at these growth rates as compared to each other to give a valid interpretation of what is going on in the economy. Of the main three: natural, warranted and balance of payments we can find eight combinations of relationships. gw > gn > gb would be a demand-constrained economy seen in mature developed economies. gw > gn < gb there is over-saving and Keynesian unemployment but also a balance of payments surplus. Same for gw > gb > gn. As for the relationship gw < gn > gb and gw < gb < gn as the author puts it “plans to invest exceed plans to save, and there will be inflationary pressure. In addition, there will be growing unemployment of the structural variety because the growth of the labor force in efficiency units exceeds the growth of capital.” Within the final possible combination (gw < gn < gb) inflation will be present with growing structural unemployment, but now the balance of payments equilibrium growth rate exceeds the economy’s capacity to grow. Surpluses on the balance of payments will arise. Finally holding all equal than the economy is in equilibrium. That in theory is the point at which the economy is growing even in the long term. While it is relatively rare all three would be perfect the closer they are to each other the higher development and economic growth should be. This is what Joan Robinson called the “true golden age”, and it is not so much about exact figures but as to the trend made (Eichner, 1975).

The purpose of this paper is to assess the long term trends in Ghana’s economy using a post-Keynesian lens. To do so we will need to test the model against Ghana’s historical data. Once that is covered we can run the model through the current 2018 statistics. Our model will be run through correlation coefficients to see the effectiveness. While coefficients deal in binomial figures and our study has multiple variables we will need to find a way to combine them. The following study will follow as:

  1. Find Gn, Gw, Gb for different years (including 2018)
  2. Find equivalency of three rates (including 2018)
  3. Correlate equivalencies to actual growth rates (average of decade)
  4. Assess any possible political/social explanations

The years we will use for the study are 1980, 1990, 2000 and 2018. 

  1.  Gw=(S-I) ,   Gn=Pw(Pr) ,  Gb=(Cu1-Ca1)/(Cu-Ca)
  1. To take these three variables (Gw, Gb, Gn) to a single one we will need to take into account the relationship of these variables as mentioned in the previous paragraph.

A. P. Thirlwall. (2001). The Relation between the Warranted Growth Rate, the Natural Rate, and the Balance of Payments Equilibrium Growth Rate. Journal of Post Keynesian Economics,24(1), 81-88. Retrieved from;

Alagidede, Paul & Baah-Boateng, William & Nketiah-Amponsah, Edward. (2013). The Ghanaian Economy: An Overview. Ghanaian Journal of Economics. 1. 4-34. 

Eichner, A., & Kregel, J. (1975). An Essay on Post-Keynesian Theory: A New Paradigm in Economics. Journal of Economic Literature, 13(4), 1293-1314. Retrieved from

Fosu, Augustin & Aryeetey, Ernest. (2010). Ghana’s post-independence economic growth 1960–2000. The Economy of Ghana: Analytical Perspectives on Stability, Growth and Poverty. 36-77. 
OECD (2017), “Graph 6.2 – Labour productivity growth for 11 African countries, 2000-10”, in Entrepreneurship and industrialisation, OECD Publishing, Paris,

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