The Effects of Trade Liberalization in Ghana

Happy New Year Everyone! My first post of 2014 was sparked by another on a colleague’s Facebook wall in response to his Ghanaweb Article on Ghana’s trade liberalization policy. I produce below my commentary to the enriching Facebook discussion. Here we go!

An open economy such as Ghana’s over-liberalized trade regime without the necessary support mechanisms for local industries to compete at even the regional level will eventual spell doom and further exacerbate our precarious trade deficit and current account balances. This is because of the massive amounts of foreign exchange that we’ll have to spend to bring these finished goods (not even intermediate goods for production) into the country at ridiculously low prices. The pressure on the Cedi is partly as a result of these over liberalized trade policies. For example, Ghanaian importers need to convert their Cedi to dollars, an intermediary currency before further exchanging it for the Chinese Renminbi. This increases the dollar demand as the Chinese import trade grows. Sino-Ghana trade reached US$5.43 billion in 2012, up 56.5 percent from 2011 figure of US$3.47 billion. The net effect of this has been the deterioration of our current account balance which only stands at about 2.6 months of import (US$4.5 billion) [MPC Report, Nov 2013].

2012_09_13_Trade_Boat_503

The only way to deal with these effects or at least stem its impact on our reserves whilst at the same time promoting mass employment and consumption of local produce is adopting some of the points my good colleague Kobina Eric Nyanteh enumerated in an earlier post on the subject today – e.g. emphasis on technology transfer and the introduction of quasi levies and other ‘sin’ taxes to artificially raise the prices on for example the useless imported fruit juices, etc to at least bring them to parity with local alternatives in the short term. ‘Sin’ taxes or a Pigovian tax basically work by killing two birds with one stone: (1) raising revenue, and (2) discouraging bad consumption habits that in turn lead to higher health costs (negative externalities) for our already dysfunctional NHIS and other public services. That is, it attempts to reduce the collective social harm from a private economic transaction by raising the price of that transaction. [2] The purpose of a sin tax is based on economic theory: it intends to reduce consumption of the undesirable good by increasing the price. Sin taxes are currently levied against a wide variety of social ills that need to be prohibited. Classic examples are alcohol, tobacco and plastic waste.

I’ve seen all sorts of rubbish toy and plastic products including sugar-induced fruit juices which are unhealthy and can be associated with diabetes and obesity being imported from China into Ghana. A higher tax or levy on these imported finished products will over time change consumer behavior if there are substitutable products –e.g. freshly pressed local fruit juices and drinks which bear close parity to the import price inclusive of the tax addon. Alternatively, the government could provide subsidies to the local producers; however, given the scarcity of resources, a rational policy maker would rather impose levies on these imported finished products to bring them at parity with local alternatives. The long term effects of these often fake, substandard, useless and potentially dangerous Chinese products is the pollution of the environment and/or rising public sector expenditure on health. One caveat though: this wouldn’t work effectively if our border and regulatory control systems are weak else that could create a black market.  There are numerous empirical studies which show that properly targeted sin taxes can positively affect consumer behaviour.

It is imperative however that these measures are tied to a wider industrial and trade policy which is anchored on the active promotion and consumption of quality Made in Ghana goods supported by a powerful and integrated value chain spanning the cottage, SMEs and large scale enterprises. The adoption of best practice production standards should become the hallmark such that long term comparative and locational advantages can translate into efficiencies of scale and scope thus reducing prices, and resulting in net positive consumer welfare.The government on the other hand should actively work to rein in on its borrowing on the domestic market which crowds out the private sector making loans ridiculously expensive. No domestic market can thrive against Chinese competition even with import levies imposed when banks are charging interest rates of 25-30%. Imagine if we could retain just US$2 billion of these capital outflows annually to invest in our local markets. That’s almost 50% of what we spent trading with China in 2012 not factoring in our traditional trade partners in the West. Now imagine again the direct and indirect impacts of these in terms of quality jobs created and the enhanced welfare for the many families which rely on these proceeds.

Ghana must work again! Good evening folks

Endnotes
[1] http://www.ghanaweb.com/GhanaHomePage/NewsArchive/artikel.php?ID=298516&comment=0#com

[2] http://www.moneymatters360.com/index.php/about-sin-taxes-and-consumer-behaviour-9948/

About the Author

Theo Acheampong
Theo is an economist and social media enthusiast who provides regular commentary on socioeconomic and political developments in Ghana and Africa at large. Theo is passionate about leadership, entrepreneurship and the role of innovative technologies in solving Africa's developmental challenges.