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Ghana's Recent Economic Surge

Posted: 05/26/11 09:24 AM ET

Just at about the time of industrial revolution and the advent of renaissance, the United Kingdom led a pack of European countries, the United States and Japan towards higher stages of economic growth, creating a dichotomy of rich countries and poor countries. For a long time, development economists held the view that the cleavage of rich countries and poor countries was a permanent state of global affairs. Then came the newly industrialized countries of the far east (Taiwan, Hong Kong, Korea, Singapore) demonstrating rapid economic growth with significant convergence of their per capita income with rich countries. This trend picked up more credence when China, the most populous country in the world, adopted significant elements of market economy causing a long surge of per capita income. The per-capita income convergence theory describes the progression of low and middle-income countries converging with high income countries. According to Professor Nake M. Kamrany's theory, countries have been rapidly converging due to three underlying phenomena: declining fertility rates, rapid transfers of technology and the demise of the Soviet Union that opened up the world's economy. Furthermore, in order for countries to converge three criteria must be met: the difference in the level of productivity, difference in the annual growth rate and a long time horizon.

There have been variations in the economic convergence rate among countries and regions. Europe and central Asian regions seem to be converging the fastest based on their growth rate while sub-Saharan Africa's performance has been disappointing as these countries' growth rates have been less than 2.5%. The combination of corruption, violence and debt along with AIDS endemic have suppressed the growth of African regions. However, not all African nations' convergence prospect is gloomy.

As its namesake suggests, Ghana has been the "warrior king" in Africa for the last decade in terms of economic and political stability. Ghana's economic turnaround from 1965 to 2009 has allowed greater political accountability and improved fiscal responsibility. Between 2000 and 2009, Ghana's average annual growth rate in terms of GDP per-capita stands at 17.6% as compared to the rich countries' 3.05%. Ghana still faces some economic hurdles that may impede future growth -- ranging from low tax collection rates to staggering inflation and heavy reliance on commodity trade -- but the country's overall prospects seems promising.

Therefore, the question arises: how has Ghana eluded the very economic and social turmoil and corruption that has plagued its neighbors with endless wars and extreme poverty? For instance, both Ghana and Ivory Coast economies are driven by their rich sources of natural resources, especially oil and gold, and both uphold democratic practices. Yet, Ivory Coast has witnessed two civil wars in the last decade and has experienced economic decline, stemming from internal corruption and the falling prices of coffee.

Ghana's political stability and economic prosperity can be partly credited to the support and financial sponsorship by China. With an influx of capital, China's six-day tour last September ended with a $10.4 billion concessionary-loan program for Ghana's infrastructure projects with a majority of this funding going towards the oil and gas sector. In addition to this agreement, China's Development Bank helped broker the acquisition of Ghana Bauxite Company for the Chinese firm, Bosai Minerals Group -- leading the way for a greater Chinese presence in the African nation.

China's recent investment in Ghana did not come from thin air but was a long-term strategic move to further their presence in Africa and its natural resources. In 2007, China Development Bank set up a $1 billion fund to encourage investment and finance trade to the impoverished continent. This fund was designed as a passageway for Chinese multinationals to explore Africa's abundant natural resources. It has established strong relations with promising countries in hopes to secure new trading partners and necessary access to oil and industrial metals.

Ghana's shift in foreign relations has caught Western nations by surprise. Both the U.S. and the UK have housed Ghanaian refugees for decades and established credit facilities in exchange for a hefty stake in the region's abundant and unexplored oil fields. Yet their influence has slowly diminished, leaving China and their commodity conglomerates to revel in the country's success.

Investments from China will ostensibly assist Ghana's economic growth. Based on empirical data taken between 2000 and 2009, Ghana's per capita income could converge with rich countries by 2037 assuming a continuation of recent trends. The United States should follow Chinese footsteps and respond to Ghana's eagerness as an opportunity to invest in the burgeoning economy. Furthermore, if Ghana is able to reel in foreign investments from superpowers like the U.S., it will help ensure Ghana's rapid economic growth and a bright spot in the African continent.

It is important to note Ghana's economy has seen dramatic growth over the past decade due to sound structural reforms and economic policies with the help of World Bank and IMF. During 2005 - 2008 Ghana enjoyed real GDP growth of 6% - 7.3%. The rapid growth was due to strong credit growth that increased private sector activity stemming expansionary fiscal policies as well as strong agriculture growth. Ghana has also improved social factors such as development of the educational system, decrease in corruption and political stability, and improving freedom of speech, press and information.

Nake M. Kamrany is Professor of Economics and Director of Program in Law and Economics at the University of Southern California. Martin Park is an Associate at the Research Group for Global Convergence of Per Capita Income in Los Angeles.