Globalization, Trade and Poverty in Ghana Edited by: Charles Ackah and Ernest Aryeetey International Development Research Centre Ottawa • Cairo • Dakar • Montevideo • Nairobi • New Delhi • Singapore First published in Ghana 2012 by SUB-SAHARAN PUBLISHERS P. O. BOX 358 LEGON-ACCRA GHANA Email: [email protected] ISBN: 978-9988-647-36-0 A co-publication with the International Development Research Centre P. O. Box 8500 Ottawa, ON K1G 3H9 Canada www.idrc.ca / [email protected] ISBN (e-book) 978-1-55250-547-2 © International Development Research Centre 2012 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the prior permission of the publishers. Typesetting by Kwabena Agyepong Acknowledgments Th is book is based on results of a research project carried out at the Institute of Statistical, Social and Economic Research (ISSER), University of Ghana, Legon. Th e project was generously funded by the International Development Research Centre (IDRC). We are deeply grateful to the IDRC for supporting this work. We also sincerely thank the chapter authors, editors, external reviewers, and the Project Advisory Committee for the work they did. Contents Foreword v Introduction and Overview 1 Charles Ackah and Ernest Aryeetey An Overview of Trade Policies and Developments in Ghana 10 Albert Laryea and Sarah Akuoni Trends in Growth, Employment and Poverty in Ghana 33 Charles Ackah and William Baah–Boateng Wage and Employment Effects of Trade Liberalization: The Case of Ghanaian Manufacturing 50 Charles Ackah, Ernest Aryeetey and Kwadwo Opoku The Effects of Trade Liberalization on the Return to Education in Ghana 75 Charles Ackah, Oliver Morrissey and Simon Appleton Trade, Trade Policy and Total Factor Productivity: The Case of Ghanaian Manufacturing Firms 102 Charles Ackah, Ernest Aryeetey and Oliver Morrissey The Impact of the Elimination of Trade Taxes on Poverty and Income Distribution in Ghana 120 Vijay Bhasin Food Prices, Tax Reforms and Consumer Welfare in Ghana during the 1990s 157 Charles Ackah and Simon Appleton The Effect of Import Liberalization on Import Tariff Yield in Ghana 188 William Gabriel Brafu-Insaidoo and Camara Kwasi Obeng Cash Cropping, Gender and Household Welfare: Evidence from Ghana 202 Charles Ackah and Ernest Aryeetey The Transmission of World Commodity Prices to Domestic Markets: Household Welfare Effects in Ghana 221 Charles Ackah, Ernest Aryeetey, David Botchie and Robert Osei Appendix 248 Index 249 This page intentionally left blank Foreword Foreword Th e last 20 years have seen signifi cant trade liberalisation across the world, and it is widely held that this has been benefi cial for development, as suggested by large successful economies in Asia, including China, India, Bangladesh and Vietnam. Th ese countries also have an impressive record in poverty reduction, though it is less clear to what extent this was a consequence of trade liberalisation. Signifi cant policy changes such as trade liberalisation will almost invariably have distributional consequences, with some gaining while others lose out, with probably diff erences in the short and longer term. Th e question of the impact of trade liberalisation on poverty was the subject of a review article in the Journal of Economic Literature, co-authored by Alan Winters, Neil McCulloch and myself. At that time empirical evidence on the question was very limited, with many of the articles we reviewed only covering specifi c aspects of it. Some more empirical evidence has accumulated over the subsequent eight years, though not so much for Africa. Th is new study of Ghana, all chapters authored or co-authored by leading and emerging Ghanaian researchers, is a really welcome and valuable contribution to the literature. In depth country studies which look at diff erent aspects of trade liberalisation are likely to be the most informative approach. And Ghana is an ideal focus. It has been one of the most successful African economies, which has achieved sustained growth over the past more than 25 years. Trade liberalisation and resulting export growth have been an important part of the story. Ghana also has had a very good record of poverty reduction, but to date there has been very little evidence as to whether trade liberalisation has been an important contributor to this. Th e results presented in this study indeed confi rm that trade liberalisation has had both positive and negative medium term impacts on diff erent categories of households. Th ose engaged in exporting activities as well as skilled workers have benefi ted, but some poor and unskilled workers appear to have suff ered, at least in the short to medium term. Trade liberalisation may therefore be a partial explanation for the increase in inequality Ghana has experienced in recent years. Th at said though the overall impact of trade liberalisation appears to have been positive in Ghana and to have contributed to poverty reduction over the longer term. But clearly appropriate complementary policies combined with institutional reforms are necessary to enable the benefi ts of trade liberalisation to be more widely shared than has been the case to date. Th ese issues are likely to become all the more important as Ghana starts to extract its recently discovered oil. Andy McKay Professor of Development Economics University of Sussex United Kingdom March 2012 v List of Editors & Contributors Charles Ackah – Research Fellow at the Institute of Statistical, Social and Economic Research (ISSER), University of Ghana. Ernest Aryeetey – Vice Chancellor of the University of Ghana. At the time of writing, Director of the Institute of Statistical, Social and Economic Research (ISSER), University of Ghana. Other Contributors: Oliver Morrissey - School of Economics, University of Nottingham. Simon Appleton - School of Economics, University of Nottingham. Albert Laryea - Department of Economics, University of Ghana . Sarah Akuoni - Department of Economics, University of Ghana. William Baah-Boateng - Department of Economics, University of Ghana. Kwadwo Opoku - Research Department, Bank of Ghana. David Botchie - Institute of Statistical, Social and Economic Research, University of Ghana. Vijay Bhasin - Department of Economics, University of Cape Coast. Camara Kwasi Obeng - Department of Economics, University of Cape Coast. William Gabriel Brafu-Insaidoo - Department of Economics, University of Cape Coast. vi Chapter Introduction and Overview 1 Charles Ackah and Ernest Aryeetey 1. Introduction Th e persistence of poverty in many developing countries, especially in Sub-Saharan Africa (SSA), in the face of increased globalisation and rapid trade liberalisation during the past two decades has inspired considerable debate on the impact of globalisation, in general, and trade liberalisation, in particular, on poverty. Th e standard argument, based on the Stolper-Samuelson theorem, is that global trade liberalisation would lead to a rise in the incomes of unskilled labour in developing countries. In other words, since developing countries are more likely to have a comparative advantage in producing unskilled labour-intensive goods, one would expect trade reforms in these countries to be inherently pro-poor (Krueger, 1983; Bhagwati and Srinivasan 2002; Bhagwati, 2004; Harrison, 2005). However, the experiences of many developing countries, particularly in SSA, have been disappointing and in many cases poverty has increased following trade liberalisation (Easterly, 2001). It is estimated that more than 1 billion people still live in extreme poverty (based on the US$1 per day poverty line), and half the world’s population lives on less than US$2 a day. In Ghana, as in many other SSA countries, poverty remains the fundamental problem confronting policy makers in the new millennium as highlighted in the Ghana Poverty Reduction Strategy (Government of Ghana, 2003) and Vision 2020: Th e First Medium-Term Development Plan (National Development Planning Commission,1977). Yet, between 1991 and 2006, the headcount index of poverty fell by 23.2 percentage points with the proportion of the population living below the national poverty line falling from 51.7% in 1991/92 to 28.5% in 2005/06. Poverty had fallen in the countryside as well as in the towns, though progress had been more rapid in rural areas. Research at ISSER (2006), suggests that this positive trend is likely to continue if Ghana maintains the average growth rates of the last few years making it likely that a number of targets contained in the Growth and Poverty Reduction Strategy II (GPRS2) will be achieved. Th is optimism is, however, tempered by the fact that while poverty declined, inequality increased signifi cantly during the same period. Th e Gini index for consumption per equivalent adult increased from 0.353 in 1991/92 to 0.378 in 1998/99 and fi nally 0.394 in 2005/06. Th e evidence shows that the northern savannah area has been left behind in the national reduction in poverty, Large reductions in the incidence of poverty have occurred among private sector employees in both the formal and informal sectors, and among public sector wage employees, but 1 Chapter 1 export farmers have experienced the largest reduction in consumption poverty. Poverty reduction among the large numbers of food crop farmers, on the other hand, has been modest. Reductions in the incidence of poverty over the period have been smaller also for the non-farm self employed and informal sector wage employees. A recent publication by the World Bank suggests that had there been no change in inequality, the reduction in poverty would have reached 27.5 percentage points, so that Ghana would have achieved the Millenium Development Goal (MDG) target of reducing poverty by half in relation to its level of 1991/92. Th ese statistics have stimulated some concern about whether the poor gain from trade liberalisation, and under what circumstances it may actually hurt them. Th is is largely in view of the fact that most of the changes in the poverty data are associated with household involvement in international trade and also migration.