Business in Ghana

We Understand the issues that make the News

The Productivity Conundrum. Critical News, 30th October 2016

Posted by Business in Ghana on October 31, 2016

Sydney Casely-Hayford, thenewghanaian@gmail.com

It’s a political season, so we’re hearing a lot of the usual crap about the economy. Should we raise taxes or lower them? Negotiate trade agreements or abandon them? These are important questions, but they are not the central economic issue that we face today. Productivity is.

Many people keep asking me to state clearly what I think of the future of the economy of Ghana in combination with our politics, and at the expense of losing some readers, I put together some thoughts on the whys and the which way if we are to tread a new path.

If you ever read Dr Frimpong-Ansah’s (at one time Governor of the Bank of Ghana) book on the political economy of Ghana you will realize that he solution to our problems have never been very far from our doorstep. If Ivory Coast can show such dramatic success in a few short years, we have no excuse except poor and bad leadership. Ghana has been cursed with directionless leaders for too long.

We saw some productivity growth in the early independence days, and between 2000 and 2008 but it sputtered since then. What’s more, the prediction is that the productivity picture will get even worse in the decades to come, making it even harder to raise living standards.

To be clear, this is not a recent problem, nor can it be laid at the feet of one President or one political party. It is also not a distinctly Ghanaian problem, but a global trend. So rehashing decades old arguments will get us nowhere. The truth is that the productivity problem is unlike anything we’ve faced in the last century and we’ll have to come up with new solutions for it.

Try to imagine what life was like before 1920. Few people had cars, indoor plumbing or electricity. Ordinary chores, such as washing clothes or cooking a meal, required families to carry heavy loads of wood and water. Without refrigeration, food spoiled regularly. Women, consumed with household labor, rarely worked outside the home and few people had higher education.

So it’s not surprising that as homes became automated, productivity went up. That’s one reason why low productivity levels are here to stay. Today, despite some comparatively narrow improvements in digital technology and entertainment, life hasn’t changed much since the 1970’s. Education levels are also unlikely to rise much from present levels.

But that’s not all. At the same time that innovation has never taken off, there are six headwinds — namely, decentralisation, education, tribal inequality, globalization, climate change and the overhang of government debt — that will be barriers to faster growth.

To understand this point, let’s look at just a few of them in combination.

As planned parenting takes another step in birth regulation and the baby fanatics (1920’s generation) retire, the growth of the unemployed working force rises and the increase in retirees will also rise. At the same time the leveling off of the rate at which people attain higher education, combined with supply side pressures from globalization and higher levels of both public and private debt will make for a smaller economic base from which to finance retirement and consumer purchases

The confluence of these factors will lead to secular stagnation, an economic condition that features excess saving due to very high Treasury bill rates and diminished investment and demand.

A further factor dragging down productivity is the composition of the economy. Since the 1980’s, manufacturing has fallen, agriculture has suffered and slowed down and the labor force has shifted its value addition from agriculture to financial services, just over half of the GDP. That’s a dramatic shift.

To understand how this affects productivity, think for example about Dalex Finance and his barber. Over the last 30 years, technology has gotten thousands of times more powerful, making people like Ken Thompson and Joe Jackson far more productive. Their barber, on the other hand, still cuts the hair on only one person’s head at a time. Still, because Ken and Joe have gotten richer, the price of haircuts has gone up. They can afford to pay ten cedis for a one cedi haircut.

This is known as the Baumol effect and it is having a measurable impact on industries, like healthcare and education that depend on highly skilled professionals to provide service. Not coincidently, costs in both of these sectors of the economy have ballooned over the past few decades without a corresponding increase in productivity.

So instead of spending more money on things that will improve our quality of life, an increasing portion of Ghanaian incomes are going to things like health insurance premiums and paying down loans.

The seeds for the transformation that took place in the 1920’s were actually sown long before. Edison opened the first electrical power plant in the US, Pearl Street Station, in 1882 and Faraday invented the dynamo 50 years before that. The internal combustion engine was invented in 1876 and Henry Ford introduced the Model T in 1908.

So it’s not quite clear whether our inertia in innovation is merely in hiatus. The impact of digital technology has been narrow, but there are indications that we just haven’t started to see its full effect yet. To be sure, it is beginning to power new technologies, such as genomics, nanotechnology and robotics, that may be far more pervasive.

To understand the impact that these technologies can have, consider the case of solar energy, which relies on nanotechnology. Since 2009, the price of solar panels has dropped by 70%. That’s made them competitive with fossil fuels, but not transformative. Now consider the fact that solar efficiency improves by about 20% for every doubling of volume and you can see the potential for the future.

It’s not just solar panels either. The same trends hold for a variety of exciting new technologies, such as energy storage and genetic sequencing. Advances in artificial intelligence also have the potential to automate many service jobs. To take just one example, 2,000 cases of beer were recently delivered by a self-driving truck in the US.

Unfortunately, we won’t see the true impact of these new technologies till after 2020. So until then, we will just have to wait and see. But we can certainly improve our odds by investing in research that will make the advances we need more likely to happen.

Consider the facts laid out above and it should be clear how irrelevant the political debate around economics is. Things like trade and tax policy will have, at best, a marginal effect on prosperity. What’s really important is improving productivity growth and that is a long term proposition that won’t lend itself to easy fixes.

Some things, such as globalization we have little control over. We can create programs to retrain older workers, who due to longer life spans can now have second or even third careers. We can also design programs to support people who’ve been put out of work by international competition and automation. But those are merely band-aids.

The truth is that if we want to have a future, we have to invest in it and that means that we have to improve our technological capacity. Unfortunately, many politicians seem hell bent on doing just the opposite, waging a war on science and cutting research budgets to post-independence lows as a percentage of GDP.

And consider this. The gap in research investment amounts to less than 0.1% of GDP. So the price for securing our future amounts to only a small fraction of pesewas on the cedi. And that is too high a price to pay?

Yet still, the issue of investment in research just doesn’t seem like something politicians want to talk — much less do — anything about. Never has the future depended on so little from so few. How are we coming up short? Ignorance. “I can’t tink near”

Ghana, Aha a yε din papa. Alius atrox week advenio. Another terrible week to come!

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

 
%d bloggers like this: