GHANA RISING Accelerating Economic Transformation and Creating Jobs GHANA RISING Accelerating Economic Transformation and Creating Jobs © 2021 International Bank for Reconstruction and Development / The World Bank Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution: Please cite the work as follows: World Bank (2021) ‘Ghana Rising – Accelerating Economic Transformation and Creating Jobs’, Washington, DC: The World Bank. Third-party content: The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third-party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re-use and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. GHANA COUNTRY ECONOMIC MOMORANDUM Report No: AUS0002590 GHANA RISING Accelerating Economic Transformation and Creating Jobs NOVEMBER 2021 Acknowledgements This Country Economic Memorandum was prepared by a core World Bank team consisting of David Elmaleh (task team leader), Katherine Stapleton (co-task team leader), Mark Dutz, Errol Graham, Aurelien Kruse and Kwabena Kwakye. Chapter 1 was prepared by Katherine Stapleton, with inputs from David Elmaleh, Kwabena Kwakye, Bradley Larson, Saumik Paul, Dhushyanth Raju and Hugo Rojas-Romagosa. Chapter 2 was prepared by Katherine Stapleton, with inputs from Daniel Boakye, Roberto Echandi, David Elmaleh, Maryla Maliszewa, Jean-Christophe Maur, Jaoa Palotti and Yulia Vnukova. Chapter 3 was prepared by Katherine Stapleton, with inputs from Edward Asiedu, Izak Atiyas, Marcio Cruz, Elwyn Davies, Mark Dutz, Kauru Kimura, Kyungmin Lee, Lucio Melito, Jaoa Palotti, Tania Priscilla-Gomez and Dharana Rijal. Chapter 4 was prepared by Carlos Leonardo Vicente and Katie Kibuuka, and Chapter 5 was prepared by David Elmaleh, with inputs from Oleksii Balabushko, Alexis Balesteros, Bill Chandler, James Cust, Dirk Heine, Erin Hayde, Christian Schoder and Katherine Stapleton. Chapter 3 drew on the findings of the Firm-Level Adoption of Technology survey for Ghana, conducted in April and May 2021 by the Ghana Statistical Service in collaboration with a core World Bank team including Edward Asiedu, Marcio Cruz, Elwyn Davies, David Elmaleh, Kyung Min Lee and Katherine Stapleton. Chapters 2 and 3 benefitted from data from LinkedIn and Facebook provided by a team led by Trevor Monroe and assisted by Lucio Melito, Joao Palotti, and Dharana Rijal. Overall guidance and comments were provided by Francisco Carneiro, Lorenzo Carrera, Elwyn Davies, Michael Geiger, Stephane Hallegatte, Neeta Hooda, Kaoru Kimura, Pierre Laporte, Agata Pawlowska, Tim Kelly, Gaurav Nayyar, Sarosh Sattar and Konstantin Wacker during the concept note scoping and preparation process. The report also benefitted from a partnership and discussions with staff at the Bank of Ghana, the Ministry of Finance, the Ministry of Trade and Industry, Ghana Statistical Service, and the National Development Planning Commission. The report was edited by Oscar Parlback. The report cover and layout was designed by Kane Chong and Francis Sim. Cover photo credit: George Gyentu/Paragon Media 4 Ghana Rising – Accelerating Economic Transformation and Creating Jobs Abbreviations AfCFTA African Continental Free Trade Area IFC International Finance Corporation AI Artificial intelligence IMF International Monetary Fund ANS Adjusted net savings LAYS Learning adjusted years of schooling BoG Bank of Ghana LMIC Low-middle-income country BPO Business process outsourcing MFN Most favored nation CAR Capital adequacy ratio MoF Ministry of Finance CARES COVID-19 Alleviation and Revitalization of MSME Micro, small, and medium-sized enterprise Enterprises Support NCA National Communications Authority CEM Country Economic Memorandum NDC Nationally determined contribution CGE Computable general equilibrium NDI Non-deposit taking institution CIESIN Center for International Earth Science Information Network NIHL National Insurance Health Levy CIT Corporate income tax NPL Non-performing loan COVID-19 Coronavirus disease 2019 NTB Non-tariff barrier CPAT Carbon Pricing Assessment Tool PIT Personal income tax DBG Development Bank of Ghana SDI Special deposit-taking institution EFT Ecological fiscal transfer SME Small and medium-sized enterprise EITI Extractive Industries Transparency Initiative SOE State-owned enterprise EPI Export Potential Index SSA Sub-Saharan Africa ESRP Energy Sector Recovery Program TFP Total factor productivity ETD Economic Transformation Database VAT Value-added tax ETR Environmental tax reform FAT Firm-level Adoption of Technology FDI Foreign direct investment GETFL Ghana Education Trust Fund Levy GGDC Groningen Growth and Development Center GHG Greenhouse gas GHS Ghanaian cedi GRA Ghanaian Revenue Authority GSE Ghana Stock Exchange GSMA Global System for Mobile Communications GVC Global value chain HCI Human Capital Index HP Hodrick Prescott ICT Information and communication technologies Ghana Rising – Accelerating Economic Transformation and Creating Jobs 5 © George Gyentu/Paragon Media 6 Ghana Rising – Accelerating Economic Transformation and Creating Jobs Table of Contents Acknowledgements 4 Abbreviations 5 Overview 8 CHAPTER 1 Ghana Rising 25 A rising star, but Ghana’s growth path has not been straightforward 26 Ghana needs to focus on economic transformation 33 An urgent need to repair the link between growth and poverty reduction 43 Responding early to the opportunities and threats from climate change 45 Realizing Ghana’s ambitious goals for future growth 47 How can Ghana revive long-term inclusive growth? 50 PART 1: LAUNCH ECONOMIC TRANSFORMATION 53 CHAPTER 2 Trade and the Changing Role of Services 55 Structural and spatial transformation have been central to growth, but the future may be different to the past 56 Harnessing trade as a force for economic transformation 59 Building on Ghana’s strong performance in high productivity services 67 How can Ghana accelerate sectoral and spatial transformation? 74 CHAPTER 3 Technological Transformation and Ghana’s Micro-enterprises 79 Digital technologies and why they matter 80 Building the backbone: Digital infrastructure 81 Investing in people: Foundational and digital skills 88 Adoption of technology in Ghana’s firms 94 How can Ghana drive technological transformation? 102 PART 2: LEVERAGE ENABLERS OF GROWTH 107 CHAPTER 4 Financing the Private Sector’s Economic Transformation 109 Why the financial sector matters for economic transformation 110 Gaps in firm access to finance 113 Key drivers of limited access to finance 117 How can Ghana improve access to finance for enterprises? 123 CHAPTER 5 Macro-fiscal Management and Revenue Mobilization 129 Why a stable macroeconomic framework matters for economic transformation 130 Harnessing natural resources to drive long-term inclusive growth 135 Improving domestic revenue mobilization 142 Fiscal tools to raise revenues and align climate incentives 150 How can Ghana leverage macroeconomic management as an enabler of growth? 159 Ghana Rising – Accelerating Economic Transformation and Creating Jobs 7 Overview Ghana has been a rising growth star and a beacon of hope in West Africa. Strong economic growth over the past two decades led to a near doubling of GDP per capita, lifting the country through the threshold for middle- income status in 2011. GDP per capita grew by an average of 3 percent per year over the past two decades, putting Ghana in the top ten fastest growing countries in Sub-Saharan Africa (SSA). A rising tide has tended to lift all boats. Poverty rates more than halved between 1998 and 2016, and the extreme poverty rate declined from 36.0 percent in 1991 to 8.2 percent in 2016. The net primary school enrollment rate rose from 62.5 percent in 2000 to 86.0 percent in 2019. This progress has motivated the government’s goal to lift the country to high- income status by 2057. Yet, this positive long-run trend obscures the variation in Ghana’s growth path and the extent to which growth has trickled down to improve livelihoods in different growth phases. Over the past decade, particularly, GDP per capita growth has been uneven, ranging Over the from +11.3 to -0.11 percent, partially reflecting increased dependence past decade, on natural resources and resultant exposure to external shocks. The trickle-down process started to stall in the early 2010s. With the particularly, beginning of oil production and rising commodity prices, the direct GDP per capita share of mining in total value-added rose from 3 percent in 2010 to 12 growth has been percent in 2018.1 In 2019, 11 percent of GDP stemmed from just oil and gold. 2 This has meant that a sizable portion of Ghana’s growth over the uneven, ranging past decade has not generated many jobs, and the impact of growth from +11.3 to on poverty reduction has declined. Between 2013 and 2019, nearly 20 percent of GDP growth was directly attributable to the mining sector, -0.11 percent while the level of employment in the sector fell. 3 Inequality and spatial disparities have also widened. There were many positive signs for Ghana’s economy before the COVID-19 pandemic, but the effects of the crisis have been severe. In the years prior to 2020, the country’s economy was one of the fastest growing in SSA, with GDP per capita growing at an average rate of 4.1 percent per year in 2018-19. Manufacturing employment had started to increase, services exports grew fivefold between 2014 and 2018, access to physical and digital infrastructure improved, foreign direct investment (FDI) was growing at a rapid rate and the choice of Ghana as the Secretariat for the African Continental Free Trade Area (AfCFTA) offered an array of new opportunities. However, the pandemic has hit Ghana’s economy hard. In 2020, GDP growth slowed to 0.4 percent, down from 6.5 percent in 2019. Firm closures and reduced incomes threaten to reverse the gains in poverty reduction and living standards achieved over the past few decades. A rapid rollout of vaccines will be essential to swiftly end the pandemic in Ghana. But after navigating through the health emergency, the country will be faced with a blank slate of opportunities for designing its recovery, but with development challenges that have become even more critical. Ghana faces an acute jobs challenge, and responding to this challenge will require generating more and better job opportunities for lower and mid-skilled workers. The country has some high-performing services sub-sectors that employ very few workers and a manufacturing sector with very low productivity, while the bulk of jobs are in low-productivity, often informal services sectors. Thus, there are few mid-productivity, mid-skilled jobs for workers moving out of agriculture. As a result, structural change and urbanization have not been engines for growth in Ghana as they have been in East Asia and other parts of the world, where lower-skilled workers moved from agriculture into modern sectors with higher productivity and the scope to drive innovation and economies of scale. Ghana’s jobs challenge is critical. It is estimated that more than 70 percent of current jobs 1 Based upon data from the Groningen Growth and Development Center (GGDC)’s Economic Transformation Database (ETD) (de Vries et al. (2021)). 2 Based upon the Ghana Statistical Service GDP by Industry data. 3 Based upon data from the GGDC ETD (de Vries et al. (2021)). 8 Ghana Rising – Accelerating Economic Transformation and Creating Jobs Overview © rosn123/bigstockphoto.com are in the informal sector, while over 65 percent of formal jobs are categorized as “vulnerable employment”.4 By 2040, the country’s population is projected to rise to 45 million, with 58 percent of the population under 30 years old. This implies that around 10 million Ghanaians will enter the labor force between now and 2040. 5 The focus of this Country Economic Memorandum (CEM) is to review options for Ghana to create enough higher quality jobs through economic transformation. Economic transformation, or inclusive By 2040, the country’s productivity growth, occurs as people and resources population is projected to shift from lower to higher productivity activities. It rise to 45 million, with 58 raises household incomes and living standards, thereby lifting people out of poverty. It can be achieved percent of the population through the movement of workers and other resources under 30 years old. This between firms and sectors, or through workers staying within existing firms that benefit from within-firm implies that around 10 productivity  growth by adopting better technologies million Ghanaians will and capabilities, for example through digitalization. It can also be achieved through the movement of enter the labor force resources from low to higher productivity activities between now and 2040 spatially, for example through urbanization, trade integration or heightened connectivity and linkages. Ghana will need to launch its economic transformation through global integration and technological progress. Chapter 2 focuses on sectoral and spatial transformation. To accelerate these transformations, it proposes that Ghana harness the potential of trade, FDI and global value chains. Ghana stands to benefit substantially from the AfCFTA if it manages to use its unique position to enhance regional value chains and diversify exports. Improving the business and regulatory environment and helping Ghanaian firms integrate into global value chains will be instrumental. In particular, Ghana should build on its potential in agribusiness and light manufacturing, as well as cultivating its high productivity export-oriented services sectors, notably IT- enabled services. Chapter 3 focuses on technological transformation, including digital, and its potential to raise 4 Statistics from Ghana’s 2015 Labor Force Survey (GLFS) (Ghana Statistical Service, 2015). 5 According to UN Population Forecasts (UN, 2021). Ghana Rising – Accelerating Economic Transformation and Creating Jobs 9 Overview productivity and drive new economic opportunities. It looks for options to improve the productivity of existing firms, particularly Micro and Small and Medium Enterprises (MSMEs) and to spur entrepreneurship, innovation and job creation, particularly for Ghana’s youth. It considers how better management practices, increased use of technologies, and enhanced workers skills can contribute to making the private sector more productive. To do so, Ghana will need to leverage two key foundational enablers of long-run inclusive productivity growth: macroeconomic stability and financial sector development. In recent years, the country has suffered from recurrent macroeconomic instability, linked to election and commodity cycles; an energy crisis; and a financial sector weakened by high levels of non-performing loans (NPLs) and insolvency of financial institutions. Additionally, Ghana’s financial sector is shallow, and access to finance is limited, which holds back the private sector from engaging in activities that boost productivity and contribute to economic transformation. Indeed, enterprises in Ghana cite limited access to finance as a major constraint to their growth. Therefore, macroeconomic management, enhanced revenue mobilization and financial sector deepening that support job creation are therefore essential for long-term inclusive productivity growth in Ghana, and they are the focus of chapters 4 and 5 of this CEM. FIGURE 0.1 Report structure PART 1: LAUNCH ECONOMIC TRANSFORMATION CHAPTER 2 CHAPTER 3 SECTORAL SPATIAL TECHNOLOGICAL PART 2: LEVERAGE ENABLERS OF GROWTH CHAPTER 4 CHAPTER 5 FINANCIAL SECTOR MACRO MANAGEMENT Source: World Bank staff elaboration. In the next phase of its development, Ghana will also need to successfully navigate the challenges and opportunities posed by climate change. Even under an optimistic scenario with low climate impacts, climate change could reduce Ghana’s GDP by an estimated 9 percent by 2030 and push over a million people back into poverty.6 Climate change not only threatens agricultural revenues, but will also likely lead to higher food prices, an increased prevalence of natural disasters and lower labor productivity. It could magnify many threats to health, as poor people are more susceptible to climate-related diseases such as malaria and diarrhea. It will, therefore, be essential to provide poor people with social safety nets as well as developing targeted climate resilience measures, such as the introduction of heat resistant crops and disaster preparedness systems. Global policy responses to climate change will also mean that new products and industries are likely to emerge, offering new potential growth paths for countries like Ghana, while old models of development may cease to be viable. In addition, the country needs to adopt mitigation measures as well to meet its climate commitments, which will require innovation and creative policy responses. 6 Based upon modelling from World Bank Shockwaves Report, Hallegatte et al. (2016). 10 Ghana Rising – Accelerating Economic Transformation and Creating Jobs © rosn123/bigstockphoto.com Ghana Rising – Accelerating Economic Transformation and Creating Jobs 11 Overview Key Findings and Conclusions PART 1 LAUNCH ECONOMIC TRANSFORMATION 1 Ghana needs to fill a ‘missing middle’ of jobs in mid- productivity sectors by cultivating both manufacturing and export-oriented services in parallel Historically, structural transformation has been central to driving growth and raising living standards in developing countries, but in Ghana the contribution of structural change to growth has been limited. Although the country has experienced rapid structural change, particularly after 2005, with the declining role of agriculture in the economy, structural change contributed a mere 13 percent to aggregate productivity growth between 1990 and 2018. Moreover, the contribution of structural change to productivity growth has declined over time, and even turned negative over the past decade, suggesting that workers are now moving into less productive sectors. The reason for the limited growth impact of structural change is partly due to the transition of employment over the last decade from agriculture to low-productivity, typically informal services, which at times have lower labor productivity than agriculture. In addition, Ghana’s expanding sectors have struggled to maintain their high productivity levels while employing more workers, reducing the potential for structural change to drive growth. Ghana has not followed the traditional path of manufacturing-led development, with high productivity services contributing more to structural transformation than manufacturing between 1990 and 2018. The share of manufacturing in total employment stagnated in Ghana for much of the past three decades, while high-productivity export-oriented services have been some of the economy’s fastest growing sectors. The manufacturing sector is generally conducive to economic transformation because of its propensity to employ low-skilled workers and its capacity for innovation, economies of scale, and productivity spillovers. Some of these characteristics are increasingly exhibited by export-oriented services sectors, notably what has been termed the ‘global innovator’ services in the areas of information and communication technologies (ICT) and financial and professional services.7 In Ghana employment growth in these services sectors made a greater contribution to productivity growth than employment growth in manufacturing between 1990 and 2018. However, despite their high productivity, these services have provided relatively few jobs for lower-skilled workers and so their growth alone has not been sufficient to drive structural transformation. This pattern has reversed since 2010, with a manufacturing employment ‘renaissance’, although manufacturing has very low productivity. Over the past decade, and particularly since 2014, this pattern has reversed, with a significant rise in the manufacturing share of employment (from 10 to 16 percent between 2010 and 2018), and manufacturing making a greater contribution to structural transformation than high productivity services. However, manufacturing productivity declined over this period, counteracting its positive impact on growth. This rise in manufacturing employment has also not been accompanied by a rise in manufacturing exports, suggesting that this manufacturing renaissance is driven by domestic demand. These patterns reflect a ‘missing middle’ of employment opportunities in mid-productivity sectors for Ghanaian workers leaving agriculture. The combination of a manufacturing sector that has only recently expanded and has very low and declining productivity, strong performance of high productivity services that 7 This categorization of services sectors was first used in Davies et al. (2021). 12 Ghana Rising – Accelerating Economic Transformation and Creating Jobs Overview employ few lower-skilled workers, and the bulk of employment generation in very low productivity services sectors, means there are insufficient mid-productivity employment opportunities for workers moving out of agriculture. In Ghana, productivity in manufacturing is only around 30 percent higher than in agriculture and has been declining. By comparison, at a similar point in China’s economic development, productivity in manufacturing was over 5 times higher than in agriculture. Additionally, a quarter of the labor force in Ghana is currently employed in services sectors with lower productivity than agriculture. Ghana does not need to choose between manufacturing and ‘global innovator’ services: the two are increasingly intertwined so boosting competitiveness of one can benefit The increased the other. The increased linkages between the manufacturing linkages between and services sectors mean that services competitiveness is increasingly important for manufacturing competitiveness. the manufacturing Services have started to play an increasingly important role as and services sectors an input supplier to other exporting sectors: the share of total value added that is generated by services embedded in goods mean that services exports grew three-fold, from 10 to 32 percent between 2004 competitiveness and 2014. This means that services competitiveness is more is increasingly important than ever for overall competitiveness and reforms to boost services productivity can have an amplified effect, raising important the competitiveness of manufacturing at the same time. Despite for manufacturing significant improvements over the last decade-plus, there Is still great potential to increase backbone services competitiveness in competitiveness Ghana and this could even spur growth in manufacturing. Ghana will also need to focus on filling this ‘missing middle’ of mid-productivity jobs in cities and boost mobility and connectivity so that urbanization drives productivity gains and agglomeration. Ghana has experienced rapid urbanization, without industrialization, with cities characterized as ‘consumption cities’ rather than ‘production cities’. The relationship between structural and spatial transformation has also not been the traditional one. Ghana’s urban population grew from 4 million to 17 million from 1984 to 2018. Historically, urbanization is typically driven by either industrialization, forming a ‘pull’ of labor into cities, or a green revolution, forming a ‘push’ of labor out of rural areas. In Ghana, however, urbanization has been linked instead to the rising role of natural resources, with cities described as ‘consumption’ rather that ‘production’ cities. As a result, the country’s cities have specialized in low-productivity services, with limited agglomeration effects and challenges related to uncoordinated informal growth. Creating higher productivity jobs in cities and increasing urban infrastructure, transport and housing will be essential in Ghana’s next phase. 2 Ghana needs to better harness the transformative potential of trade and faces an historic opportunity to do so with the AfCFTA Ghana’s strong performance in goods exports over the past decade has mainly stemmed from the export of primary commodities, limiting the potential of goods trade to drive structural transformation. Ghana’s export performance over the past decade has been outstanding and Ghana’s trade to GDP ratio has increased rapidly. However, growth in exports of goods has been fueled by extractives, and exports are increasingly concentrated in primary commodities, offering limited scope for productivity spillovers or employment generation. Over the last decade, trade in goods not related to extractives has declined relative to GDP, while manufacturing exports have increased only modestly. Moreover, the share of intra-Africa trade has also declined over the past decade. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 13 Overview Rapid growth of FDI inflows and exports of services over the last decade have offered more potential for driving economic transformation. FDI flows into Ghana increased nearly tenfold between 2007 and 2018, with inflows roughly evenly split between natural resources on the one hand and manufacturing and services on the other. Over the past five years, Ghana has also transitioned from being mainly a commodity exporter to a commodity and services exporter. Exports of services increased fivefold between 2014 and 2018, and the country’s services sector is now the largest contributor to value-added exports. Still, a large share of the increase in services exports relates to services that are embedded in commodity exports. However, services are increasingly interlinked with other areas of the economy, and the sectoral linkages between services and goods production have grown stronger. Ghana faces an historic oppor tunit y to boost its manufacturing sector and regional value chains with the AfCFTA, which could be a major force for economic Ghana faces an historic transformation. The AfCFTA could reverse Ghana’s trends opportunity to boost its of stagnant manufacturing exports and declining trade with the continent. Modelling estimates from the World Bank’s manufacturing sector AfCFTA Report (2021) have shown that the AfCFTA could and regional value raise Ghana’s GDP by 7 percent by 2040, but the greatest chains with the AfCFTA, benefits will come from the trade facilitation measures and not tariff reductions alone. These estimates suggest which could be a major that the major beneficiary sector would be manufacturing. force for economic As secretariat of the AfCFTA, Ghana can also play a major position in shaping the direction of the AfCFTA and ensuring transformation its benefits are realized. Ghana needs to build on the high performance of ‘global innovator’ services by expanding into segments of these services that also create more low-and middle-skilled jobs. Between 2000 and 2012, growth in Ghana’s global innovator services employment share was on a par with that in India and the Philippines, spurring optimism that Ghana could follow in the path of these countries in export-led services growth. ICT particularly has been one of Ghana’s best performing sectors over the past decade and grew on average by 19 percent per year between 2014 and 2020. Currently ‘global innovator’ services employ relatively few, with employees being highly skilled and highly paid. Employment conditions in these service sectors are also currently far more favorable than in manufacturing. A deep dive into the types of jobs in global innovator services using LinkedIn profiles reveals that jobs in Ghana appear more concentrated in higher-skilled segments of these services, such as Accounting, than in countries like the Philippines and India, which have more profiles in segments like Offshoring and Outsourcing. Ghana also has far fewer low-skilled workers on LinkedIn in these sectors than in comparators. Offshoring of global innovator services to Ghana is also still limited. To do so will require an improved business environment, investment climate and regulatory reform. There are still some major barriers to export diversification, global value chain participation, FDI and the growth of large firms in Ghana. Ghana’s trade-weighted tariffs remain high, particularly on imported raw materials and intermediate goods. Ghana’s business environment is also potentially a constraint to growth. It is also still too costly and time consuming to start a business in Ghana, reducing market entry. Additionally, access to land and minimal capital requirements remain barriers to FDI. 3 Ghana also needs to accelerate technology adoption, particularly in MSMEs The concentration of employment in low productivity services and MSMEs means that firm technology upgrading could also be a major force for productive job creation. Employment in Ghana is dominated by MSMEs, which suffer from low and stagnant productivity. In 2015, 98 percent of the country’s businesses were micro or small and 90 percent were informal. Over the past decade, productivity growth in services has 14 Ghana Rising – Accelerating Economic Transformation and Creating Jobs Overview stagnated and productivity in manufacturing has declined. The adoption of new technologies and particularly, digital technologies, could accelerate firm upgrading and spur innovation and entrepreneurship, driving growth of higher quality jobs. MSMEs also provide important job opportunities for women and young people, meaning that addressing their challenges is a major way to improve inclusion. Ghana performs well on the availability of digital infrastructure in terms of high mobile internet coverage and low costs, but fixed broadband presents a barrier to digital technology adoption. The country’s telecommunications sector has experienced impressive growth due to an early liberalization and deregulation of the market in the late 1990s. There is near ubiquitous mobile network coverage and a high mobile penetration rate. While its mobile internet network coverage is high (94 percent and 88 percent of the population had access to 2G and 3G coverage, respectively, in 2019) most of the population is still not connected to mobile internet, likely reflecting low affordability, digital literacy, and demand. Only 37 percent of the population used mobile internet in 2019, and mobile internet speeds are low. Compared to the rapid growth of the mobile market, broadband infrastructure development in Ghana has been slow. In particular, the fixed broadband network has high end-user prices and very low uptake, despite high internet speeds. The country has made impressive progress in increasing school enrolment, but low learning outcomes hinder the development of the foundational and digital skills required to drive technology adoption. The expected years of schooling in Ghana is 12.1 years, significantly higher than the average of SSA and low-middle-income In 2015, 98 countries (LMICs). However, the learning adjusted years of schooling percent of (LAYS), which discount time spent in school by a factor measuring the country’s how much children learn, is only 6 years. This means that children are effectively learning only half the time they spend in school. The global businesses were digital skills survey, conducted by the International Finance Corporation micro or small (IFC) in 2018, shows that basic digital skills are among the most in- demand skills in Ghana, and demand exceeds the supply of all digital and 90 percent skills, particularly advanced skills. An analysis of LinkedIn profiles also were informal shows that the prevalence of digital skills among the country’s LinkedIn users is less than half that of the global average, with a particular lack of specialist digital skills in most areas. Most firms in Ghana benefit from ICT (Industry 3.0), although many are still held back by a lack of access to electricity (Industry 2.0), and there are few signs of firms leveraging big data, artificial intelligence, and other advanced technologies (Industry 4.0). Of the firms studied in the latest Firm-level Adoption of Technology (FAT) survey with 5 or more employees, 97 percent report that they suffer from power outages, with a median 13 outages per month. While mobile phones, computers, and smart phones are widespread, particularly in the services sector and among large firms, only 58 percent have access to the internet. Most firms still rely on manual methods to conduct many business functions (e.g., finance, accounting, and human resources), marketing is still predominantly conducted face-to-face, and cash remains the most common payment method. Manufacturing firms lag behind on Industry 3.0, and manufacturing processes are still predominantly manual, with only around 3 percent conducted by machines or computers. For micro and small firms with less than 5 employees, there is limited use of smartphones and the internet, but there is a vibrant use of mobile phones and mobile money. Dutz and Atiyas (2021) use a national sample of informal micro firms in Ghana to show that only 3 percent of sampled firms use smartphones, virtually none use fixed broadband connections (only 0.2 percent), and only 6 percent use the internet or social media for business purposes. By contrast, the use of mobile phones and mobile money among these firms is high, as 75 percent of them own 2G/2.5G supported phones. Mobile phones are used by almost all Ghanaian micro businesses. They use them to communicate with suppliers, and three-quarters of the micro firms that have mobile phones use them to communicate with customers. A total of 40 percent of the country’s micro firms also use mobile money. This suggests that micro businesses’ familiarity with basic mobile applications, including mobile money and SMS, has lowered the need to adopt smartphones. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 15 Overview PART 2 LEVERAGE ENABLERS OF GROWTH 4 The financial sector needs to provide affordable capital to firms to enable economic transformation Ghana’s level of financial intermediation is low, suggesting that the financial sector has not broadly supported private sector investment. At 12 percent of GDP, the level of credit to the private sector in Ghana is the lowest among peers. Ghanaian banks allocate a smaller share of their assets to loans and advances compared to their counterparts in peers such as Senegal, Côte d’Ivoire, and Kenya. Instead, Ghanaian banks allocate a higher share of their assets to government securities. Private enterprises — mostly large firms — receive about two-thirds of total bank loans in the country. The bulk of these loans have short maturities, preventing borrowers from investing in long-term projects that could potentially contribute significantly to economic growth and the creation of quality jobs. Not surprisingly, the majority of enterprises identify limited access to finance as a major constraint to growth. Small and medium-sized enterprises (SMEs) are even more constrained, with a high share of them reporting not having access to loans or lines of credit from a financial institution. SMEs also face higher collateral requirements than their larger counterparts in the form of land and buildings, which they typically do not own. Firms in the FAT survey also identify lack of access to finance as the main reason for not adopting new technologies. Low access to finance for firms is further exacerbated by the high cost of financing. The average lending rate in Ghana is above 20 percent in nominal terms (more than 10 percent in real terms), higher than below 20 percent in nominal terms (or 6 percent in real terms) in peer countries. At these high rates, it is not only difficult to find financially viable investments, but it is even harder for these investments to sustain the requisite high levels of return over the long term. © George Gyentu/Paragon Media 16 Ghana Rising – Accelerating Economic Transformation and Creating Jobs Overview There are various, mutually reinforcing factors contributing to the low access to and high cost of finance in Ghana. First, excessive government borrowing from the domestic market has diverted resources away from the private sector (crowding out private investment) and contributed to high interest rates. Second, limited availability of wholesale long-term funding prevents banks from offering long-term retail loans without creating maturity mismatches. Meanwhile, the capital market has yet to become a viable alternative funding source for enterprises. Third, financial institutions are understandably cautious given the high rate of non- performing loans (NPLs) and the high risk of lending to SMEs, especially those in high-risk sectors such as agriculture. As a result, financial institutions require high levels of collateral, which limits the volume of loans that enterprises can access. Fourth, a deficient credit infrastructure is unable to play its enabling role, given: (i) limited availability and poor quality of credit information, which complicates the appraisal of borrowers; (ii) gaps in the regulatory framework, which impede the effective use of movable assets as collateral; and (iii) a weak insolvency framework, which is critical to ensure that failing enterprises can be orderly reorganized or liquidated and creditors can be protected. Finally, a challenging business environment and informality raise the overall cost of operations for businesses, affecting enterprises’ viability and creditworthiness. Although the authorities have taken decisive measures to safeguard the stability of the financial sector, vulnerabilities remain. Between August 2017 and December 2018, the Bank of Ghana (BoG) resolved 9 domestically owned banks and closed 411 specialized deposit-taking institutions (SDIs) and non-deposit taking institutions (NDIs). The majority of closed institutions were saddled with NPLs and suffered from poor corporate governance. Similarly, the Securities Exchange Commission (SEC) revoked the licenses of 50 fund management companies that were unable to meet investors’ redemptions. The government provided 26.5 billion Ghanaian cedi (GHS), equivalent to 7 percent of GDP, for the compensation of depositors, creditors, and investors. Following the resolution measures, the banking sector is largely sound, with adequate capital buffers and liquidity. While NPLs have declined from their highs in 2017, they remain elevated and could increase further as the pandemic evolves. 5 Macroeconomic management needs to play a greater role to reduce economic volatility, improve sustainability and manage natural resource wealth While positive overall, Ghana’s recent growth experience has been characterized by high volatility, weighing on its growth potential. Since 2000, the yearly growth rate has fluctuated wildly due to both global crises (e.g., the global financial crisis in 2007-08) and the country’s reliance on commodities (linked to the commercial production of oil in 2011 and subsequent fluctuations in global commodity prices). Increasing public debt and consistently high fiscal deficits have increased Ghana’s country risk, potentially limiting the amount of FDI received, particularly in non-traditional sectors (outside of commodities). It has also increased the cost of finance (and limited access) for private businesses, as volatility drove risk premia higher, and extensive public sector borrowing to finance deficits has crowded out private borrowers. In the longer term, the extremely constrained fiscal space limits the government’s ability to make the investments in human and physical capital required to provide the foundation for long-term inclusive growth. The country’s attempts to shore up fiscal sustainability have been thwarted by successive crises. The discovery of oil and gas created high expectations regarding future oil revenue that have fallen short. These expectations helped loosen fiscal and monetary discipline as Ghana started to borrow in anticipation of future oil revenue. To stabilize the economy and improve public finances, the government adopted a fiscal stabilization plan in 2015, the implementation of which was slowed by costly financial- and energy-sector restructurings. These concomitant crises contributed to erode fiscal discipline even before the COVID-19 crisis. In 2020, the pandemic led to unplanned health expenditure, the adoption of a stimulus package targeting the real sector, and significant revenue shortfalls resulting in a large financing gap. Going forward, the authorities are committed to significant fiscal consolidation, including ambitious domestic revenue mobilization targets in the 2021 budget and spending cuts beginning in 2022. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 17 Overview Ghana is not following a sustainable growth path in terms of its natural wealth: its human capital per capita has grown while its natural capital per capita has been depleted. While human capital accumulation is a positive development, it has been accompanied by a modest increase in Ghana’s produced capital accumulation, a stagnation of its nonrenewable natural capital (new reserves could have been discovered as oil and mining industries developed), and a decline in renewable natural capital (mostly forests). Recent research shows that degrading the value of renewable natural capital is associated with lower or declining total wealth per capita. Meanwhile, protecting and enhancing the value of renewable natural capital is associated with better economic performance overall. The countr y has not saved suf ficient ly during commodity booms, limiting its ability to manage crises. The increase in Ghana’s income has been matched by an increase in consumption, such that the savings rate The increase in Ghana’s today is about the same as it was 23 years ago. During income has been the commodity boom, Ghana paradoxically experienced matched by an increase its lowest rates of Adjusted Net Savings (ANS), which fell below zero for six years. 8 By contrast, other countries such in consumption, such as Côte d’Ivoire increased their gross savings rate during that the savings rate boom years, which helped propel their ANS rates. Ghana’s ANS rate, however, has picked up after the commodity today is about the same boom, on the back of stronger gross savings and sustained as it was 23 years ago education expenditure. Ghana’s increasing non-renewable and net forest depletion could impact its ANS. A stronger macroeconomic framework is needed to manage volatility stemming from natural resources, in particular extractives. Extractive industries are important but volatile contributors to growth and public revenue. In Ghana, they contributed approximately 11 percent of public revenue in 2019. While the extractive sector continues to present opportunities to support medium-term growth, managing the sector’s volatility requires a comprehensive framework for fiscal responsibility. The authorities need to revisit (and possibly revise) the current fiscal responsibility framework (including the fiscal rule) to promote great fiscal sustainability, generate higher savings, and ensure better economic stability. 6 Ghana needs to increase domestic revenue mobilization and should consider environmental taxation to generate revenue and enhance sustainability in key sectors Ghana needs to optimize its tax mix to strengthen domestic revenue mobilization, increase efficiency and reduce the size of its informal economy. The very low level of domestic resource mobilization, notably due to generous tax exemptions, is one of the primary causes of the country’s continued fiscal stress. Ghana’s tax-to- GDP ratio has been persistently low. For the past two decades, the tax ratio has remained at around 12.8 percent of GDP, well below the SSA average of 15 percent. The country also needs to rationalize its tax expenditures (mostly value-added tax (VAT)-related), which were estimated to be about 5 percent of GDP for 2014. Recent revenue growth was driven by Corporate Income Tax (CIT), generally considered to be among the least efficient taxes; moreover, CIT does little to address equity. The size of the informal economy is reflected in low Personal Income Tax (PIT) revenues, a potentially important tool for achieving social policy objectives. To finance its social policy objectives, Ghana needs to adjust its tax mix to rely on more efficient revenue sources, like VAT and property tax. 8 ANS are a measure of sustainability, and they are calculated as the total of a country’s gross national savings minus consumption of fixed capital, plus education expenditure, minus subsoil resources depletion (fossil fuels and minerals), minus net forest depletion, and minus carbon dioxide and particulate emissions costs. 18 Ghana Rising – Accelerating Economic Transformation and Creating Jobs Overview The authorities need to strike a balance between tax efficiency and equity. Increasing the dependence on revenue from property and consumption taxes improves the tax system’s efficiency. Personal income tax systems can encourage taxpayers to move out of the informal economy while making the tax system more progressive. Administering social transfers through the personal income tax system creates an incentive for individuals to enroll in the tax system while allowing policymakers to income test eligibility for social transfers. Corporate income taxes should be used as stimulative measures to encourage productivity enhancing investments in capital. These are significant changes; Ghana will need to strike the balance between optimizing efficiency and equity. Carbon charges could serve as a tool to both expand and diversify fiscal revenues while also helping Ghana meet its climate commitments and generating climate co-benefits. Carbon charges are a form of carbon pricing, whereby fees, charges, taxes, or permits are applied to fossil fuels, with rates varying with the carbon content of the fuel. For Ghana, such charges could form a valuable source of revenues while also contributing to climate targets. The country has committed to national emissions abatement through its nationally determined contributions (NDCs). By shifting energy consumption away from fossil fuels, carbon charges can also have development co-benefits, or a positive impact on other development outcomes, such as reducing the negative health effects of air pollution and encouraging the use of public transport, thereby reducing congestion in cities and boosting agglomeration effects and productivity. An analysis of the potential impact of two scenarios for carbon charges in Ghana suggests that they could be an important source of revenue generation. Climate Climate change change remains a pervasive threat to the country’s remains a pervasive historical and future development gains and will require investment in climate adaptation measures, which carbon threat to the country’s charges could fund. Compared to a baseline of maintaining historical and future the existing excise regime, a ‘moderate carbon charge’ of US$25 per tCO2 in 2021, rising to US$50 by 2030, and development gains a ‘low carbon charge’ of US$10 per tCO2 in 2021, rising and will require to US$25 by 2030, could raise about US$0.6 billion (0.5 investment in climate percent of GDP) and US$0.3 billion (0.3 percent of GDP), respectively, each year in additional revenues from fossil adaptation measures, fuels by 2030. In both cases, the largest source of revenue which carbon charges generation would be from carbon charges on diesel, accounting for just over one-third of revenues in 2030 in could fund the moderate scenario. Implicit carbon pricing could be applied to cocoa through an environmental fee-and-rebate (feebate) mechanism that allows policy makers to set variable tax rates corresponding to the emissions intensity of production.9 Cocoa could be charged based on the assumption that production is not sustainable (i.e., involved in deforestation or other emissions-intensive methods), and producers could receive a tax rebate if they could prove that it was produced sustainably. Environmental feebates have worked successfully to reduce emissions in other sectors and countries. For example, in the automotive sector of several countries cars with emissions below a certain threshold receive a subsidy that is financed by cars above the threshold. In the palm oil sector, Switzerland decided in March 2021 to apply a default rate of tariffs on imported palm oil on the assumption that it stems from deforestation, but it grants a reduced rate if the palm oil is certified as deforestation free. The scheme suggested for Ghana is similar: it would tax a ton of cocoa at a default rate unless it is certified deforestation free, in which case a lower tax rate would apply. 9 Sustainable cocoa includes cocoa designated as “zero-deforestation” or produced through agroforestry methods. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 19 Overview Summary of Recommendations 1. Revitalize long-term growth After navigating through the pandemic, Ghana will need to focus on three key areas to revive growth. • Create more and better jobs by launching economic transformation and leveraging enablers of growth. Focus on driving sectoral, spatial and technological transformations. Create an enabling environment for growth by ensuring the macro framework and financial sector support growth. • Ensure that growth is inclusive and addresses rising inequality and spatial disparities. Increase the poverty reduction impact of growth, focus on opportunities for lower-skilled workers, improve services for underserved regions and populations. • Invest in climate adaptation measures to avoid the worst effects of climate change. Invest in measures to reduce exposure to climate risks in agriculture, to improve resilience in infrastructure and resilience to natural disasters. Prepare social safety nets. Plan for paths to decarbonization. 2. Launch sectoral and spatial transformations To create jobs, Ghana will need to drive sectoral transformation through the movement of workers into higher productivity firms and sectors and spatial transformation through trade, urbanization and connectivity. • Expand lower-skilled jobs in global innovator services, particularly ICT and business services. Focus on a) cross-cutting reforms to boost services competitiveness and b) expanding and attracting FDI into the lower-skilled segments of these services. • Boost competitiveness in manufacturing by fully implementing the AfCFTA. Reduce barriers to GVC participation primarily through full implementation of the AfCFTA and also improved logistics services and improved access to electricity. • Transition to higher value-added labor-intensive tradable services through FDI, attracting and cultivating large firms and developing the tourism sector after the pandemic. Improve mobility, connectivity and urban planning to enable these transitions. 3. Launch technological transformation To deliver productivity growth and boost innovation and entrepreneurship, Ghana will need to drive technological transformation through the adoption of digital and complementary technologies in domestic firms. • Reduce cost and increase speeds of internet connections, particularly broadband. Accelerate mobile internet adoption through reducing costs and addressing usability barriers. Increase mobile internet speeds and reduced fixed broadband costs and expand access through regulatory reforms and government investments. • Invest in foundational skills for all and expand advanced digital skills in tertiary education. Skills gaps need to be filled at both the bottom and top. Improve learning outcomes and the quality of education. Invest in advanced digital skills in tertiary education. • Expand the use of internet, smart phones and computers in small firms and manufacturing. Accelerate adoption of advanced technologies in large firms. 20 Ghana Rising – Accelerating Economic Transformation and Creating Jobs Overview 4. Leverage the financial sector To support more inclusive private sector development, Ghana will need to leverage the financial sector to facilitate firm expansion, technology adoption and innovation. • Increase the availability of long-term finance. Accelerate the implementation of the new wholesale development bank. Develop the capital market, including through the implementation of the Capital Market Master Plan (CMMP) 2020-2029. Pursue fiscal discipline and reduce reliance on the banking sector as source of public financing to limit crowding out. • Mitigate financial institutions’ credit risk and lessen collateral requirements. Expand partial credit guarantee facilities. Promote supply chain financing such as factoring and reverse factoring. Strengthen credit infrastructure, building on various reforms in initiated in 2020. • Leverage technology. Digitize retail and merchant payments. Establish digital financing platforms and marketplace solutions. Encourage further digitization financial institutions’ operations to reduce operational costs. 5. Leverage macroeconomic stability To enable long-term inclusive growth, Ghana will need to leverage the macro- fiscal environment to provide stability, manage natural resources and generate the revenues to fund reforms for economic transformation. • Adopt a consistently counter-cyclical fiscal policy to stabilize the economy and enhance savings rates from the public sector. Reaffirm the fiscal anchor. Improve debt management. Improve transparency in the extractive sector. Increase savings. • Strike the right balance between efficiency and equity in the tax mix while increasing revenues. Review and rationalize tax expenditures to raise revenues. Strengthen the tax administration to ensure compliance and reduce the size of the informal sector. Improve taxpayer engagement. • Review and enhance the framework for environmental taxation to minimize the impact of climate change on households and incentivize sustainable land-use. Consolidate existing environmental taxes into one comprehensive instrument. Incentivize more sustainable cocoa farming practices. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 21 Overview The Path Forward to 2040 Without reforms, in a ‘business as usual’ scenario, Ghana’s economy is currently projected to reach upper middle-income status by 2037.10 Annual real GDP growth is projected to peak in 2024 and then remain elevated at over 5 percent for the following 15 years. Real GDP per capita growth is projected to also peak in 2024 and remain elevated at just under 4 percent for the next 15 years. Under a ‘bright horizons’ scenario, which includes the adoption of some key reforms to drive economic transformation, Ghana’s economy could reach upper-middle-income status by 2032. This scenario would involve the implementation of important reforms to fill the ‘missing middle’ and raise productivity. Reforms would target lower-skilled workers; the manufacturing sector; ‘global innovator’ services in the areas of ICT, business services, and finance; and low-productivity services sectors, including wholesale and retail trade. This scenario would also include improvements in foundational skills, the full implementation of the AfCFTA, and growth in net FDI inflows, as well as avoiding some of the direct negative effects of climate change. Under the ‘bright horizons’ scenario, Ghana’s economy would be 25 percent larger in 2040 relative to the ‘business as usual’ scenario (see Figure 0.2). However, under a ‘pitfalls’ scenario, Ghana would only reach middle income status by around 2040. This scenario assumes Ghana being negatively affected by: (i) the direct impact of climate change from the rise in heat from a 1 degree temperature increase; (ii) falling productivity in manufacturing, global innovator services, and low-productivity services; and (iii) a decline in FDI inflows. Under this scenario, GDP would be around 12 percent lower by 2040 than under the ‘business as usual’ scenario. FIGURE 0.2 Under a ‘Bright Horizons’ scenario with these key reforms, Ghana’s economy could be 25 percent larger by 2040 Real GDP per capita levels by scenario, GHS Million 30,000 25,000 20,000 Bright Horizons Business as Usual 15,000 Pitfalls 10,000 5,000 0 2020 2025 2030 2035 2040 Source: World Bank staff calculations using MANAGE Computable General Equilibrium (CGE) model (Rogas-Romagoaa, 2021). 10 Based upon World Bank MFMOD predictions in the short term and OECD predictions in the long term, as discussed in Chapter 1. 22 Ghana Rising – Accelerating Economic Transformation and Creating Jobs © George Gyentu/Paragon Media Ghana Rising – Accelerating Economic Transformation and Creating Jobs 23 © peeterv/istockphoto.com 24 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising Ghana has been one of the fastest growing countries in SSA and doubled its GDP per capita over the past 15 years. It has demonstrated impressive performance in a range of areas, particularly in the years before the COVID-19 pandemic. However, growth has varied widely and was especially volatile during the past decade as the economy became more reliant on natural resources, highlighting some of the downsides of natural resource booms and how they can be detrimental to long- term inclusive growth if not managed well. Going forward, it will be imperative for Ghana to focus on accelerating economic transformation to create more and better jobs for all working-age Ghanaians. The country’s path of structural change has not been typical, with an expansion of high-productivity services before an expansion of manufacturing. The lack of jobs in middle-productivity sectors has meant that structural change has not been a major growth driver, and productivity in services and manufacturing has been stagnating or declining. To drive economic transformation, the authorities need to ensure that the foundational enablers of growth are in place, and the country needs to make sure that growth does not just benefit high-income groups but continues to lift people out of poverty. Ghana also needs to prepare for the climate crisis, which threatens to reverse its development gains and will change the global economy as well as demand and business models over the next few decades. Ghana must plan ahead now or be left behind. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 25 CHAPTER 1 Ghana Rising This chapter provides background on Ghana’s economy and growth, then provides modelling estimates of different future paths for Ghana’s economy to 2040. This chapter begins by providing background on Ghana’s growth trajectory and the historic drivers of growth. It next takes a focused look at economic transformation in Ghana, patterns of structural change and job creation over the past three decades and the relationship between growth and poverty reduction. Finally, it looks at how climate change might affect Ghana’s economy. It then provides CGE modelling estimates for different future scenarios for Ghana and how Ghana can accelerate the transition to upper-middle income status. A rising star, but Ghana’s growth path has not been straightforward After independence in 1957, Ghana’s economy experienced a challenging three decades of volatility and stagnation. Structural analysis shows that Ghana’s growth path can be divided into three periods: 1960-1993, 1993-2005 and 2005-present (see Figure 1.1). In this first period from 1960 until 1993, annual GDP per capita growth was highly volatile, averaging -0.5 percent per year, reflecting the heavy reliance of the economy on agricultural output. Political instability in these three decades undermined economic growth until 1993. The negative growth episodes in the late 1970s and early 80s plunged GDP per capita in constant terms to its lowest level in this 60-year period in 1983. From 1984, however, per capita GDP entered an elongated stretch of continuous, albeit modest positive growth, gradually lifting per capita incomes again. FIGURE 1.1 Structural analysis shows that Ghana’s growth can be divided into three key periods: 1960-1993, 1993-2005, and 2005-present Average annual GDP per capita growth by phase, Percentage GROWTH MODEST REBOUNDS STAGNANT GROWTH GROWTH Rapid INDEPENDENCE GROWTH TAKEOFF VOLATILITY growth until Growth turns WARMS UP & CRISES COVID-19 positive Followed by instability Rapid growth hits and volatile growth Stability drives with peak in Energy & new growth era 2011 scal crises 1957 1984 1993 2006 2013 2017 2020 Phase 1: -0.5% Phase 2: 1.9% Phase 3: 4.1% Source: World Bank, WDI. From the early 1990’s growth started warming up. From the early 1990s a period of economic stability ushered in a new era of growth, with per capita GDP growth averaging 1.9 percent per year between 1993 and 2005, driven mainly by the expansion of the services sector. Political stability driven by the return to democracy under constitutional rule yielded a growth dividend. A new government in 2000 led reforms in private sector 26 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising development and macroeconomic management, providing the foundations for further growth. Ghana’s success in poverty reduction over this period has been highlighted as exemplary across the region. Growth then accelerated rapidly from 2006. Then after 2005, growth really accelerated, with a yearly average GDP per capita growth of 4.1 percent and aggregate GDP growth of 6.6 percent from 2005-2019. This is considerably above the average GDP growth for non-high-income Sub-Saharan African countries (2 percent) and for low-income countries of 2.6 percent, and slightly above lower-middle-income countries of 4.4 percent. GDP per capita almost doubled over these 15 years, after taking 45 years just to return to its 1960s level (see Figure 1.2). Structural change from the movement of labor from agriculture into services accelerated, FDI inflows grew rapidly and trade openness increased. Per capita GDP growth peaked in 2011 at 11.3 percent, with the start of commercial oil production. The prior growth acceleration was also partly due to higher prices for Ghana’s main commodity exports, notably gold and cocoa, as well as the start of commercial oil production. After peaking in 2011, GDP per capita growth declined steadily to -0.1 percent in 2015, falling far below IMF forecasts for growth between 2014 and 2016. The slowdown reflected a combination of declining commodity prices, energy rationing (partly due to the impact of a severe drought on hydropower output), and a major fiscal crisis in 2013. FIGURE 1.2 It took 45 years just for Ghana to regain its 1960 level of GDP per capita, then 15 years to nearly double it GDP per capita, Constant LCU Annual growth, Percentage 6,000 15 10 5,000 5 4,000 0 3,000 -5 2,000 -10 1,000 -15 0 -20 2013 2015 2017 2019 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 GDP per capita growth (annual %) GDP per capita (constant LCU) Source: World Bank, WDI. The management of natural resource revenues posed new challenges for Ghana. In the early 2010s, industry became the major driver of growth and the concentration of exports in gold and oil left Ghana vulnerable to shocks. The direct share of mining in total value-added rose from 3 percent in 2010 to 12 percent in 2018 with the beginning of oil production and rising commodity prices. Government spending increased rapidly in the anticipation of oil revenues, a pattern that has been termed the ‘pre-source’ curse, whereby the discovery of natural resources can have negative effects on the economy even before any production has begun (Cust and Mihalyi, 2017). The contribution of natural resources to GDP became large, but was also very volatile, introducing new risks to macroeconomic stability. Growth over the past decade ranged from 11.3 percent to -0.11 percent GDP per capita growth. Instead of saving the increased revenues from oil, the government increased spending, such that today’s savings rate to be about the same as 23 years ago. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 27 CHAPTER 1 Ghana Rising © George Gyentu/Paragon Media This natural resource driven growth also meant that while Ghana’s performance in reducing poverty was impressive prior to 2012, between 2012 and 2016 poverty reduction was disappointing. In 2019, 11 percent of GDP stemmed from the two commodities of oil and gold.11 This has meant that a sizable portion of Ghana’s growth over the past decade has been jobless and the impact of growth on poverty reduction has declined. Between 2013 and 2019 nearly 20 percent of GDP growth was directly attributable to the mining sector, while employment in the sector in fact decreased. After 2015, Ghana’s economic growth performance improved, spurring optimism. Growth picked up after 2015, and the annual GDP per capita growth rate recovered to 5.8 percent in 2017. In the years prior to 2020, Ghana’s economy was one of the fastest growing in Africa, with GDP per capita growing by an average of 4.1 percent per year in 2018-19. Robust export growth put the merchandise trade balance into surplus and contributed to reducing the current account deficit. Service exports and FDI inflows grew rapidly during this period and Ghana became one of the highest per capita FDI recipients in the region. A consistently tight monetary policy stance helped to progressively reduce the inflation rate. Strong net inflows on the balance of payments led to a steady growth in reserves. During this period Ghana also made strides in improving access to electricity and infrastructure. Then then COVID-19 crisis hit. The crisis has substantially weakened Ghana’s growth outlook. Due to the impact of the pandemic, the economy contracted in the second quarter of 2020 for the first time in 38 years by 3.2 percent, compared to a 5.7 percent expansion in the second quarter of 2019. Prior to the pandemic, economic growth was projected at 5.8 percent for 2020 and about 5.5 percent over the medium-term (2020- 2023). Growth still remained positive in 2020 unlike in many countries but slowed to 0.4 percent in 2020. A substantial fiscal gap has arisen from the COVID-19 crisis as a result of reduced revenues, primarily from lower oil-related revenues and lower economic activity, and the need to increase expenditure, including in the health sector. The overall fiscal deficit is projected to more than double to 14.5 percent of GDP in 2020, up from a pre- COVID-19 crisis projection of 6.4 percent of GDP. 11 Based upon the Ghana Statistical Service GDP by Industry data. 28 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising BOX 1.1 The impact of the COVID-19 pandemic on Ghana’s economy The COVID-19 pandemic has had significant adverse impacts in Ghana, despite direct health effects of the virus being relatively limited. The first COVID-19 case was reported in March 2020. In May 2021, there were about 93,000 confirmed cases, 800 deaths, and just under a million vaccine doses administrated. Despite keeping transmission of the virus to limited levels relative to many advanced countries, the effects of the pandemic on Ghana’s economy have been significant for two key reasons. The economic impact has firstly been felt through Ghana’s external trade and links with the global economy. Secondly, through the impacts of social distancing and closures, leading to a reduction in labor force participation, closure of businesses, disruption of public transportation, the closure of schools, and the closure of airport and seaports to passenger travel. Poverty and social implications: Poverty and social effects have been felt primarily through loss of incomes in agriculture and particularly cocoa, services and especially hotels and restaurants, and Despite keeping manufacturing. Estimates indicate that poverty rates of people working in agriculture and manufacturing could be pushed up by as much as 10 transmission of percentage points. It has been estimated that the poverty rate of people the virus to limited working in the services sector could rise by 5.8 percentage points. The 3.7 million people who have incomes from the manufacturing sector levels, the effects currently have a poverty rate of 18.2 percent, but this could rise to 27.4 of the pandemic percent if their incomes were to fall by 20 percent due to the crisis. on Ghana’s Elevated food price inflation due to the COVID-19 crisis is also likely to adversely impact poverty. At the peak of the lockdown, school closures economy have affected an estimated 9.2 million students in kindergarten, primary, been significant lower and upper secondary, as well as 0.5 million tertiary education students and 450,000 teachers in public and private institutions. Fiscal impacts: The fiscal impacts of the pandemic have been felt primarily through two, reinforcing channels: First, reduced revenues, mainly from lower oil-related revenues and lower economic activity. Tax revenues are projected to fall from a pre-COVID-19 level of 13.4 percent of GDP to 11.9 percent of GDP in the baseline scenario in 2020. Second, total expenditure is projected to increase to 23.2 percent of GDP in 2020, from a pre- COVID-19 level of 21.9 percent of GDP, as the Government spends more on health and support to individuals and businesses to mitigate the impact of the crisis. The crisis has hence halted the fiscal consolidation program the Government had embarked upon. The COVID-19 crisis-associated high expenditures and low revenues led to the suspension of the fiscal rule and the fiscal deficit is estimated at 16.2 percent of GDP in 2020. GDP impacts: Ghana’s economy demonstrated some resilience as growth in GDP in 2020 remained positive at 0.4 percent, in comparison to many comparators in the region, and showed early signs of recovery in the second half of 2020 as business sentiments improved with the ending of lockdowns. The economic contraction was smaller in Q3 than Q2, thanks to strong year-on-year performance in the agriculture, manufacturing and tradable services sectors. The medium-term negative impact of the pandemic on growth will continue to be felt through low external demand, low commodity prices, particularly of oil, and lower FDI and tourism receipts. However, continued recovery could spur growth to 1.4 percent in 2021 and further to 3.6 percent by 2023. Impact on businesses: The first COVID-19 Business Tracker Survey conducted by the UNDP, World Bank and Ghana Statistical Survey in May/June 2020 showed that around 40 percent of businesses had to close during the first wave, with 16 percent remaining closed after the lockdown’s easing. Few firms laid off workers, but half of businesses reported reducing wages for around a quarter of the workforce. The second wave of the survey conducted in August 2020 found that 8 percent of businesses were still closed, while a quarter of businesses reported reducing waves for around 10 percent of their workforce. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 29 CHAPTER 1 Ghana Rising Pre-COVID-19, Ghana’s drivers of growth were becoming more favorable FIGURE 1.3 On the demand side, growth has been driven by household consumption and, more recently, by investment Contributions to GDP growth, by expenditure 35 25 15 5 -5 -15 -25 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Net exports Household consumption Government consumption Investment Changes in inventories Total Source: UN 2021, WBG 2021. Growth accounting analysis of GDP on the demand side indicate that the past five years have been an exceptional period in Ghana’s growth history with all factors mainly making a positive contribution to growth. Prior to 2015 there was more volatility in the direction of contributions, except for the period between 2005 and 2008. The main drivers of Ghana’s recent growth phase since 2005 have been household consumption and investment. Household consumption was the main driver of growth between 2009 and 2015, with investment and government consumption volatile. However, after 2015, the contribution of investment has been the largest and household consumption has been more limited.12 Relative to Ghana’s peers between 2015 and 2019, Ghana has had a far higher contribution of investment to growth. The contribution of net exports to growth has been volatile over the past 30 years; however, there has been some positive contribution since 2015 as the country began to record a positive trade balance. Growth accounting on the supply side shows that since 2005, growth has mainly been driven by accumulation of ICT capital and increased labor supply, while since 2017, TFP has become the main contributor to growth.13 Between 2005 and 2016, labor quantity and ICT capital were the main drivers of growth, with a volatile contribution of TFP and a low contribution of non-ICT capital. Since 2016, the contributions of labor quantity and ICT capital have been declining with a rising contribution of TFP. Relative to Ghana’s peers, since 2015 growth has been driven far more by ICT capital and far less than non-ICT capital, perhaps reflecting the strong performance of the ICT sector and investments in digital infrastructure. Another period with an important contribution of TFP was between 2008 and 2011. 12 Investment is gross capital formation measured by the UN as the total value of the gross fixed capital formation, changes in inventories and acquisitions less disposals of valuables for a unit or sector. 13 This decomposition uses data from the Conference Board Total Economy Database. ICT capital includes computer hardware and equipment, telecommunication equipment and computer software and services. For Ghana it is estimated using data on total ICT expenditure from the World Information and Technology Services Alliances Digital Reports or proxied using trade data according to the commodity flow approach. 30 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising BOX 1.2 Benchmarking Ghana: structural, aspirational and regional peers Benchmarking country performance relative to relevant peers enables the illumination of important characteristics, trends, and constraints in economic analysis. The practice is increasingly common in World Bank reports and is employed here to compare Ghana to its structural, aspirational, and regional peers. Ghana’s regional peers are the other members of ECOWAS: Benin, Burkina Faso, Côte d’Ivoire, The Gambia, Guinea, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, Togo. We also compare Ghana to its structural and aspirational pers as defined in the World Bank’s 2018 Systematic Country Diagnostic for Ghana. Structural peers are countries with similar economic characteristics to Ghana in terms of being commodities exporters, agrarian economies with a similar population and income level. These are Cameroon, Côte d’Ivoire, Kenya, the Kyrgyz Republic, Mauritania, Myanmar, Nicaragua. Aspirational peers are countries that could be used as good examples of development for Ghana and those that had elements that Ghana may emulate. These are countries that are now upper-middle income countries with poverty rates half those of Ghana’s, that were lower middle income and agrarian three decades ago: Algeria, Belarus, Colombia, Dominican Republic, Ecuador, Jordan, Paraguay and Peru. In addition, Chapter 2 places a focus on services-led development and so we also compare Ghana to a group of ‘services superstars’. These are countries that have experienced significant export and GDP Growth in high productivity services sectors: India, the Philippines and South Africa. © George Gyentu/Paragon Media Ghana Rising – Accelerating Economic Transformation and Creating Jobs 31 CHAPTER 1 Ghana Rising FIGURE 1.4 On the supply side, growth has mainly been driven by ICT capital and labor supply Contributions to GDP growth, by expenditure in Ghana (left) and compared to peers between 2015-2019 (right) 16 6 14 5 12 4 10 3 8 2 6 1 4 0 2 -1 0 Aspirational Ghana Regional Services superstars Structural -2 -4 -6 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Labor quantity Labor quality ICT capital non-ICT capital TFP Source: World Bank staff calculations using The Conference Board Total Economy Database. Recent growth has been characterized by limited capital formation. Over 2005 to 2019, which spans the beginning of commercial oil exploitation, gross capital formation only accelerated slowly. Ghana’s average performance in 2015-2019 was in line with its income level and with that of the selected comparators. This performance explains the limited contribution of capital to GDP growth (see Figure 1.5). Physical capital accumulation is critical to develop the asset base necessary to support long-term growth, and for a country like Ghana which is fueling some of its growth by the exploitation of its natural resource (see Chapter 5), it is even more critical to replace natural capital with physical capital. FIGURE 1.5 Gross capital formation has accelerated slowly A) Over time, 2005-2019 B) Across countries, 2015-2019 50% 50% Gross capital formation (% of GDP) Gross capital formation (% of GDP) 40% 40% 30% 30% 20% GHA 20% 10% 0% 10% 800 1,000 1,200 1,400 1,600 1,800 GDP per capita (constant 2010 US$) 500 5,000 50,000 CIV (2005−2019) CMR (2005−2019) GDP per capita (constant 2010 US$) KEN (2005−2019) MRT (2005−2019) GHA (2005−2019) 2008 Ghana Structural Latest Regional Aspirational Source: World Bank staff calculations using data from WDI 2021. 32 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising Reflecting the importance of natural resources in driving growth, Ghana’s economy is characterized by a low level of economic complexity. Economic complexity is a measure of the know-how of an economy related to the products it makes, calculated based on the diversity and nature of its exports. This measure has been shown to be a good predictor of a country’s income level and of its future growth. Despite Ghana strong growth performance, economic complexity stagnated from 2005 to 2017. Its economic complexity stood below that of most structural peers and all aspirational peers. In particular, it stood below that of the services superstars country group. This indicate the need for Ghana to continue its process of economic transformation and climb the economic complexity ladder, to continue improving standards of living and to sustain growth. FIGURE 1.6 Economic complexity has stagnated for the past decade and is below that of countries with similar income level Economic Complexity Index and GDP per capita (2010 US$) -0.5 2 Economic Complexity Index Economic Complexity Index -1 1 0 -1.5 -1 GHA -2 800 1000 1200 1400 1600 1800 -2 GDP per capita (constant 2010 US$) 500 5,000 50,000 CIV (2005−2017) CMR (2005−2017) GDP per capita (constant 2010 US$) KEN (2005−2017) MRT (2005−2017) GHA (2005−2017) 2008 Ghana Structural Services superstars Latest Regional Aspirational Source: World Bank staff calculations using data from AEC 2021 and WDI 2021. Ghana needs to focus on economic transformation Ghana’s economy faces the two major challenges of generating a large number of high-quality jobs and long-run productivity growth. There is a pressing need for job creation and particularly, the creation of high-quality jobs. Ghana’s formal unemployment rate is around 6 percent, with youth unemployment at nearly 12 percent, but the employment challenge is even greater than these formal statistics suggest. Ghana’s Statistical Service reports that more than 70 percent of jobs in Ghana were in the informal sector in 2015 and, of formal jobs, over 65 percent are categorized as vulnerable employment. There is also a pressing need to raise productivity. Productivity growth in Ghana over the past decade has been highest for extractives and agriculture, while productivity in services, Ghana’s largest employment generator, has stagnated and productivity in manufacturing has declined. Economic transformation occurs as people and resources shift from lower to higher productivity activities. By enabling workers (notably by enhancing their skills) to create and benefit from higher productivity activities, economic transformation raises their incomes and lifts people out of poverty. Importantly, the efficiency gains also allow sizable increases in production that in turn support more and better jobs (see Box 1.2). It can be achieved through the movement of workers and other resources between and within sectors (sectoral transformation), Ghana Rising – Accelerating Economic Transformation and Creating Jobs 33 CHAPTER 1 Ghana Rising or through workers staying within existing firms that benefit from within-firm productivity growth by adopting better technologies and capabilities (technological transformation).  It can also be achieved through the movement of resources from low to higher productivity activities spatially, for example through urbanization, trade integration or heightened connectivity and linkages (spatial transformation). Within-sector productivity growth can stem from the adoption of new “hard” technologies (such as a better tractor or irrigation system on a farm) or new “soft” technologies (such as better management practices) that increase the efficiency of existing firms or as a result of the reallocation of resources away from the least productive firms towards more productive firms, including through entry of new firms and exit of no-longer profitable ones. It could also be achieved through the movement of workers from less-productive informal to more-productive formal employment (see Figure 1.7). This report focuses on accelerating these three transformations. Chapter 2 considers Ghana’s recent experience in sectoral and spatial transformation and how Ghana can accelerate these transformations. For spatial transformation, the focus of this report is primarily on global integration through trade, FDI and global value chains, with some discussion around urbanization. Chapter 3 considers technological transformation in Ghana and how Ghana can accelerate technological transformation, with a focus specifically on digital transformation. FIGURE 1.7 Economic transformation can be driven by movement of workers between and within sectors, from upgrading within existing firms and from movement of resources spatially Between firms & sectors Between locations Within firms SECTORAL SPATIAL TECHNOLOGICAL Movement to more Spatial integration, Productivity upgrading, productive firms connectivity & adoption of new technologies & sectors urbanization & techniques Source: World Bank staff elaboration. Structural change in Ghana has accelerated since 2005 The composition of employment in Ghana has shifted away from agriculture, particularly after 2005, with the decline being offset mainly by services and only more recently by manufacturing. Between 1990 and 2018, the share of employment in agriculture declined from 55 percent in to 33 percent. The composition of value added has also shifted away from agriculture and towards services, but with an important role of the rise in extractives. Figure 1.8b shows that during the past decade there has been a substantial rise in the value- added share of ‘Other Industry’, largely due to the contribution of Mining and Quarrying, including oil and gas extraction, although this has not been accompanied by a concurrent rise in the employment share of this sector. This has resulted in a divergence in the patterns of employment and value-added shares by sector. 34 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising FIGURE 1.8 The composition of Ghana’s economy has shifted away from agriculture and into services and extractives, with a slight rebound in manufacturing employment since 2014 A) Employment shares B) Value added composition 70% 100% 60% 80% 50% 60% 40% 30% 40% 20% 20% 10% 0% 0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Manufacturing Services Manufacturing Services Agriculture Other Industry Agriculture Other Industry Source: GGDC Economic Transformation Database. Note: Other Industry includes construction, utilities and mining and quarrying. New jobs were initially created mainly in ‘Trade Services’ and ‘Other Services’ but recently major employment generation has occurred in ‘Government Services’ and Manufacturing as well. Between 1990 and 2010, Figure 1.9 shows that most of the employment creation in Ghana was in the economy’s lowest productivity subsectors of ‘Other Services’, Agriculture and ‘Trade Services’, with Manufacturing making only a small contribution to employment growth. ‘Other Services’ comprises of the main categories of Arts, Entertainment and Recreation, Other Service Activities and Activities of Households as Employers. Trade Services includes the main categories of wholesale and retail trade, repair of motor vehicles and motorcycles and accommodation and food service activities. Between 2010 and 2018 this pattern had changed, with a decline in employment in Other Services and most employment generation occurring still in Trade Services and additionally in the mid productivity subsectors of Manufacturing and Government Services. FIGURE 1.9 Between 1990 and 2010 most employment generation was in low productivity services, while since 2010 there has been a shift to mid-productivity services and manufacturing Changes in employment, thousands A) 1990-2010 B) 2010-2018 4500 12 6 4000 6 4 62 43 31 1 4000 139 66 1022 106 190 3500 -46 211 -55 3500 256 257 3000 3000 812 1039 2500 -878 2500 827 2000 2000 1473 1500 1500 1153 1000 1000 500 500 0 0 Other services Agriculture Trade services Transport services Government services Construction Manufacturing Business services Mining Financial services Utilities Real estate Trade services Government services Manufacturing Construction Agriculture Business services Utilities Real estate Financial services Mining Transport services Other services Source: GGDC Economic Transformation Database. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 35 CHAPTER 1 Ghana Rising Structural change has been fastest in Ghana’s cities. Household survey data shows that the shift from agriculture to services has not been experienced evenly across regions. In Greater Accra and Ashanti, the agriculture employment share approximately halved or more than halved between 2005 and 2016, while in other regions the decline was more modest. The only region without any meaningful decline in the agriculture employment share was the Western region (Paul and Raju, 2021). FIGURE 1.10 Structural change has been fastest in Ghana’s cities Employment share by sector in Ghana’s regions, Share percentage Upper West Upper East Northern Volta 80% 60% 40% 20% 0% Brong Ahafo Eastern Central Ashanti 80% 60% 40% 20% 0% Western Greater Accra National 80% 60% 40% 20% 0% 2005/06 2012/13 2016/17 2005/06 2012/13 2016/17 2005/06 2012/13 2016/17 2005/06 2012/13 2016/17 Year Agriculture Industry Services Source: Paul and Raju (2021). Yet, rapid structural change has made a limited contribution to growth Although Ghana’s economy experiencing considerable structural change over the past three decades, the contribution of structural change to growth has been limited. Over this period, 87 percent of all labor productivity growth was driven by within-sector productivity growth, with the contribution of structural change, meaning the movement of workers across sectors, contributing only 13 percent (see Table 1.1 and Figure 1.11) (Stapleton, 2021). This compares to a global average of around a third of all productivity growth stemming from structural change (Nayyar et al., 2021). Over the past decade in Ghana the contribution of structural change to productivity growth has even turned negative, implying that workers have been moving into less productive sectors. 36 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising TABLE 1.1 Structural change has contributed only 13 percent to total productivity growth, while within sector growth has contributed 87 percent Productivity growth decomposition within and between sectors Structural change Average annual Structural Period Within-sector Static Dynamic productivity growth change 1990–2000 2.94% 2.90% 0.03% 0.46% -0.43% 2000–2010 2.15% 2.21% -0.06% 1.00% -1.06% 2010–2018 3.23% 4.36% -1.13% 2.75% -3.88% 1990–2018 2.74% 2.37% 0.37% 0.90% -0.53% Source: World Bank staff calculations based on GGDC ETD data. Note: Average annual productivity growth is the compound annual growth rate (CAGR), the structural change component reflects the contribution from workers moving into higher productivity sectors, the static component reflects workers moving into sectors with initially higher productivity, while the dynamic component reflects workers moving into sectors with higher productivity growth rates. FIGURE 1.11 Structural change in Ghana has made a limited contribution to growth: expanding sectors have had either low productivity and created many jobs or high productivity and few jobs Change in employment share 1990-2018 and relative productivity in 2018, by sector 2.00 1.50 Mining Relative productivity in 2018 1.00 Real Estate Utilities Financial Services 0.50 Construction Transport Government Business Services 0.00 Manufacturing Trade -30% -25% -20% -15% -10% -5% 0% 5% Services 10% 15% Agriculture -0.50 Other Services -1.00 Change in employment share 1990-2018 Source. World Bank staff analysis using GGDC Economic Transformation Database. Notes: Relative productivity is measured as the log of sectoral labor productivity divided by aggregate labor productivity. The bubble size represents the total employment of the sector. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 37 CHAPTER 1 Ghana Rising High productivity services sectors played a greater role in structural transformation than manufacturing over the past three decades While the major gains from structural transformation have typically stemmed from the move from agriculture to manufacturing, in Ghana high productivity export-oriented services made a greater contribution to growth-enhancing structural change than manufacturing. Chapter 2 takes a detailed look at Ghana’s services subsectors, categorizing them into groups. One group of services is particularly important in light of its tradability and capacity for scale, innovation and productivity spillovers: what has been termed the ‘Global Innovator’ services of financial and business services. Over the past three decades in Ghana these services made a greater contribution to productivity growth from structural change than the manufacturing sector (Figure 1.12A). Global innovator services were also among the fastest growing sectors in Ghana over the past three decades in terms of employment (Figure 1.12B). But these high productivity export-oriented services have not been major job creators, particularly for low or middle-skilled workers. In 2018, employment in high productivity services sectors was very low with the combined employment share of Transport Services, Business Services, Financial Services and Real Estate lower than 5 percent. The bulk of all new employment generation over the past three decades has been in lower productivity services, which have also made the greatest contribution to productivity growth from structural change. Government Services, which includes the categories of education, human health and social work activities, accounted for 19 percent of all employment generation over the three decades, while Trade Services and Other Services accounted for 38 percent. FIGURE 1.12 Export-oriented ‘Global Innovator’ services made a greater contribution to growth from structural change than manufacturing between 1990-2018, and these were Ghana’s fastest growing sectors A) Contributions to growth-enhancing structural change 1990-2018 B) Employment growth rates 1990-2018 110% 9% Financial services 100% 5% Government services 90% 23% 80% Business services 70% 49% Construction 60% Other services 50% Trade services 40% 30% Transport services 20% 10% Real estate 10% 5% Manufacturing 0% Utilities Manufacturing Low prod services Mid prod services Global innovators Other high prod services Other industry Mining Agriculture 0% 100% 200% 300% 400% 500% 600% 700% Source: World Bank staff calculations using GGDC ETD data. Source: World Bank staff calculations using GGDC ETD data. Since 2010 Ghana has seen a manufacturing employment ‘renaissance’ This pattern reversed over the past decade between 2010 and 2018, with a manufacturing employment ‘renaissance’ and a greater contribution of manufacturing to structural transformation than high productivity services. Ghana’s manufacturing employment share grew from around 10 percent in 2010 to 16 percent in 2018, with particularly fast growth after 2014, implying the country has been ‘reindustrializing’ in terms 38 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising of employment shares. During this period, the manufacturing sector made a greater contribution to productivity growth from structural change than did high productivity services. However, during this period labor productivity in manufacturing simultaneously declined, counteracting the impact of an expanding manufacturing sector to productivity growth. In 2018 Ghana’s manufacturing sector also had very low productivity at only around 30 percent higher than in agriculture. For comparison, in 2005 when China had a similar GDP per capita on PPP terms as Ghana, China’s manufacturing sector was over 5 times more productive than agriculture. The transition of workers from agriculture into informal activities, rather than formal ones, and limited movement into higher productivity formal activities could also suggest there are barriers to mobility or ‘misallocation’. Much of structural change in Ghana has occurred through the movement of workers from agriculture into informal nonfarm activities, which remain of very low productivity. In many of Ghana’s regions there was no change in the informal share of nonfarm employment over the past decade. The gap between formal and informal productivity varies across regions, with the gap greatest for Greater Accra. In Greater Accra, the formal sector is over 1.5 times more productive than the productivity of the next highest productivity region, while the informal sector is just over twice as productive. Paul and Raju (2021) have suggested that this could reflect ‘misallocation’, or the inability of resources to transition to more productive activities, particularly in urban areas and so reducing regional variation in formal-informal productivity gaps through raising the productivity of the informal sector in Greater Accra particularly could increase the contribution of structural change to growth. Within-sector productivity growth has been led by extractives and agriculture Productivity growth within sectors in Ghana has been high, particularly after 2010, although this has been driven by rapid productivity growth for mining and a positive productivity story for agriculture. Labor productivity grew at an annual average of 2.9 percent between 1990 and 2010, dipping to an average of 2.1 percent between 2000 and 2010 and then rising to an average of 3.2 percent between 2010 and 2018. Excluding the mining sector, agriculture has had the highest labor productivity growth over the past three decades, with labor productivity nearly tripling. Productivity in services has stagnated, although trade services and transport services have experienced high labor productivity growth of 54 and 48 percent, respectively, over the past three decades. Labor productivity in ‘Other Industry’ has exploded (see Figure 1.13) due to the changing role of extractives. While there has been a trend of rising employment shares in manufacturing over the past decade, at the same time labor productivity in manufacturing has been declining (see Figure 1.13). FIGURE 1.13 Labor productivity ‘Other Industry’ has grown rapidly, while agricultural productivity has risen steadily, services productivity stagnated and manufacturing productivity started to decline Value added by sector, with and without ‘Other Industry’ (Thousand LCUs per worker) in 2018 300 20 250 15 200 150 10 100 5 50 0 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Agriculture Manufacturing Agriculture Manufacturing Services Other Industry Services Source: World Bank staff calculations using GGDC Economic Transformation Database. Note: ‘Other Industry’ Includes Mining & Quarrying, Construction and Utilities. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 39 CHAPTER 1 Ghana Rising The jobs imperative: Ghana’s employment ‘missing middle’ The result of these patterns of economic transformation is that Ghana faces a ‘missing middle’ of employment opportunities in middle productivity sectors. Manufacturing in Ghana in 2018 was of very low productivity, at only 30 percent higher than in agriculture. For comparison, in 2005 when China had a similar GDP per capita in PPP terms as Ghana, China’s manufacturing sector employed only a slightly larger share of the population (19 percent relative to 16 percent in Ghana in 2018) but was around 5 times more productive than agriculture. Services employment in Ghana is concentrated in the lower productivity sectors. While some high productivity services have expanded rapidly, they remain limited employers. For comparison with a country that has followed a services-led growth path, in 2009 when the Philippines had a similar GDP per capita in PPP terms as Ghana, Business and Financial Services employed around 5 percent of the labor force, relative to 2 percent currently in Ghana. FIGURE 1.14 Ghana faces a ‘missing middle’ of mid-productivity employment opportunities Employment shares and labor productivity (thousand LCUs per worker) by sector in 2015 200,000 Real Estate 1 Agriculture has been decreasing in employment 150,000 share but remains the largest source of jobs 3 Labor productivity Finance 2 Manufacturing has low & 100,000 Small scale informal services declining productivity, while have absorbed labor but are high productivity services very unproductive employ very few people ICT 50,000 Transport Public Admin Professional Health Accom & Retail Agriculture Education Manufacturing Other Services Wholesale & Retail 0 0 0.2 0.4 0.6 0.8 1.0 Employment Share Source: World Bank staff calculations using data from UN Statistics and Ghana Labour Force Survey 2015. The need to create more and better jobs must be a top development priority for Ghana. Ensuring that economic growth is accompanied by increased access to productive economic opportunities, particularly among those at the bottom of the distribution, is critical for sustainable poverty reduction and to meet the aspirations of citizens. Beyond earnings, jobs are also a source of learning and a critical channel for social inclusion. The jobs challenge is becoming even more acute with Ghana’s young and growing population. Ghana’s population is projected to rise to 45 million by 2040 with 58 percent of the population under 30 years old by this point. This implies that around 10 million Ghanaians will enter the labor force between now and 2040. The current pace of job creation remains far below what is needed (UN, 2021). 40 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising BOX 1.3 What is productivity and why is it important for jobs? © George Gyentu/Paragon Media “Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” - Paul Krugman (1994) Productivity is an indicator of efficiency that captures how firms, industries, or the country transform inputs into the production of goods and services. The two most common productivity measures are labor productivity and total factor productivity. This report mainly focuses on labor productivity. Labor productivity captures the value of the outputs produced (or value-added) divided by the number of workers. This is determined by the amount of capital and other non-labor inputs available to workers, as well as the efficiency with which these inputs are used. TFP is derived as a residual of output once the impact of all measured inputs is accounted for, notably labor and capital. TFP therefore captures the efficiency with which all inputs are combined into the productive process. A wide body of literature in economics has documented that cross-country productivity differentials are one of the most important determinants of differences in standards of living. In the long-term, how efficiently countries use all available inputs is the key determinant of differences in economic growth rates and resulting income levels (Caselli, 2016) The relationship between productivity growth and employment in the short run is not necessarily clear-cut, but productivity growth can lead to job creation, including for lower- skilled jobs, for several reasons: • Productivity improvements that allow firms to produce more with the same inputs reduce marginal costs, often making firms more competitive and allowing them to expand production, creating more jobs directly. • Productivity improvements that reduce costs can raise demand for the same and other products due to lower prices or higher wages, creating more jobs indirectly. • Productivity improvements can also create new opportunities, new types of economic activity and new types of jobs. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 41 CHAPTER 1 Ghana Rising Urbanization without industrialization has resulted in ‘consumption cities’ Ghana has experienced rapid urbanization, without industrialization, with cities characterized as ‘consumption cities’ rather than ‘production cities’. Ghana’s urban population grew from 4 million to 16.5 million from 1984 to 2018. Today, around 56 percent of total population lives in urban areas and this value is projected to reach 63 percent by 2030. While historically, particularly in the experience of East Asia, urbanization was typically driven by either industrialization, defined as a rising role of manufacturing in the economy, forming a ‘pull’ factor into cities, or a green revolution forming a ‘push’ out of rural areas, in Ghana urbanization has been linked instead to the rising role of natural resources, with cities described as ‘consumption cities’, as opposed to ‘production cities’ (Jedwab, 2014; Gollin et al. 2016). For example, it has been shown by Jedwab (2014) that the production of cocoa in Ghana had a strong causal effect on the growth of cities, without these cities industrializing because resource windfalls are disproportionately spent on urban goods and services, giving rise to these consumption cities. The result has been that Ghana’s cities specialize in low-productivity services, with limited agglomeration effects and some major issues of uncoordinated informal growth. The manufacturing sector and tradable services typically have greater scope for agglomeration effects than non-tradable services. Consumption cities have therefore been shown to often produce more limited growth effects that those of production cities. In Ghana the high share of the workforce in low-productivity, often informal, services has resulted in a rise in informal settlements. Some 40 percent of Ghana’s urban population live in informal settlements, and that population is growing at 2 percent per year. Service provision in informal settlements is precarious, limiting the potential of urban workers to find productive employment: only 20 percent of those living in informal settlements have access to improved sanitation. Urbanization in Ghana has therefore also brought exclusion, new poverty and lowering livelihood conditions, particularly for people living in underserved informal areas. Spatial transformation will require increasing connectivity and access to formal housing in cities. Uncoordinated spatial expansion and limited connectivity is leading to inefficient urban expansion and sprawl. Accra, like most Ghanaian cities, is a very spread out, low-density city. Transport costs for goods are relatively high, and this lack of connectivity prevents Ghana’s cities from seeing gains from agglomeration, specialization, and economies of scale. High capacity mass transport is virtually nonexistent even in Accra, where only 0.3 percent of commuters use public buses. And despite being a very spread out city, Ghana’s cities have very low road density. This has environmental as well as congestion and efficiency impacts. Nationally, 60 percent of workers are forced to commute on foot (World Bank Group, 2015). Economic transformation will not be possible without the foundations in place Economic transformation requires a stable and enabling macro-economic framework, with sufficient domestic revenue mobilization and a financial sector that can support private sector development. Economic transformation will require human capital development to enable workers to transition into new jobs and sectors, to adopt new technologies and to create and run new businesses. It will also require improved digital and physical infrastructure to connect people to new opportunities and to drive technological transformation. These essential investments will all hinge upon sufficient domestic revenue mobilization, which is currently one of Ghana’s major weaknesses. Ghana’s tax to GDP ratio is lower than its peers and hinders these essential investments. In addition, it has been well documented that macroeconomic stability is one of the key determinants of long-run growth, while this has also been one of Ghana’s weak points. Chapter 5 will hence focus on enhancing these two aspects to enable economic transformation. Economic transformation will also require a financial sector that can support private sector development, enabling firms to expand and invest in new capabilities. The link between financial sector development and the growth of the private sector has been well established but Ghana currently lags behind on access to finance. Chapter 4 hence focuses on ways to address these limitations. 42 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising An urgent need to repair the link between growth and poverty reduction Over the last three decades Ghana experienced a significant reduction in poverty. Between 1991 and 2012 poverty levels steadily declined from 52.7 percent to 24.2 percent. Favorable economic conditions driven by high prices for cash crops, oil, and rapid urbanization contributed to expanding economic opportunities. Ghana also achieved a substantial increase in consumption among the bottom 40 percent of the population. Non-monetary dimensions of poverty also improved: assisted births and vaccination rates increased; fertility, mortality, stunting and underweight children under five years of age all decreased; and access to sanitation, electricity, and clean drinking water increased. © Bill Wegener/unsplash.com Ghana Rising – Accelerating Economic Transformation and Creating Jobs 43 CHAPTER 1 Ghana Rising In recent years, however, the speed of poverty reduction has slowed and there is significant risk of reversal given the expected slowing growth due to the pandemic. The growth elasticity of poverty (the percentage reduction in poverty associated with a percentage change in GDP per capita) was 1.2 between 1991 and 1998, but declined to less than 0.1 between 2012 and 2016, indicating a 1 percent increase in GDP per capita led to less than a 0.1 percent reduction in poverty (see Table 1.2). The last nationally representative household survey completed in 2016 showed that between 2012 and 2016, the poverty level declined by only 0.8 percentage points falling to 23.4 percent. This was accompanied by a deepening of poverty as reflected by increases in the poverty gap from 7.7 to 8.4, and in poverty severity, from 3.5 to 4.3, between 2012 and 2016. Ongoing analysis using synthetic panels built from household surveys suggests that there are complex dynamics underpinning these aggregate poverty statistics. Although poverty levels have stagnated in recent years, there has been significant movement of people both in and out of poverty at the same time, with these movements in and out of poverty highly correlated with the sectors that households are employed in. TABLE 1.2 The impact of growth on poverty reduction has declined over the past three decades GDP Growth, Poverty Reduction, and Sectoral Drivers Annual GDP Annual GDP per Annual poverty Growth Elasticity   Growth capita growth reduction of poverty 1991–1998 4.4 1.7 2 -1.18 1998–2005 4.8 2.1 1.4 -0.55 2005–2012 7.7 5 1.1 -0.17 2012–2016 5.6 3.2 0.2 -0.07 Source: GLSS7 Poverty Profile Report, Poverty Assessment 2015; WDI Data; World Bank Macroeconomic Growth Accounting Tool; World Bank SCD (2018). Note: 2005–2012 only covers up to 2011. A related challenge in Ghana is high and worsening inequality. The Gini index in Ghana stood at 43.5 in 2016, much higher than many other LMICs. Poverty reduction has been spatially asymmetric, worsening regional inequality. Ghana’s Gini index has also been increasing over the past three decades; it stood at 38.4 in 1991. This indicates that while Ghana has made impressive economic progress, the share of gains captured by the wealthy has increased. The rate of growth in inequality in Ghana has outpaced China and India, as well as countries in the region like Nigeria, and Côte d’Ivoire. The wealthiest decile of Ghanaians currently account for 32 percent of the country’s consumption, whereas the poorest decile account for only 1.7 percent. Between 2006 and 2013, consumption growth of the top decile was 40 percent faster than that of the bottom decile (Cooke et al. 2016). Significant wealth gaps exist in Ghana, with northern regions disproportionately poor, unequal, and poorly covered in critical services. More than 80 percent of households in the North, Upper East, and Upper West regions are in the bottom 40 percent in terms of wealth. While access to improved water is moderately high throughout the country the Northern region has the lowest access at 78 percent. Access to improved sanitation remains low throughout much of the country, with northern regions having fewer than 40 percent of the population served. Women’s literacy rates remain particularly low in rural areas at 46 percent relative to 71 percent in urban areas. Inclusive growth will hence require tackling these spatial inequalities and accelerating growth and poverty reduction in these poorest regions. Spatial transformation by improving infrastructure and digital connectivity in these regions will also be required to tackle this issue of inequality. 44 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising Responding early to the opportunities and threats from climate change Climate change poses a major threat to Ghana’s economy, particularly through the channels of rising food prices and worsening health outcomes. Even under an optimistic scenario with low climate impacts, it has been estimated by modelling from the World Bank’s ‘Shockwaves’ Report by Hallegatte et al. (2016) that climate change could reduce Ghana’s GDP by 9 percent by 2030 and push over a million people back into poverty. Climate change not only threatens agricultural revenues, but will also likely lead to higher food prices, increased prevalence of natural disasters, lower labor productivity and could magnify many threats to health, as poor people are more susceptible to climate-related diseases such as malaria and diarrhea. In Ghana the greatest effects are projected by this report to be felt through increased food prices and worse health outcomes (see Figure 1.15). Both higher food prices and worsening health outcomes are projected to push around 1.2 percent of the population below the US$1.9 poverty line by 2030 relative to the baseline, while 7 percent of the 9 percent negative GDP effects are projected to stem from rising food prices. Ghana’s agricultural and forestry sectors, which directly or indirectly employ 70 percent of the population, are very vulnerable to climate change, particularly in the north of the country. Northern Ghana is the most vulnerable to the negative effects of increased rainfall volatility, due to higher poverty rates, a drier climate, and more reliance on rainfed agriculture. Without climate change, the price of maize and rice are each projected to increase 60 percent. With climate change, however, the prices of maize and rice are projected to increase 153 percent and 121 percent, respectively. This would have major impacts on food security and nutrition throughout the country. Cocoa farming is especially vulnerable, as decreased humidity and changes in rainfall due to climate change can also increase incidence of pests and diseases, and alter the type of pests and diseases impacting cocoa farms (Choudhary et al., 2015). Resilience to the negative effects of climate change also varies across Ghana’s regions. The highest dependency ratios are among rural, female-headed households and among older cohorts. Food insecurity is higher in the Upper East and highest among people with disabilities and the availability of assets in the household, which plays an important role in resilience, is lower in Northern and rural households. FIGURE 1.15 Even under an optimistic scenario, climate change could reduce Ghana’s GDP by 9 percent by 2030 Additional people below US$1.9 poverty line as a percentage of population (left) and change in GDP (right) by 2030 3% 2% 2.5% 0% 2% -2% 1.5% -4% 1% -6% 0.5% -8% 0% -0.5% -10% Agri revenues Disasters Food prices Health Labor productivity All impacts Agri revenues Disasters Food prices Health Labor productivity All impacts Source: World Bank Shockwaves Report modelling, Hallegatte et al. (2016) Ghana Rising – Accelerating Economic Transformation and Creating Jobs 45 CHAPTER 1 Ghana Rising Ghana’s declining quantity of internal renewable water resources per capita, increasing deterioration of water quality and water related disaster events also continue to put Ghana’s development at risk. Ghana’s internal renewable water resources (IRWR) year 2020 was 975 m3 per capita, about 40 percent less than the amount in year 2000 and below the FAO water scarcity threshold of 1,000 m3 per capita. With business as usual, Ghana risks becoming a water stressed country by 2050 and its plans for economic growth and poverty reduction severely impacted across key development sectors — agriculture, energy, transport, tourism. Approximately 75 percent of Ghana’s water courses affected by small-scale (and unregulated) mining. Municipal and industrial waste, fertilizers and pesticides find their way into the water bodies. Moreover, deforestation and ensuing erosion, haphazard urban development, and the resultant impact of climate change are leading to recurrent flooding and droughts across the country. It will be essential to provide poor people with social safety nets as well as developing targeted climate resilience measures, such as the introduction of heat resistant crops and disaster preparedness systems. The impacts of disaster risks on poverty are large because poor people are exposed to hazards more often, lose more as a share of their wealth when hit, and receive less support from family and friends, financial systems, and governments. Efforts to reduce disaster risks are therefore complementary to reducing poverty. In Ghana it has been estimated by the World Bank’s ‘Beyond the Gap’ report by Rozerberg and Fay (2019) that around 14 percent of the population are exposed to moderate or high risk of floods and over half of these live below the US$5.5 a day poverty definition. Half of Ghana’s 540-km coastline is vulnerable to erosion and flooding as a result of sea-level rise. While the country’s flagship safety net programs14 have expanded and strengthened over the years, these programs need to incorporate a structure that will allow government to expand coverage, raise benefit amounts, or adjust frequency of benefits distribution during negative shocks. Adaptative social protection systems could be investigated to improve preparedness, particularly to natural disasters and food security emergencies. The increased prevalence of natural hazards will magnify the challenges of already strained and fragile infrastructure systems and it will be essential to invest in more resilient infrastructure. Unreliable electricity grids, inadequate water and sanitation systems, and overstrained transport networks already pose major costs to individuals and firms in Ghana. It has been estimated by the World Bank’s ‘Lifelines’ report that in Ghana 18.1 percent of transport assets are exposed to earthquakes, 4.5 percent are exposed to cyclones and 20 percent are exposed to floods, meaning that the total exposure rate of transport assets to natural hazards is 38 percent. It will also be essential to invest in more resilient infrastructure to mitigate the worst effects of climate change. COVID-19 recovery measures could play a role in making the recovery more resilient, sustainable, and set in place pathways to decarbonization.  ‘Building back better’ with a green economic recovery could serve to both mitigate future risks and generate long-term growth. It has been recently shown that several green interventions can create twice as many jobs from the money invested than a business-as-usual package that supports demand without sectoral targeting.15 Ghana needs to jumpstart growth and put people back into work in ways that are greener, leverage new technology and seize new opportunities. The right investments will need to be fast, labor-intensive in the short run, and have high multipliers and co-benefits, including for air pollution, climate and resilience. Some investments with these characteristics include clean physical infrastructure such as in renewable energy assets and grid modernization, building efficiency investment in the form of renovations and retrofits, research and development in clean technologies, rural support and investment in climate smart agriculture.16 It will also be essential for the recovery measures to be inclusive and engage women and youth in productive activities. 14 Livelihood Empowerment Against Poverty (LEAP) cash transfer program; the Labor-Intensive Public Works (LIPW); the Ghana School Feeding Program (GSFP); the National Health Insurance Scheme (NHIS) and the Education Capitation Grant (ECG) and Productive Inclusion (PI). 15 See for example, https://blogs.worldbank.org/climatechange/how-create-twice-many-jobs-integrating-climate-policies-covid-19-economic-recovery 16 https://www.financeministersforclimate.org/sites/cape/files/inline-files/Better%20Recovery%2C%20Better%20World%20FINAL.pdf 46 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising Realizing Ghana’s ambitious goals for future growth The Government of Ghana has the vision and aspiration to reignite growth in Ghana after the COVID-19 pandemic. The Coordinated Programme of Economic and Social Development Policies (CPESDP) laid out the target to at least double GDP per capita between 2017 and 2024, an ambitious goal that would entail achieving average annual economic growth rates of at least 7.2 percent between 2017 and 2024. This plan placed a particular focus on reviving and strengthening manufacturing, solving Ghana’s energy crisis, and aggressively promoting exports. To ensure a quick recovery from the pandemic the government has created the medium- term Ghana COVID-19 Alleviation and Revitalization of Enterprises Support (CARES) program to mitigate the impact of the pandemic on the lives and livelihoods of Ghanaians. In addition to a first ‘stabilization’ phase, the pandemic recovery CARES program also has a medium term ‘revitalization’ phase to boost economic recovery between 2021 and 2023. This second phase aims to accelerate the Ghana Beyond Aid agenda through improvements in business regulations, digitization to improve quality and transparency of public service delivery, expanding access to finance for Ghanaian business, skills training, and energy sector reform. The program targets the creation of 420,000 productive jobs in the formal sector (of which 85 percent in the private sector). It envisions structural reforms in the business environment to support economic diversification and plans to refocus key government flagship programs for increased efficiency, leverage digitization and advance financial sustainability. Ghana’s President has also previously expressed the aim to “build the most business-friendly economy in Africa” and foster the competitiveness of Ghanaian firms. The Government’s CPESDP also proposed an ambitious agenda that aims to develop a competitive private sector by focusing on reducing the high cost of doing business, resolving the energy constraints for businesses, lowering the overall tax burden on business, and instituting new incentive packages, targeting agro-processing, pharmaceuticals and light manufacturing, especially garments and textiles. This strategy document has also laid out the goal to formalize Ghana’s informal economy. In addition to these aims, the Ministry of Business Development has articulated the ambition to make Ghana the most entrepreneurial country in Africa, particularly targeting start-ups and youth businesses. This report aims to provide new research and analysis on many of these priority areas for the Government of Ghana to understand in more depth how these ambitions can be achieved, with concrete steps forward to achieve this agenda over the next twenty years. Accelerating the transition to upper-middle income status Without reforms, Ghana’s economy is currently projected to reach upper-middle income status by 2037 in a ‘business as usual’ (BaU) scenario. In a ‘business as usual’ scenario, annual real GDP growth is projected to peak in 2024 and then remain elevated at over 5 percent for the following 15 years.17 Real GDP per capita growth is projected to also bounce back and peak in 2024, then remain elevated at just under 4 percent for the next fifteen years. Under a ‘bright horizons’ scenario with reforms to drive economic transformation, Ghana’s economy could reach upper-middle income status by 2032, five years ahead of ‘business as usual’. This scenario would involve important reforms to raise productivity in manufacturing, high productivity ‘global innovator’ services and Ghana’s lowest skilled services sectors. It would also include improvements in foundational skills, the impact of the full implementation of the AfCFTA and growth in net FDI inflows, as well as avoiding some of the direct negative effects of climate change resulting from rising temperatures. In this scenario, Ghana’s economy would be 25 percent larger in 2040, relative to the ‘business as usual’ scenario (see Figure 1.16). 17 Projections based upon the latest World Bank MFMod estimations (for 2020 to 2023) and the OECD SSP2 long-term growth rates (for 2023 to 2040). Ghana Rising – Accelerating Economic Transformation and Creating Jobs 47 CHAPTER 1 Ghana Rising Under a ‘pitfalls’ scenario, however, Ghana would only reach middle income status by around 2040. This scenario would involve being negatively affected by some of the direct impacts of climate damages associated with a 1-degree temperature increase, declining productivity of manufacturing, high productivity ‘global innovator’ services and the lowest productivity service sectors, and also a decline in FDI inflows. In this scenario, GDP would be around 12 percent lower by 2040 than under a business as usual scenario. The greatest impact on GDP would be from reforms to raise the productivity of export-oriented global innovator services and manufacturing. Reforms that lead to a 2 percent increase in TFP and a 1 percent increase in low-skilled labor productivity in ICT, and business services would have the greatest prospective impact on GDP by 2040 (see Figure 1.17). Reforms that lead to the same productivity growth rates in Financial Services FIGURE 1.16 Under a ‘Bright Horizons’ scenario Ghana’s economy could be 25 percent larger by 2040 Real GDP per capita by scenario (left) and real GDP differentials by scenario (right) GDP per capita Percentage change w.r.t. baseline 30,000 30 25 20 25,000 15 10 20,000 5 0 15,000 -5 -10 10,000 -15 2020 2025 2030 2035 2040 2025 2030 2035 2040 Bright Horizons Business as Usual Pitfalls Overall positive Overall negative Source: World Bank staff calculations using MANAGE CGE model (Rojas-Romagosa, 2021). FIGURE 1.17 The greatest effects would be from reforms to raise the productivity of the ICT, business services and manufacturing sectors Real GDP level effects by 2040 in bright horizons scenario (left) and by services subsector and scenario (right) 4 Overall (total) positive Export serv. prod. increase 3 L−intensive serv. prod. increase 2 Manufacture prod. increase Educational attainment 1 Educational quality Trade: AfCFTA 0 2025 2030 2035 2040 FDI increase % change w.r.t. baseline 0 10 20 ICT services Financial services Other services % change w.r.t. baseline Business services Trade services Source: World Bank staff calculations using MANAGE CGE model (Rojas-Romagosa, 2021). 48 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising or Ghana’s lowest productivity services sectors of Wholesale and Retail Trade and Other Services would have a more muted effect on GDP. Reforms that lead to the same productivity growth rates in Manufacturing would have an impact that is just over two thirds that of the combined effect for the five services sectors considered. The full implementation of the AfCFTA would also have a major impact on growth. The ‘full’ implementation of AfCFTA is simulated taking changes in trade and real income gains as estimated in the World Bank’s AfCFTA report (2020), which defines full implementation to include tariff cuts, NTM reductions and trade facilitation measures. The combined effect of the full implementation would be to raise GDP by approximately 7 percent by 2040 relative to business as usual. The effects of a 1 percent growth in FDI inflows are far more limited. The effects of improved education quality on GDP are far higher than the effects of increased educational attainment. Improvements in educational attainment, through increased years of education, translate into a gradual shift in the education levels of the total work force. The bright horizons scenario for educational attainment assumes that Ghana achieves the targets for enrollment rates by education level as laid out in the Ghana Education Strategic Plan (ESP). This would result in a limited increase in GDP by 2040 of under 1 percent. The bright horizons scenario for educational attainment assumes that between 2021 and 2040 a one standard deviation improvement in the Ghana National Education Assessment (NEA) test scores is achieved, which is a regional standardized test. This has a far greater impact on GDP, leading to around a 2.7 percent increase in 2040 relative to business as usual. In the ‘pitfalls’ scenario, the climate damage from the heat effects of a 1 degree warming is expected to shrink Ghana’s GDP by at least 1 percent in 2040 relative to the baseline. The values for the climate change damage functions are taken from Roson and Sartori (2016). They provide benchmark estimations of six damage functions for temperature increases associated with climate change. These evaluate the impacts of climate change through only the channel of rising heat, so estimates should be treated as a minimum lower bound of the potential effects of climate change, with various further ways in which climate change could have effects that are not modelled here, but modelled above in the estimates above from the World Bank Shockwaves report. Most notably, these estimates do not include any impact from extreme weather or natural disasters In Ghana the most negative effects from rising heat are estimated to be felt through reduced labor productivity due to increased heat and reduced agriculture productivity from increased temperatures, particularly maize (see Figure 1.18). The effects of climate change on Ghana’s GDP for 2 degrees of warming are approximately double those for 1 degree. FIGURE 1.18 The greatest impacts of rising heat from climate change would be felt by labor productivity Real GDP level effects of 1 degree warming (left) and totals for 1 and 2 degrees (right) 0.0 0.0 -0.1 -0.5 -0.2 -0.3 -1.0 -0.4 -1.5 -0.5 -0.6 -2.0 2025 2030 2035 2040 2025 2030 2035 2040 % change w.r.t. baseline % change w.r.t. baseline Agriculture prod. Energy demand Labor productivity All climate damages (1C) All climate damages (2C) Arable land Health Tourism Source: World Bank staff calculations using MANAGE CGE model (Rojas-Romagosa, 2021). Ghana Rising – Accelerating Economic Transformation and Creating Jobs 49 CHAPTER 1 Ghana Rising How can Ghana revive long-term inclusive growth? To revive long-term more inclusive growth, Ghana will need to focus on three key priorities. Firstly, Ghana will have to focus on job creation from economic transformation and developing the key enablers of growth, the subjects of Chapters 2-5 of this CEM. However, in addition Ghana will also need to take additional measures to ensure that growth is inclusive and the link between growth and poverty reduction is repaired. Finally, Ghana will also need to prepare in advance for the impacts of climate change and set in place a growth path that will be resilient to the impacts of climate change both through its effects on the climate and its effects on global demand. LAUNCH economic Create more and better jobs through economic 1 transformation as described in Chapters 2-3  transformation and LEVERAGE enablers of growth stability Focus on the financial sector and macro  described in Chapters 4-5 as enablers of growth as  2 Repair the link disparities Reduce inequality and regional  between growth and and safety nets through public investment  poverty reduction Develop targeted adaptation measures for worst affected sectors  3 Prepare for the worst impacts of climate change Invest in resilient infrastructure and disaster response measures Source: World Bank staff elaboration. POLICY PRIORITY 1 Create more and better jobs by launching economic transformation and leveraging enablers of growth The first priority for Ghana will be to focus on economic transformation and creating an enabling environment for growth as laid out in this report. Economic transformation will lay the foundations for long-term growth that can reduce poverty, raise living standards and create jobs. This will feed into the other two key priorities listed below. Chapters 2 and 3 will provide detailed recommendations on launching economic transformation. Chapters 4 and 5 will provide detailed recommendations on generating an enabling environment for growth by ensuring the macro framework and financial sector support firms and the economy. POLICY PRIORITY 2 Ensure that growth is inclusive and tackle Ghana’s rising inequality and spatial disparities In addition to the key agenda of driving long-term growth through economic transformation, Ghana will have to play close attention to the inclusivity of growth and set in place a framework for redistribution and poverty alleviation. This can be achieved through improving social safety nets, investing in public infrastructure, education and health, a focus on opportunities for lower-skilled workers and improving services for underserved regions and populations. 50 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 1 Ghana Rising POLICY PRIORITY 3 The gains from priorities 1 and 2 will be in vain if Ghana does not prepare now to avoid the worst effects of climate change Ghana will need to invest in targeted measures to reduce exposure to climate risks in agriculture. It will need to improve resilience in infrastructure and set in place better preparedness systems for natural disasters. It will need to prepare social safety nets for future crises. Finally, it will need to make sure its growth, trade and industrialization strategies are prepared for shifts in global demand resulting from climate action to both take advantage of opportunities and minimize investments in areas that are financially unviable in the long term because of the global push for decarbonization. Chapter 5 provides several ways in which Ghana can use its macro-fiscal toolkit to achieve this goal. References Cooke, Edgar, Sarah Hague, and Andy McKay. “The Ghana Hallegatte, Stephane; Bangalore, Mook; Bonzanigo, Laura; poverty and inequality report: Using the 6th Ghana living Fay, Marianne; Kane, Tamaro; Narloch, Ulf; Rozenberg, standards survey.” University of Sussex (2016). Julie; Treguer, David; Vogt-Schilb, Adrien. 2016.  Shock Waves : Managing the Impacts of Climate Change on Choudhary, Vikas; D’Alessandro, Stephen. 2015.  Ghana Poverty. Climate Change and Development;. Washington, Agricultural Sector Risk Assessment: Risk Prioritization. DC: World Bank. © World Bank. https://openknowledge. World Bank, Washington, DC. © World Bank. https:// worldbank.org/handle/10986/22787 License: CC BY 3.0 openknowledge.worldbank.org/handle/10986/22498 IGO. License: CC BY 3.0 IGO. Paul, Saumik and Raju, Dhushyanth., 2021. Barriers to Cust, James; Mihalyi, David. 2017. Evidence for a Presource Growth-Enhancing Structural Transformation: The Role Curse?: Oil Discoveries, Elevated Expectations, and of Subnational Differences in Intersectoral Productivity Growth Disappointments.  Policy Research Working Gaps. Paper;No. 8140.  World Bank, Washington, DC . © World Bank. https://openknowledge.worldbank.org/ Rojas-Romagosa, Hugo. 2021. Ghana: MANAGE results for handle/10986/27643 License: CC BY 3.0 IGO different growth-related Davies, Elwyn. Hallward-Driemeier and Nayyar, Gaurav. Rozenberg, Julie; Fay, Marianne. 2019.  Beyond the S e r vi ce s- l e d D eve l o p m e nt : I n th e S e r vi ce of Gap : How Countries Can Afford the Infrastructure Development? World Bank, 2021. They Need while Protecting the Planet.  Sustainable Infrastructure;.  Washington, DC: World Bank. © De Vries, G., Timmer, M. and De Vries, K., 2015. Structural World Bank. https://openknowledge.worldbank.org/ transformation in Africa: Static gains, dynamic losses. The handle/10986/31291 License: CC BY 3.0 IGO. Journal of Development Studies, 51(6), pp.674-688. Stapleton, Katherine. 2021. A missing middle? Structural De Vries, Gaaitzen,  Linda Arfelt, Dorothea Drees, Mareike change in Ghana and the role of services Godemann, Calumn Hamilton, Bente Jessen-Thiesen, Ahmet Ihsan Kaya, Hagen Kruse, Emmanuel Mensah, UN, 2021. 2019 Revision of World Population Prospects. and Pieter Woltjer (2021). The Economic Transformation Database (ETD): content, sources, and methods. WIDER World Bank Group. (2015). Rising through Cities in Ghana: Technical Note 2/2021.  https://doi.org/10.35188/UNU- The time for action is now to fully benefit from the gains WIDER/WTN/2021-2.’ of urbanization. Ghana Statistical Service, 2015. Ghana Labor Force Survey. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 51 52 Ghana Rising – Accelerating Economic Transformation and Creating Jobs © George Gyentu/Paragon Media PART 1 LAUNCH ECONOMIC TRANSFORMATION Creation of sufficient, quality jobs will require Ghana to launch deeper economic transformation. Growth on its own is necessary, but not sufficient to deliver more and better jobs, particularly for poor people. What is needed are productivity gains across the range of jobs where poor people are actively engaged or those to which they are able to transition to. This part of the report focuses on sectoral and spatial transformation (Chapter 2) and technological transformation (Chapter 3). Chapter 2 sheds new light on Ghana’s recent patterns of structural change, Ghana’s performance in trade, integration into global value chains and FDI and takes a detailed look at Ghana’s services subsectors, the jobs they create and their transformative potential. Chapter 3 provides new analysis on the state of Ghana’s digital infrastructure, digital skills and the digital and complementary technologies being adopted by Ghana’s firms and microenterprises. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 53 © George Gyentu/Paragon Media 54 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 2 Trade and the Changing Role of Services Historically very few countries have managed to deliver long-run growth without significant structural transformation and the major gains from structural transformation in developing countries has generally been from the rise of manufacturing. However, paths to structural transformation are changing and we should not expect the future to necessarily look like the past. Ghana’s path of structural transformation has not been the typical one, but that does not mean that there won’t be new opportunities. High productivity export-oriented services have been some of Ghana’s best performing sectors and drove the major gains from structural change over the past three decades. They are increasingly interlinked with other areas of the economy, embedded in goods production and exported. Manufacturing in Ghana has only taken off in terms of employment in the past decade and remains domestically focused and low productivity. Trade has historically been one of the major drivers of structural and spatial transformation, but in Ghana it has not been harnessed sufficiently to drive structural transformation, with goods exports becoming more concentrated in primary commodities this decade and the trade share with the continent declining. The AfCFTA offers a major opportunity to reverse this trend, but to really benefit, deep reforms will be required on trade facilitation. FDI and services exports in Ghana have been very promising, not only in extractives. Ghana’s ‘global innovator’ services have high potential but Ghana specializes in the higher-skilled segments of these services, generating very few jobs for lower-skilled workers. Ghana will need to attract investment into lower-skilled segments of these services to harness their transformative potential. With services increasingly used as inputs in manufacturing, reforms to benefit services simultaneously boost manufacturing competitiveness: Ghana does not need to choose between manufacturing and services, both aims are increasingly intertwined. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 55 CHAPTER 2 Trade and the Changing Role of Services Between firms & sectors Between locations 1 Harnessing trade as a force for economic transformation 2 Building on Ghana’s SECTORAL SPATIAL success in high Movement to more Spatial integration, productivity services productive firms connectivity & & sectors urbanization This chapter evaluates the extent to which sectoral and spatial transformation have contributed to growth and job creation in Ghana and how Ghana can accelerate these transformations. It first discusses changing global patterns of structural and spatial transformation, with a focus on global integration. It then brings together several different data sources to shed light on recent patterns of trade, FDI and global value chain participation in Ghana and how they have contributed to economic transformation. Finally, it takes a detailed look at the performance of Ghana’s different services industries. Using LinkedIn data, household survey data and data on services trade and task offshoring, it evaluates the characteristics of jobs in detailed services subsectors in Ghana and the opportunities and limitations of services-led development. Structural and spatial transformation have been central to growth, but the future may be different to the past One of the key insights on the process of long-term economic development is that it has rarely been achieved without structural transformation. The countries that have managed to reduce poverty and grow rapidly, historically and more recently, have been those that were able to diversify away from agriculture into modern economic activities with higher productivity and the capacity to drive innovation and generate positive spillovers to other areas of the economy. Historically, the major development gains from structural transformation stemmed from the transition from agriculture into manufacturing. The characteristics of the manufacturing sector that made it so conducive to development, as exemplified by East Asia’s success in export-led growth, have been its propensity to generate large-scale employment opportunities for lower skilled workers and its capacity for innovation, exploiting economies of scale and productivity spillovers. In short, the manufacturing sector has typically generated such development dividends because it has provided better paid job opportunities for large numbers of low skilled workers moving out of agriculture and subsequently placed those workers on a productivity growth path through opportunities for learning-by-doing generated from trade and innovation (Davies et al., 2021). More recently, several developing countries have also experienced important gains from structural change through the movement from agriculture directly into export-oriented services. There is growing evidence that some of the features of the manufacturing sector that were historically conducive to development, such as this capacity to employ large numbers of low skilled workers at a productivity premium and the potential for scale, innovation and productivity spillovers, may not be specific to manufacturing per se, but increasingly 56 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 2 Trade and the Changing Role of Services exhibited by some export-oriented service industries. In India particularly, the positive contribution of structural change to economic growth after the 1990s was largely down to the expansion of high-productivity export- oriented service activities such as IT, business process outsourcing (BPO), and other business services. The manufacturing and services sectors are not what they used to be. There has been a growing debate about the extent to which the path of manufacturing-led development will generate the same development gains for future developing countries as it did in the past in light of the declining labor intensity of the manufacturing sector globally, climate policies that will require decarbonization, the increased potential for automation of manufacturing production and the slowing growth and regionalization of global value chains. Services are also increasingly tradable. There have also been suggestions, for example by Baldwin (2019) and Baldwin and Forslid (2020), that digital platforms, the rise in remote working and machine intelligence, will facilitate outsourcing of tasks and jobs, enabling new waves of offshoring of various services activities to lower-income countries. At the same time, the growing complementarities between manufacturing and services mean that the lines between To maintain manufacturing and ser vices are increasingly blurred. Manufacturers increasingly use services either for their own broad-based growth production needs or for their customers, for example sales over the next few and after-sales services bundled with goods. As a result, services are growing in importance to develop a competitive decades, Ghana will manufacturing sector. This is a process expected to intensify have to develop a given the role that the generation and use of data will play in strategy to further increasingly interconnected “smart” factories. The traditional path of structural change was for countries to first move move labor from from agriculture into manufacturing and then to move up the low productivity value chain of manufactured goods by diversifying out of the “production” of goods into services e.g. design and R&D, or those jobs to higher- embedded in goods during postproduction, such as after-sales productivity jobs in support and other add-on services. However, with these services manufacturing or accounting for a greater share in the manufacturing product’s supply chain, having competitive service sectors first could later higher-productivity trigger the expansion of manufacturing sectors through boosting services manufacturing competitiveness. They typical path of structural transformation into manufacturing was also previously accompanied by spatial transformation, but now spatial transformation often occurs without structural transformation. Historically, there was a strong relationship between urbanization and industrialization. However, Gollin et al. (2016) have shown that this relationship has broken down for most developing countries over the past decade and that resource exports have caused an increase in urbanization rates, with the rise of ‘consumption cities’ where a larger fraction of workers are employed in non-tradable services such as commerce and transportation or personal and government services. This contrasts with ‘production cities’ from earlier patterns of structural transformation, were a larger fraction of workers were engaged in manufacturing or tradable services. Trade expansion and integration have historically been central to creating new, higher-productivity jobs that facilitate growth through structural and spatial transformation. To maintain broad-based growth over the next few decades, Ghana will have to develop a strategy to further move labor from low productivity jobs, mainly in agriculture and low-productivity services, to higher-productivity jobs in manufacturing or higher- productivity services. Trade and integration into global value chains provide opportunities to facilitate this growth-enhancing structural and spatial transformation by allowing for economies of scale to be exploited through access to larger markets and through providing an avenue for technology diffusion and productivity spillovers. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 57 CHAPTER 2 Trade and the Changing Role of Services BOX 2.1 Understanding Ghana’s manufacturing employment ‘renaissance’ © George Gyentu/Paragon Media The pattens we document in this CEM for structural change and the manufacturing sector in Ghana have a lot of similarities to those experienced in other countries in sub-Saharan Africa. Diao et al. (2021) have shown that labor productivity growth in manufacturing has been disappointing across Africa over the past decade and that countries with a strong contribution of structural change to growth (Ethiopia, Malawi, Senegal, and Tanzania, especially) experienced little labor productivity growth within their non-agricultural sectors. They argue that this pattern is not consistent with a supply side model of growth driven by productive improvements in manufacturing but instead is most likely explained by an increase in demand for urban products — whether due to transfers from abroad, public expenditures, or income gains in agriculture. These authors show that for Tanzania and Ethiopia, the expansion of the manufacturing sectors was not accompanied by an expansion of formal employment in manufacturing, unlike in Taiwan and Vietnam. They also show there is a sharp dichotomy between larger firms that exhibit superior productivity performance but do not expand employment much, and small firms that absorb employment but do not experience any productivity growth. They argue that standard explanations for the lack of employment growth in the most productive manufacturing firms are inadequate but that the reason for the limited employment expansion of the most productive firms might stem instead from the nature of technologies used by these firms. Relatively large firms in the manufacturing sectors of Tanzania and Ethiopia are significantly more capital- intensive than what would be expected on the basis of the countries’ income levels or relative factor endowments. This is especially true of the larger, most productive firms, where capital intensity approaches (or exceeds) levels observed in the Czech Republic, a country that is around twenty times richer. They conclude that the imperative of competing with production in much richer countries at similar quality levels makes it difficult to undertake large shifts in production technique. Kruse et al. (2021) have also studied the rising manufacturing employment share in Africa over the past decade. They document that in sub-Saharan Africa, the share of workers in manufacturing rose by 1.2 percentage points to 8.4 per cent during the period 2010–2018, an important reversal of the prior de-industrialization trend. They show this rise in the employment share is driven by the absorption of workers by unregistered small manufacturing firms. By separating countries into those that are manufacturing exporters and non-exporters, they show that domestic rather than foreign demand appears related to industrialization. They conclude that small-scale firms in sub-Saharan African have increased production of (low-) quality goods to meet rising demand by domestic consumers. 58 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 2 Trade and the Changing Role of Services Harnessing trade as a force for economic transformation Trade, FDI and global value chain integration are key parts of the Government of Ghana’s development agenda. The Government’s new export strategy seeks to leverage the manufacturing sector to diversify the export base, including trade in services and to integrate deeper into GVCs. In October 2020, the Government launched the new National Export Development Strategy (NEDS), which envisages growth in non-traditional exports (NTEs) from US$2.8billion to US$25.3billion over a 10-year period, to be accompanied by deep structural transformation and a competitive export-led industrialized economy. The Government has also stated its aim is to “build the most business-friendly economy in Africa”; through diversification of the export base, further integration into global value chains (GVCs) and promotion of intra-Africa trade. Ghana faces an historic opportunity as the secretariat of the AfCFTA. The full implementation of the AfCFTA will create the largest free trade area18 in the world, connecting 55 countries with a combined US$3.4 trillion market economy of 1.3 billion people. This has great potential to boost intra-African trade, promote industrialization, create jobs and improve the competitiveness of African industries on the global stage. Furthermore, the agreement could offer major opportunities for investors- both domestic and foreign, to do business with a single set of trade and investment rules across the continent. The agreement aims to reduce all trade costs and enable Africa to integrate further into global supply chains — it will eliminate 90 percent of tariffs, focus on outstanding non-tariff barriers, and ultimately aims to create a single market with free movement of goods and services. Cutting red tape and simplifying customs procedures could bring significant income gains. Yet, trade is not a silver bullet, the gains from the AfCFTA will not be automatic and, to date, trade has not been a force for sufficient job creation or economic transformation in Ghana. Ghana’s outstanding export performance has been driven primarily by extractives, which offer limited scope for job creation, export concentration is rising, sophistication is declining and significant barriers to trade and global value chain participation remain. Trade also has distributional effects and benefits will not be automatically shared evenly. The full implementation of the AfCFTA still faces major obstacles, which will need to be overcome if Ghana is to reap the benefits. Ghana has had an impressive export performance, but without diversification Ghana’s export performance over the past decade has been outstanding and Ghana’s trade to GDP ratio has increased rapidly. Total trade in goods and services expanded from a volume equivalent to 55 percent of GDP in 2010 to 72 percent of GDP in 2019. Exports of goods and services increased by an annual average of 13.2 percent, with per capita exports doubling in value between 2010 and 2019. This has placed Ghana as the 8th most dynamic exporter globally and the 5th in Africa. But growth in exports of goods has been fueled by extractives and exports are increasingly concentrated in primary commodities, offering limited scope for productivity spillovers or employment generation. Excluding extractives, trade in goods declined from 39 percent of GDP in 2010 to 31 percent of GDP in 2019 (Figure 2.1). Since 2010, when oil and gas exploration started, Ghana’s total extractive exports increased nearly 3.5 times in trade value, from 66 percent share in 2010 to 71 percent of merchandise exports in 2019. Extractive exports are evenly distributed between gold and oil: 55 percent and 45 percent of extractive exports in 2019, respectively. Ghana’s level of diversification in exported products lags most comparators, outperforming only Nigeria in 2019. Additionally, since 2011, Ghana’s exports have become less sophisticated, bearing less resemblance to the typical export basket of high-income countries as measured by the income content of exports. 18 AfCFTA is the largest free trade area in terms of the size of participating countries. As at April 2020, 54 African countries had signed the AfCFTA agreement, 24 countries had deposited their instruments of ratification, and only Eritrea is yet to sign the agreement. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 59 CHAPTER 2 Trade and the Changing Role of Services FIGURE 2.1 Ghana’s merchandise trade excluding extractives is lower than expected Ghana: Merchandise trade excluding extractives, Ghana and comparators Merchandise Trade excl extractives, avg2010−12 (% of GDP) Merchandise Trade excl extractives, avg2017−19 (% of GDP) 2 3 1.5 2 Vietnam Vietnam 1 1 Cote d’Ivoire .5 Kenya Ghana South Africa Cote d’Ivoire South Africa Kenya Ghana Nigeria Nigeria 0 0 6 8 10 12 6 8 10 12 Log GDP per Capita, avg 2010-2012 Log GDP per Capita, avg 2017-2019 Source: World Bank staff calculations using data from UN Comtrade and WDI. Note: (i) The relationship between the merchandise trade (excluding extractives) as a share of GDP and income per capita is explained by the fractional-polynomial prediction; (ii) The extractive sector includes minerals (HS 25-26), fuels (HS 27), and precious metals (HS 71); (iii) Ghana’s exports are constructed by using the ‘mixed mirror’ method (the mirror data for all sectors except HS71 gold). Export opportunities for other goods remain untapped Manufacturing exports remain a small share of total exports and their growth has been modest. Manufacturing exports nearly doubled in value but declined in share from 12 percent to 7 percent between 2010 and 2019 (see Figure 2.2). There were no light or complex manufacturing products included in Ghana’s top 20 export products by value between 2015 and 2017. Ghana’s manufactured exports comprise primarily of medium technology or resource-based manufactures, with limited high-technology products. FIGURE 2.2 Manufacturing exports have increased only modestly over the past decade and remain a very small share of Ghana’s goods exports A) Ghana goods exports by category, US$ million B) Ghana and peers, goods exports by category 18,000 100% 16,000 80% 14,000 12,000 60% 10,000 40% 8,000 6,000 20% 4,000 0% 2,000 2010 2019 2010 2019 2010 2019 2010 2019 2010 2019 2010 2019 0 Ghana Cote Kenya Nigeria South Vietnam 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 d'Ivoire Africa Agriculture Extractive Manufacturing Agriculture Extractive Manufacturing Source: World Bank staff calculations using data from UN Comtrade. Note: (i) The extractive sector includes minerals (HS 25-26), fuels (HS 27), and precious metals (HS 71); (ii) the export data for Ghana are constructed using a ‘mixed mirror’ method (the mirror data for all sectors except HS71 gold), the imports are directly reported. The data for Kenya are based on the mirror method. 60 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 2 Trade and the Changing Role of Services According to gravity model estimations, Ghana’s merchandise exports have huge untapped potential. Ghana’s Export Potential Index19 (EPI) shows that Ghana’s merchandise exports should have been 32 percent higher20 than the observed values during the past decade. At the industry level, Ghana’s top three sectors with the greatest untapped export opportunity (‘missing trade’) were textiles and clothing, electronics, and chemicals. In terms of the processing stage and end-use sectors, Ghana’s top three sectors with the greatest export opportunity (‘missing trade’ value) are final apparel, final electronics, and intermediate electronics. FIGURE 2.3 Ghana’s merchandise exports have performed far below potential over the period 2010-2019 Ghana: EPI and Missing Exports in Top 20 markets, average 2010-2019 (US$ million) 2,500 120 100 2,000 80 1,500 60 1,000 40 500 20 0 0 United States Germany Japan Brazil Canada Spain United Kingdom Nigeria Mexico Australia South Korea Indonesia Sweden Russia Saudi Arabia Argentina Austria Poland Israel Italy Untapped potential (US$ million) (left axis) EPI (right axis) Source: World Bank staff calculations. Ghanaian goods exports have been on the rise to Asia and on a decline to Africa over the past decade. In 2019, the largest destination for Ghana’s merchandise exports was Asia which accounted for 43.4 percent share in goods exports, out of which China and India received 16.7 and 14.2 percent share, respectively. The African market for Ghana’s exports has declined in importance from 63.1 percent share in 2010 to 17.7 percent share in 2019, which could be explained by the fact that extractive products are mainly destined to advanced economies’ markets. Within Africa, the most important export markets for Ghana have been SADC 21 led by South Africa and ECOWAS22 led by Burkina Faso. From commodity exporter to commodity and services exporter Another major driver of Ghana’s export growth has been the rapid rise of services exports. Exports of services increased fivefold between 2014 and 2018 and Ghana’s services sector is now the largest contributor to value added exports. Much of the growth in Ghana’s services exports stemmed from the category of ‘Technical, trade related and other business services’, which includes architectural, engineering, scientific, and other technical services, waste treatment and de-pollution, agricultural and mining services, operating leasing services, trade-related services and other business services (Figure 2.4). 19 Export Potential Index (EPI) varies between 100 and -100. The maximum 20 For a given export potential, the relationship with respect to the observed value is obtained when observed bilateral trade flows are equal to 0, but the trade flows is calculated as follows: model predicts positive exports to the destination market, while the minimum value (i.e., -100) is obtained when the predicted value is equal to 0, and the observed values are positive. The EPI is defined as follows: 21 Southern African Development Community (SADC). 22 Economic Community of West African States (ECOWAS). Ghana Rising – Accelerating Economic Transformation and Creating Jobs 61 CHAPTER 2 Trade and the Changing Role of Services FIGURE 2.4 Ghana’s services exports increased fivefold between 2014 and 2018, with the rise mainly driven by services embedded in commodities exports A) Total commercial services exports B) Commercial sevices exports by type 10,000 6,000 9,000 8,000 4,000 7,000 6,000 5,000 2,000 4,000 3,000 2,000 0 1,000 2005 2010 2015 Exports (USD millions) 0 Transport Travel 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Insurance and pension services Other business services Source: WTO Trade in Services Database. Source: WTO Trade in Services Database. While this has implied the diversification of exports towards services, a big chunk of the increase in services exports corresponds to services that are embedded in commodities exported from Ghana. In Ghana, services generate nearly a half of total export value added, outperforming all comparators. The services share of value-added exports increased by 19 percentage points, from 25 in 2004 to 44 in 2014. Such increase in the importance of services in Ghana has been driven by the services that support oil exports, and which accounted for one-half of services value added in 2014 (or 24 percent of total export value added). Meanwhile, over one-third of services added value supports manufacturing exports (or 13 percent of total export value added). Ghana’s services value added mostly contributes to other exports sectors in the economy, indicating a high integration with other sectors as only one-eighth stays within the same sector (as a direct value added) or 6.1 percent of total export value added. FIGURE 2.5 Half of Ghana’s value-added exports from services came from inputs into energy extraction Services value added as a percentage of total export value added 30% 24.2 25% 19.6 20% 17.3 15% 13.0 9.5 10% 7.7 6.1 6.7 5.7 4.1 3.5 5% 3.0 1.5 1.2 0.3 0% Direct Value Added Inputs into agriculture Inputs to energy extraction Inputs to manufacturing Inputs to services 2007 2011 2014 Source: World Bank staff calculations. 62 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 2 Trade and the Changing Role of Services Ghana has been one of the largest FDI recipients in the region, with extractives only half of the story Ghana’s outstanding FDI performance has also been primarily driven by extractives, although also with an important contribution of manufacturing and high-productivity services sectors. Majorly boosted by the oil sector, FDI inflows in Ghana increased very rapidly in the mid-2000s to reach an average of US$3 billion per year in 2014, being even on par with Nigeria. Beyond investments in extractives and their transformation, which accounted for half of total inflows between 2003 and 2018, manufacturing and services were also important destinations of FDI, with manufacturing accounting for 28 percent of inflows between 2013 and 2018 and services accounting for 22 percent (Figure 2.6). Within manufacturing, the greatest share of inflows has been into metals, accounting for 41 percent of total manufacturing inflows between 2003 and 2018, chemicals, accounting for 17 percent and food and tobacco, accounting for 13 percent. Within non-traditional services, which comprises of all services excluding tourism, warehousing and storage and transportation, the greatest recipients have been communication, accounting for 41 percent of total non-traditional services inflows between 2003 and 2018, real estate, accounting for 29 percent and financial services, accounting for 21 percent. Manufacturing appears to have been the largest source of job creation from FDI. The sector creating the most jobs, according to FDI Markets data, has been food and tobacco, accounting for 45 percent of all manufacturing FDI jobs created over this 15 year period, followed by the automotive sector, which has created nearly 10 percent of jobs, despite accounting for only 4 percent of inflows. Within non-traditional services, the greatest share has been created by communications, accounting for 33 percent of non-traditional services FDI jobs over this fifteen-year period. It is worth noting that in Ghana FDI flows into manufacturing have had twice the job creation impact per dollar invested than services and over five times the impact for natural resources. 23 FIGURE 2.6 FDI inflows into Ghana increased nearly tenfold between 2007 and 2018, with half of inflows into natural resources A) Ghana's number of FDI projects B) Ghana’s value of FDI in ows, US$ million 450 50,000 400 350 40,000 300 30,000 250 200 20,000 150 100 10,000 50 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Natural resources Manufacturing Total Natural resources Manufacturing Total Services traditional Services non-traditional Services traditional Services non-traditional Source: Financial Times FDi Markets Database. 23 It is worth noting that FDI Markets data uses announcements of FDI projects, not final realizations and so may not be highly accurate. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 63 CHAPTER 2 Trade and the Changing Role of Services Great expectations for the AfCFTA, but major benefits will require more than tariff reductions Ghana could stand to gain substantially from the AfCFTA, which has the potential to boost trade and regional value chains in Africa and reverse the pattern of Ghana’s declining trade share with the continent. It has been estimated by the World Bank AfCFTA Report (2020) that total real income gains from full implementation of AfCFTA across the continent could reach 7 percent by 2035. For Ghana the estimates range from 6 percent to below 1 percent, depending whether the trade facilitation agreement is implemented or only the reduction of tariffs. Trading under the first phase of AfCFTA began in January 2021 with the progressive reduction of tariffs on intra-continental trade starting with a 90 percent elimination of tariff lines over a five- year period, followed by an additional 7 percent of tariff lines to be eliminated over a five-year period from 2025. Achieving the full potential of the agreement will depend on putting in place significant policy reforms and trade facilitation measures. For Ghana, the gains from tariff reductions alone are relatively limited with an increase of 0.2 percent in real income by 2035 relative to the baseline (see Figure 2.7). This is because other barriers to trade with the continent are a far greater impediment to trade than tariffs. The greatest gains for Ghana are estimated to come from the implementation of trade facilitation (TF) measures in line with the Trade Facilitation Agreement (TFA), leading to halving of trade costs. Trade facilitation measures involve improving border infrastructure and reducing the cost of administrative procedures, ultimately making it easier for African businesses to integrate into regional and global value chains. The combination of tariff reductions, cutting non- tariff barriers (NTBs) and trade facilitation measures would lead to an increase of 5.7 percent in real income when compared to the baseline. An intermediate scenario without full trade facilitation measures but with NTBs on both goods and services reduced on a most favored nation (MFN) basis is estimated to lead to a more modest 1.7 percent increase in real income by 2035. FIGURE 2.7 The major gains from the AFCFTA for Ghana will come from trade facilitation measures, with tariffs making only a limited impact Estimated percentage deviations from the baseline by 2035 for AfCFTA scenarios 30% 25% 20% 15% 10% 5% 0% Only tariffs Tariffs & NTBs Tariffs, NTBs & TF Real Income (EV) Exports Imports Source: World Bank AfCFTA Report 2020. With full implementations of tariffs, NTBs and trade facilitation measures, Ghana’s exports to Africa could be twice as high as they would be otherwise in 2035. In the scenario with tariffs, NTBs, and trade facilitation, intra-AfCFTA trade is estimated to grow substantially, with Ghana seeing its exports to the region increase by 94 percent by 2035 relative to the baseline, or a US$5 billion difference. Its imports from AfCFTA 64 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 2 Trade and the Changing Role of Services partners would increase 79 percent relative to the baseline, by US$12.5 billion. Heightened integration with AfCFTA countries would mean that Ghana’s share of exports to the region would increase from 9 percent in 2020, to 16 percent in 2035, while without the trade facilitation measures, the increase would only from 9 percent in 2020 to 10 percent. Manufacturing would be the major beneficiary sector and wages for lower skilled workers would benefit the most. Manufacturing is estimated to be the sector with the highest increase, with growth of up to 78 percent in terms of total exports relative to the baseline, which is an equivalent of 11 billion in 2014 US dollars. Exports of wearing apparel, chemicals, wood, agricultural and food products see the greatest potential with communications growing the fastest among services sectors. The potential wage effects would be largest for unskilled workers and women, but all workers would benefit. It is estimated that the income gains would lift 0.2 million additional people out of extreme poverty by 2035. There are still major constraints to Ghana’s export diversification Ghana has not significantly cut tariffs over the past decade and trade-weighted tariffs remain high, particularly on imported raw materials and intermediate goods, potentially hindering manufacturing competitiveness. Ghana’s simple average MFN (11.95 percent) and applied tariff (12.41 percent) have not significantly changed over the past decade and trade-weighted MFN and applied tariff rates in 2019 remained high and above those of its comparators. In terms of processing stages, Ghana’s tariffs on imported raw materials and intermediate goods, particularly, exceeded those of its comparators, with the most protected sector being raw materials at 17.3 percent (as a trade-weighted average MFN rate), compared to 12 percent in 2010. Ghana’s trade-weighted MFN rate on imported intermediate goods was 9.2 percent, exceeding all comparators. The trade MFN tariff on imported capital goods also exceeded most comparators. While 26 percent of imports were free in 2010, only 9 percent were free in 2019. There are several ways Ghana could improve global value chain participation. Ghana does not seem to offer a high level of buyer sophistication, scoring only 3 out of 7 in the WEF’s indicator measuring buyer sophistication. Ghana’s local suppliers also do not seem to provide enough quantity and quality. Ghana scores 4.1 out of 7 in the WEF’s local supplier quality indicator and 4.6 in local supplier quantity. Ghana could also improve on FDI and technology transfers (4.3 out of 7), as well as on value chain breadth (3.9 out of 7). Additionally, only 9.2 percent of firms in Ghana have internationally recognized quality certification, representing the lowest percentage among both structural and regional peers. Ghana’s transport and logistics operations place it at the forefront of West Africa but Ghana’s ambition to become a regional logistics and transport hub still faces several obstacles. Maritime cargo volume has experienced rapid growth of 7.6 percent on average over 2010–2020, with container volumes growing at the same rate. Ghana’s trade-related infrastructure is good by regional standards and there have been important investments in recent years, including the expansion of the container terminal in Tema. Seventy percent of the road network is in good or fair condition and the distribution of Ghana’s infrastructure networks generally reflects the spatial distribution of economic activity. However, transport and logistical service performance improvements have been uneven. While container traffic has grown in Ghana, the share of container traffic remains low and stagnant, which points to an absence of modernization of freight transport. Transit traffic to hinterland neighbors has been a source of growth in port and transport activities, but transit volumes as a share of total port activity remain relatively low. Ghana is in the bottom third for the Logistics Performance Index (LPI) 2018. The latest LPI survey shows Ghana slipping back after progressing 41 ranks — from 129 to 88 in 2016 — to ranked 106th country out of 160 in the last survey. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 65 © George Gyentu/Paragon Media 66 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 2 Trade and the Changing Role of Services Building on Ghana’s strong performance in high productivity services The strong performance of Ghana’s high-productivity export-oriented services has offered promise for the prospects for services-led development in Ghana. Between 2000 and 2012, growth in Ghana’s global innovator services employment share was on a par with that in India and the Philippines. ICT particularly has been one of Ghana’s best performing sectors over the past decade and contributed 3.3 percent of the country’s GDP in 2020, growing 23 percent in 2020 despite the pandemic. The Government of Ghana aims to establish Ghana as the leader in ICT innovation in Sub-Saharan Africa by 2023 and to position the country as a regional hub for digital services. The BPO industry is also part of the government’s transformational agenda to develop Ghana’s services sector, with the Accra Digital Centre a BPO hub created by government with the aim to spur further growth in the sector. Ghana’s recent selection as the host country for the AfCFTA could also be a major factor in encouraging foreign companies to use Ghana as a base for expansion into the AfCFTA, as has been seen recently with the relocation decision of Twitter. FIGURE 2.8 ICT has been one of Ghana’s fastest growing sectors, averaging 19 percent growth 2014-2020 Contribution of Information and Communication sector to GDP and the sector’s growth rate 5.0 50 4.0 40 3.0 30 2.0 20 1.0 10 0.0 0 2014 2015 2016 2017 2018 2019 2020 Contribution to GDP (%) Growth rate (%) Source: Ghana Statistical Service. For services to drive sufficient job opportunities through economic transformation, they will need to meet the dual objectives of providing many jobs for low and middle skilled workers and spurring innovation, economies of scale and productivity spillovers. High productivity, export-oriented global innovator services comprising finance, ICT and business services have often faced the limitation in their development potential that that they have been typically intensive in skilled labor. Countries like India and the Philippines have been the exception, rather than the rule, in attracting segments of these services sectors that have been more labor intensive. More labor-intensive tradable services — transportation, wholesale and retail trade, and accommodation and food services — on the other hand, are also traded internationally but are typically less offshorable and have lower capacity to spur innovation and productivity spillovers. Ghana will have to navigate this dichotomy, expanding both groups of services to achieve these dual objectives and catalyzing lower-skilled employment growth in global innovator services and innovation and productivity growth in labor intensive tradable services. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 67 CHAPTER 2 Trade and the Changing Role of Services Global innovator services in Ghana are elite employers for the economy’s highest skilled workers Currently, Ghana’s global innovator services employ relatively few, with employees being highly skilled and highly paid. In 2016, the average worker in manufacturing in Ghana had not completed secondary school and had 8.8 years of education. Financial and insurance services, on the other hand, was the most highly skilled sector in the economy, with the average worker holding a tertiary degree and having 14.2 years of education. In the information and communications sector, the average worker had 13.8 years of education, while for the professional, scientific and technical services sector it was only slightly lower at 12.6 years. Individuals working primarily in the information and communication, finance and insurance and professional, scientific and technical services sectors also had average incomes 3.2, 2,3 and 1.4 times higher than in manufacturing, respectively (Figure 2.9). FIGURE 2.9 Ghana’s high productivity, global innovator services remain very highly skilled and highly paid Average incomes (left) and average years of education (right) for workers in global innovator services relative to manufacturing in 2016 Manufacturing 1 1 ICT 3.2 1.6 Finance & Insurance 2.3 1.6 Professional, Scienti c & Technical 1.4 1.4 Source: World Bank staff calculations using GLSS Wave 7 survey data. Global innovator services in Ghana are not just generators of ‘good’ jobs, but ‘great’ jobs. Employment conditions in these service sectors are also currently far more favorable than in manufacturing. In 2016, individuals of similar education, age, gender and region working in the finance and insurance sector earned 31 percent more, were 34 percent more likely to have a contract, 17 percent more likely to have health insurance and 24 percent more likely to have social security than those in the manufacturing sector. For the information and communications sector, workers of similar observable characteristics were 28 percent more likely to have a contract, 15 percent more likely to have health insurance and 23 percent more likely to have social security. For the professional, scientific and technical services sector those statistics stand at being 28 percent more likely to have a contract and 19 percent more likely to have social security, relative to in manufacturing, but with no difference in probability of having health insurance. The only services subsectors that rival manufacturing in terms of the number of jobs for workers with only a primary school education or below are Other Services and Wholesale and Retail. According to weighted data from the GLSS 7th wave in 2016, the Wholesale and Retail Trade sector employed just over twice as many individuals with only a primary school education as the manufacturing sector (see Figure 2.10). The ‘Other Services’ sector employed a roughly similar number of workers with only a primary school education as in manufacturing. The global innovator services, on the other hand, employed very few workers with only a primary school education. In total, these sectors are estimated to have employed around 19,000 workers with only a primary school education in 2016, only around 6 percent as many as in manufacturing. The vast majority of all of these lower skilled jobs in global innovator services, or 87 percent of the total, were in Professional, Scientific and Technical services, with ICT and Finance and Insurance together only employing around 2,500 workers with only a primary school education or below. 68 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 2 Trade and the Changing Role of Services FIGURE 2.10 Global innovator services employ very few lower skilled workers Estimated number of workers in each sector with only a primary school education or below Wholesale & Retail 707,485 Other Services 361,192 Manufacturing 302,678 Global Innovator Services 18,562 Source: World Bank staff calculations using GLSS Wave 7 survey data. Note: Results weighted by household sampling weights. Employment is defined as being employed in the week before the survey was conducted and all estimates are weighted using household survey weights. The industry of employment is defined as the individual’s industry of their primary job during the previous week. Jobs are concentrated in the higher-skilled segments of global innovator services A deep dive into the types of jobs in global innovator services using LinkedIn profiles reveals that jobs in Ghana appear more concentrated in Finance than other Global Innovator services relative to comparators. LinkedIn users represent only a subsection of the labor market, which has typically been shown to be skewed towards higher-skilled, white collar and urban workers. This subset of workers is therefore not representative of the wider economy but serves as a useful barometer when studying the detailed composition of specific white- collar services industries. Relative to three other ‘Services Superstars’, countries that have seen rapid growth in output and exports of global innovator services over the past two decades: South Africa, the Philippines and India, Ghana has a higher share of LinkedIn profiles in Finance and a lower share in Corporate Services and Software and IT Services (see Figure 2.11). 24 For example, the combined share of profiles in Corporate Services and Software and IT Services in Ghana was 25 percent, compared to 54 percent in India, 39 percent in the Philippines. Ghana’s composition is more similar to that of South Africa, which has only 28 percent in these categories and a distribution more skewed towards Finance. Within Corporate Services, Ghana has a far higher share of profiles in Accounting and a far lower share in Outsourcing/Offshoring. In the Philippines, for example, Outsourcing/Offshoring accounts for nearly half of all profiles in this category, while Ghana has less than 1 percent (See Figure 2.12A). In India it represents 12 percent. This category is likely to have some of the greatest potential development impacts in terms of its tradability and potential for productivity spillovers. Ghana’s regional peers even have a higher share of profiles in this category at 3.4 percent, while South Africa has 4.3 percent. Instead, Ghana has a far higher share of profiles within Corporate Services in Accounting, making up over half of profiles in this category, relative to peers and particularly to the Philippines and India. Ghana also has a lower share of low-skilled workers on LinkedIn in almost all industries than all of these other countries. Software and IT Services is the sector with the highest share of profiles with only a high school degree or below for most countries and that share stands at 7 percent for India, 2.3 percent for the Philippines and 4.2 percent for South Africa, while in Ghana it is just above 1 percent. In every single industry except for Energy and Mining, Ghana has a lower share of profiles with only a high school degree or below (see Figure 2.12B). 24 In Ghana the share of LinkedIn profiles relative to total formal jobs as measured in the GGDC ETD data is 0.122, compared to 0.146 in India, 0.231 in the Philippines and 0.45 in South Africa. Ghana therefore has a lower share of the population using LinkedIn than the services superstars, but it is not far off the ratio of users to formally employed population in India. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 69 CHAPTER 2 Trade and the Changing Role of Services FIGURE 2.11 Global innovator services employ very few lower skilled workers Estimated number of workers in each sector with only a primary school education or below Ghana India Others Finance Finance 14% 14% 19% Others Manufacturing 38% 10% Corporate Services Energy & Mining 13% Corporate Services 2% 14% Education 6% Manufacturing Software & IT 6% services Software & IT Energy & 11% services Education Mining 41% 6% 6% Philippines South Africa Finance 13% Finance 20% Others Others 31% 32% Corporate Services 19% Corporate Services 15% Manufacturing 6% Manufacturing Energy & 8% Mining Software & IT Software & IT Energy & services 2% Education services Education Mining 13% 9% 20% 5% 7% Source: World Bank staff calculations using LinkedIn profile data. FIGURE 2.12 Ghana’s LinkedIn users work in higher skilled segments like Accounting rather than Outsourcing/Offshoring (left) and Ghana has far fewer low-skilled workers on LinkedIn (right) A) Breakdown of Corporate Services LinkedIn pro les B) Share of LinkedIn pro les with only a high-school education Design Regional peers Public Administration Entertainment Recreation & Travel South Africa Construction Health Care Consumer Goods Philippines Transportation & Logistics Hardware & Networking Media & Communications India Corporate Services Finance Manufacturing Ghana Nonpro t Education Software & IT services 0% 50% 100% Energy & Mining 0% 2% 4% 6% 8% Accounting Management Consulting Human Resources Outsourcing/Offshoring Regional peers South Africa Philippines Information Services Staf ng & Recruiting India Ghana Source: World Bank staff analysis using LinkedIn data. 70 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 2 Trade and the Changing Role of Services Telecommunications is the largest component of Ghana’s ICT sector. In 2017, telecommunications accounted for 85 percent of ICT gross value added and 37 percent of employment. IT support services were the second largest component, accounting for 13 percent of GVA and 28 percent of employment. Digital services offerings of telecommunications companies have grown particularly rapidly due to mobile money services (ICT sector diagnostic, 2018). Offshoring of global innovator services to Ghana is still limited Other countries that successfully pursued a services export-led development path did so in part due to a substantial rise in offshoring from high-income countries. There has also been growing discussion about the prospect of digital technologies enabling greater offshoring or outsourcing of activities from high-income to lower-income countries, for example through digital platforms that make it easier for firms to contract out activities to workers in other countries. Baldwin (2019) and Baldwin and Forslid (2020), for example, have suggested that software robots and digital platforms will facilitate outsourcing of tasks and jobs, making services more easily tradable and enabling the offshoring of services to lower-income countries. There is growing evidence that services are increasingly tradable. Ghana has experienced a rapid rise in its service exports over the past decade but growth in offshoring of global innovator services appears more modest. Growth in exports of services categories other than ‘Other Business Services’, as defined above, has been gradual, albeit still promising. Services offshoring from the UK to Ghana, Ghana’s largest services export destination, for example, nearly tripled over the past two decades, with particular growth in telecommunications services and business management services. Ghana is the UK’s fifth largest services offshoring destination in Africa after South Africa, Nigeria, Mauritius and Kenya. While ‘microwork’ task outsourcing platforms have taken off on a large scale in Kenya, Nigeria and South Africa, task outsourcing to Ghana is more nascent. According to data from the iLabour Project, which scrapes and collates data on the number of projects and workers completing projects on four of the largest English language online freelancing or online outsourcing platforms, Ghana ranks 8th in sub-Saharan Africa FIGURE 2.13 Task outsourcing to Ghana via digital platforms has risen steadily, but remains limited relative to Nigeria, Kenya and South Africa A) Monthly online microworkers B) Annual microworkers by occupation (millions) 6,000 15,000 10,000 4,000 5,000 2,000 0 2017 2018 2019 2020 0 Clerical and data entry Creative and multimedia Jul 2017 Jul 2018 Jul 2019 Jul 2020 Professional services Sales and marketing Software development Writing and translation Source: World Bank staff analysis using iLabour project data. Source: World Bank staff analysis using iLabour project data. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 71 CHAPTER 2 Trade and the Changing Role of Services in terms of number of workers completing projects on these platforms. Task outsourcing to Ghana on these platforms has risen steadily since 2017, with a particular jump in platform use in 2020, perhaps sparked by the COVID-19 pandemic and a rise in remote working. Around 20,000 workers conduct microwork on these platforms annually in Ghana. There has been a shift from predominantly software development occupations in 2017 and 2018 to writing and translation tasks being most prevalent in 2019 and now data entry and clerical tasks dominating in 2020. However, microwork platforms in Ghana are mainly used by women and young people, contributing to poverty alleviation in rural areas. Remarkably, in the country, microwork platforms are used more by women than men, of which 56 percent have a secondary school certificate, and almost 60 percent were unemployed (Research ICT Africa, 2017). In the country, there are 19 microwork platforms in use, such as 15ghana.com and freelancer.com, through which local talent is satisfying local and global demand (Insight2Impact 2019). © George Gyentu/Paragon Media 72 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 2 Trade and the Changing Role of Services Services also play a key and growing role in other areas of the economy The increase in the importance of services — or the ‘servicification’ — of the Ghanaian economy means that sectoral linkages between services and goods production have grown stronger. Services played a key role as an input supplier to other exporting sectors: the share of total value added that is generated in services and that gets exported embedded in a good grew three-fold, from 10 to 32 percent between 2004 and 2014 (Ganz and Varela, 2018). Recent research (van de Marel and Shepherd, 2019) has also shown that over the last thirty years the role of trade in services in production processes (both of tangible goods and other services as well) has grown exponentially (Miroudot et al., 2013). The increase in the share of services embedded in production and exports of Ghanaian products makes competitiveness in services more important than ever for overall competitiveness. Despite significant improvements over the last decade-plus, potential to increase backbone services competitiveness in Ghana remains untapped. Using World Bank Enterprise Surveys, Ganz and Varela (2018) have shown that in Ghana, firms — especially those that are integrated into the global marketplace and the highly productive — still perceive service provision as a major constraint on their performance. Increased efficiency in backbone services provision can be brought about by reducing the regulatory burden on firms, by opening services sectors to trade and investment, and by encouraging competition at home. When done strategically and efficiently, such reforms can result in reduced prices of services inputs, increased varieties, and improved quality. Reforms to improve services competitiveness have an amplified effect, also benefiting manufacturing There are important restrictions affecting trade in services in Ghana, which could be limiting FDI and the expansion of high productivity services sectors. Using data from the OECD’s Services Trade Restrictiveness Index (STRI), Echandi (2021) has shown that for trade in services when compared to other African countries, Ghana is far from being the most restrictive country. However, when placed in comparison with international averages by broad sector, Ghana’s STRI position in most sectors shows slightly more restrictive policies. In most of the sectors covered by the STRI (transport being the exception), i.e. telecommunications, financial, professional and distribution services, Ghana shows a higher than average index, showing a more protectionist stance across the board. This suggests scope for reform progress, notably in sectors such as telecoms and professional services where Ghana could expect to develop. Notably, all FDI projects in Ghana require prior approval and are affected by minimum capital requirements, which not only entails trade costs in terms of red-tape, but a certain degree of uncertainty as authorities have the legal authorization not to approve the establishment of certain projects. FDI screening is a practice that has become non-typical in most other developing countries. In fact, less than 30 percent of the countries worldwide still have it -and those that do, tend to fall in the lower-income categories. In addition to prior screening and minimum capital requirements, acquisition and use of land and real estate by foreigners is restricted. Ghana could leverage its international trade negotiations on services, in particular in the AfCFTA, to amplify the government’s existing efforts to modernize and diversify the country’s potential on trade in services, attract investment and foster policy coherence. Ghana’s GATS commitments are currently quite limited and the gap between Ghana’s commitments and actual de facto regulations is very high, at more than 70 percent. Trade in services agreements negotiated by Ghana could hence be adjusted to: (i) lock-in the existing level of openness for trade in services in Ghana, (ii) increase the level of confidence of services providers by improving regulatory transparency and predictability of remaining barriers to trade and (iii) lock-in future domestic reforms reducing the level of protectionism for trade in services in the country. This would bring Ghana more in line with trade partners. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 73 CHAPTER 2 Trade and the Changing Role of Services How can Ghana accelerate sectoral and spatial transformation? To enable the kind of sectoral and spatial transformations that generate sufficient job creation, Ghana will need to focus on reforms targeting three key segments of the economy. Firstly, to capitalize on the strong progress of Ghana’s global innovator services, Ghana will need to focus on expanding lower-skilled segments of these services, such as BPO. Secondly, to counteract the trend of declining productivity in manufacturing, Ghana will need to boost competitiveness in manufacturing. Finally, Ghana will need to facilitate the transition to higher value-added segments of labor-intensive tradable services sectors like transportation, wholesale and retail, accommodation, and food. Increase services competitiveness through reforms  ervices trade restrictiveness, reducing barriers on s 1 Expand lower  business environment to FDI & skilled jobs in global innovator services f Focus on expanding lower skilled segments o global innovator sevices, such as BPO 2 such Reduce barriers to GVC participation,  Boost competitiveness  raw as barriers on intermediate imports & in manufacturing materials and streamline logistics Focus on the trade facilitation measures during negotiations of the AfCFTA  3 Transition to higher value-added labor-intensive Enable transition to higher productivity tradable services connectivity, urban planning activities through  & education Source: World Bank staff elaboration. POLICY PRIORITY 1 Expand lower-skilled jobs in global innovator services, particularly ICT and business services This could be achieved through a two-pronged approach that focuses on a) cross-cutting reforms to boost services competitiveness, including reducing services trade restrictiveness, reducing barriers to FDI in services and improving the business environment and b) a targeted approach to expand and attract FDI into the lower- skilled segments of these services, particularly BPO and other IT-enabled services, to provide more jobs for a wider portion of the Ghanaian workforce. Reforms to improve services competitiveness will also benefit the manufacturing sector due to manufacturing-services linkages. POLICY PRIORITY 2 Boost competitiveness in manufacturing through reforms on goods and services trade competitiveness This could be achieved through reforms that reduce barriers to GVC participation, improving transport and trade-related logistical services, particularly inland connections, and through reductions in NTBs and trade facilitation measures enacted by the AfCFTA countries. It could also be achieved through a targeted approach for high potential sectors. 74 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 2 Trade and the Changing Role of Services POLICY PRIORITY 3 Transition to higher value-added labor-intensive tradable services Productivity in some of Ghana’s tradable services sectors is extremely low. For example, in 2015, labor productivity in Wholesale and Retail Trade was even lower than in agriculture. Ghana will need to transition to higher-value added segments of these services through FDI, attracting and cultivating large firms and developing the tourism sector after the pandemic. It will also need to improve mobility, connectivity and urban planning to enable these transitions. Chapter 3 will also discuss ways to facilitate this transition through raising productivity in existing firms, and particularly MSMEs, from the adoption of improved capabilities and technologies. Detailed Recommendations POLICY PRIORITY 1 Expand lower-skilled jobs in global innovator services, particularly ICT and business services Boost services trade • Adjust trade in services agreements negotiated by Ghana to: lock-in the existing competitiveness level of openness for trade in services (standstill commitment). • Adjust trade in services agreements to increase the level of confidence of services providers by improving regulatory transparency and predictability of remaining barriers to trade (by publishing a services regulatory audit recently concluded for Ghana). • Adjust trade in services agreements to lock-in future domestic reforms reducing the level of protectionism for trade in services in the country (ratchet mechanism). Improve the services FDI • Reduce or eliminate prior screening and minimum capital and other requirements policy environment and restrictions to FDI projects. Reduce to the extent possible restrictions on acquisition and use of land and real estate by foreigners. There are no minimum capital requirements in countries like South Africa, Mauritius and Egypt. • Improve coordination across agencies on access to land for FDI projects. • Harmonize the system for access to land for FDI projects so as to eliminate competing guidelines issued by different institutions, making the process clearer for investors. • Conduct a review of the efficacy of the existing EPZ and consider whether an upgrade could be beneficial. Expand existing policies • Rationalize and better target incentives that support ICT sector development to attract FDI in services by reducing qualifying conditions such as minimum export requirements to avail into the lower-skilled free zone facilities for ICT-related organizations. segments of these sectors, particularly BPO • Consider replicating the Accra Digital Center in other technology parks. and other IT-enabled • Consider introducing targeted policies to facilitate and encourage ICT service services providers to set up and scale operations in Ghana. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 75 CHAPTER 2 Trade and the Changing Role of Services POLICY PRIORITY 2 Boost competitiveness in manufacturing through reforms on goods and services trade competitiveness Reduce barriers to GVC • Improve customs and trade facilitation measures by reviewing the participation implementation of the trade facilitation roadmap and considering the consolidation of all trade facilitation forums into a center of expertise as an enhanced National Trade Facilitation Committee created under the WTO Trade Facilitation Agreement. • Consider a review of intermediate input and raw materials tariffs, taking into account high level policy objectives and potential impacts on domestic suppliers. Improve investment • Implement the Investment Climate reform action plan defined under the IEE- climate and business ACP agenda, with the following key priority areas: environment a. Removing barriers to investment and market entry by developing a coherent national investment strategy across agencies b. Implementing cross-cutting business regulatory reforms through the formal establishment of an inter-ministerial committee (“DBRIMC”) and technical working groups for reforms c. Supporting the design and implementation of an investor grievance mechanism d. Improving standards and quality processes of Ghana Standards Authority Improve transport and • Improve the transit environment by removing VAT (zero-rating) on transit services, trade-related logistical improving customs connectivity with neighbors through the implementation of services the ECOWAS SIGMAT solution, and removing redundant checkpoints along the Tema-Paga trade corridor. • Improve ports operations by considering adopting a new transshipment regime, creation of the enabling environment for economically and financially feasible containerized transit regime for traders, and improving coordination with operators on the setting of fees. Focus on NTB reductions • Pursue implementation of modern risk management techniques and a and trade facilitation comprehensive effort to pursue a voluntary compliance relationship with measures and the trade community through increased outreach, informed compliance and implementation of the incentivized benefits for trusted traders including an Authorized economic AfCFTA operators scheme. More active implementation of trade facilitation measures from the WTO TFA, the AfCFTA’s trade facilitation annexes and current regional trade facilitation obligations. • The World Bank is already providing support in all stages of the AfCFTA process. Continue the existing agenda, with particular focus on services trade and negotiating Phase 2 including investment, competition and intellectual property rights. • Continue with the for “Boosting Intra-Africa Trade” project, prioritizing trade facilitation and services. 76 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 2 Trade and the Changing Role of Services POLICY PRIORITY 3 Transition to higher value-added labor-intensive tradable services Facilitate the expansion • Consider expanding targeted support to first-mover private sector investors to of large and high growth help to open new markets and mitigate higher start-up costs and risks. firms in labor-intensive tradable service sectors • Consider a review of measures to incentivize new firms to enter markets, with focus on improving procedures to start and operate new businesses by reducing minimal capital requirements and procedures and fees for registering a business. Encourage growth, • Align better the Government’s and donors’ eco-system support for small formalization and businesses and entrepreneurs. upgrading in existing labor-intensive tradable • Consider reviewing the regulatory and tax environment creating the incentive service firms for firms to stay small or informal. Increase mobility, • Improve urban transport connectivity and mobility. connectivity and urban planning • Tackle spatial inequality through improving rural infrastructure and public transport. • Continue the institutional and policy reform dialogue that have been undertaken under different transport sector projects to ensure that investments in the transport sector are sustained in the long run. • Increase supply of affordable urban housing. One priority area is through reforms to the laws and regulations relating to housing to strengthen the provisions for contract enforcement and allow for expeditious foreclosure proceedings. In addition, operationalization of the new land Act in relation to land acquisition and registration will be important to ensure sustainable land administration and management and effective land tenure and security. References Baldwin, Richard, and Rikard Forslid, “Globotics and Kruse, H. et al. (2021) A manufacturing renaissance? Development: When Manufacturing is Jobless and Industrialization trends in the developing world. WIDER Services are Tradable,” Working Paper 26731, National Working Paper 2021/28. Helsinki: UNU-WIDER. Bureau of Economic Research February 2020. Miroudot, S., Sauvage, J. and Shepherd, B., 2013. Measuring Baldwin, Richard, “The Globotics Upheaval: Globalisation, the cost of international trade in services.  World Trade Robotics and the Future of Work,” 2019. Rev., 12, p.719. Diao, X., Ellis, M., McMillan, M.S. and Rodrik, D., 2021. Africa’s Research ICT Africa. 2017. What is the State of Microwork Manufacturing Puzzle: Evidence from Tanzanian and in Africa?: A View from Seven Countries. Policy Paper Ethiopian Firms  (No. w28344). National Bureau of Series No. 5 After Access: Paper No. 2 (2017). https:// Economic Research. r e s e a r c h i c t a f r i c a . n e t /a f te r a c c e s s _ t h e - s t a te - o f- microwork-in-africa/. Ganz, Federico and Varela, Gonzalo. 2018. Services and Manufacturing Linkages in Ghana. van der Marel, Erik; Shepherd, Ben. 2020. Trade Facilitation in Services : Concepts and Empirical Importance. Policy Gollin, D., Jedwab, R. & Vollrath, D. Urbanization with and Research Working Paper;No. 9234.  World Bank, without industrialization. J Econ Growth 21, 35–70 (2016). Washington, DC. © World Bank. https://openknowledge. https://doi.org/10.1007/s10887-015-9121-4 worldbank.org/handle/10986/33743 License: CC BY 3.0 Insight2Impact. 2019. Africa’s digital platforms database, IGO. March 201 9. http://access .i2ifacilit y.org/Digital _ World Bank. Th e African Continental Free Trade Area: platforms/. Economic and Distributional Eff ects. Washington, DC: Jedwab, R ., 2013 . Urbanization without structural World Bank. doi:10.1596/978-1-4648-1559 -1. License: transformation: Evidence from consumption cities in Creative Commons Attribution CC BY 3.0 IGO Africa. George Washington University, Washington, DC. Processed. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 77 © Nataly Reinch/bigstockphoto.com 78 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 3 Technological Transformation and Ghana’s Micro-enterprises The adoption of new technologies has historically been a major driver of long- term economic progress. This Chapter focuses primarily on the adoption of digital technologies, which have recently led to drastic declines in transaction costs — search costs, replication costs, communications costs, tracking costs, and verification costs, creating new products, services, jobs and industries. For Ghana, digital technologies offer the potential for much-needed upgrading in existing firms and creating new job opportunities. Capitalizing on the opportunities from digital and complementary technologies firstly requires having the digital infrastructure in place. Ghana has succeeded in rapidly developing its mobile internet network, resulting in high coverage, but nearly two thirds of Ghanaians still do not use the internet, reflecting still limited affordability, low digital literacy and demand. Speeds of mobile internet are still low given limited adoption of 4G services, while fixed broadband speeds are a lot higher, but very costly, resulting in very low uptake. Secondly, it requires a workforce with sufficient foundational and digital skills. Digital skills are now among the most in-demand skills for white-collar workers in Ghana but there is a major digital skills gap, particularly for advanced digital skills. Learning outcomes in Ghana remain low, limiting the development of the foundational skills required to make the most of new technologies. While most of Ghana’s larger firms are now benefiting from the key technologies associated with Industry 3.0 — smartphones, computers and the internet — many smaller firms and those in manufacturing still do not use the internet or computers, while the use of these technologies among micro-sized firms is even more scarce, leaving plenty of opportunities for further technological upgrading. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 79 CHAPTER 3 Technological Transformation and Ghana’s Micro-enterprises Within firms 1 Digital Infrastructure 2 Digital Skills TECHNOLOGICAL 3 Productivity upgrading, Firm Technology Adoption adoption of new technologies & techniques This chapter explores the extent to which technological transformation can drive growth and job creation in Ghana and how to accelerate this transformation. It focuses on digital technologies specifically as a key enabler of complementary technologies as well. It starts by providing new analysis conducted by the World Bank and GSMA on the state of digital infrastructure in Ghana, with a focus on mobile internet and policies to accelerate mobile internet adoption. It then evaluates Ghana’s performance on foundational and digital skills, using data from LinkedIn, Facebook and the IFC’s Global Skills Survey. Finally, it provides new and detailed analysis on the use of digital and complementary technologies in Ghanaian firms using the new Firm Adoption of Technology Survey conducted in Ghana in April 2021 and analysis on the use of digital technologies among micro firms in Ghana using data from the Research on ICT in Africa (RIA) survey. Digital technologies and why they matter For better and for worse, digital technologies, from computers to smartphones to robots, continue to reshape economies, permeating virtually every sector and aspect of daily life. ‘Digital technology’ is a broad term that refers to all digital or computerized devices. Given the prevalence of digital or computerized products and solutions in today’s economy, digital technologies are a key driver of overall technological progress and so form the focus of this chapter. Both of the most recent ‘industrial revolutions’ have been driven by digital technologies: the third industrial revolution has been characterized as the takeoff of computers and the internet in the 70s and 80s and ‘Industry 4.0’ was coined as the use of 3D printing, Artificial Intelligence (AI), Internet of Things (IoT) and smart machines. Digital technologies of various forms have now changed the way we can learn, work, trade, socialize, produce goods, access public services and access information. This has been even more apparent during the COVID-19 pandemic. However, Ghana is currently capturing only a fraction of this growth and opportunities from digital technologies and also could be adversely affected by their downsides. Digital technologies offer potential to drive much needed productivity improvements and upgrading in Ghana’s firms. Chapter 2 documented how Ghana has suffered from a lack of productive employment opportunities for workers moving out of agriculture, limiting the contribution of structural change to growth. It also highlighted the stagnating and declining productivity in services and manufacturing, respectively. Digital technologies together with complementary analog technologies could help to raise the productivity of existing firms and generate more and better jobs. There is a wide body of evidence that the adoption of digital technologies by enterprises can reduce various types of costs (e.g. search, replication, transport and monitoring costs as well as networking and organization costs), leading to higher productivity, higher sales and/or better and more jobs (Goldfarb and Tucker, 2019). However, digital technologies are a double-edged sword and can also have negative effects on economies as well, ranging from labor displacement, to the concentration of markets and wealth, to altering the way in which we consume information. ‘Low-skill biased’ technologies that complement the work of lower-skilled workers, such as certain technologies in agriculture or agribusiness also have the potential to reduce poverty and improve the livelihoods of lower-skilled workers. 80 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 3 Technological Transformation and Ghana’s Micro-enterprises The future is not what it used to be: digital technologies can also lead to the creation of entirely new industries, jobs and business models. The internet has changed the way economies of scale are achieved, particularly with online service delivery. Digital platforms have changed the matching of buyers and sellers, altering the impact of asymmetric information. New industries have sprung up doing things we couldn’t even imagine five or ten years ago. In Ghana there are still relatively low levels of domestic demand for many mass consumption products, such as processed food and tourism, retail, and hospitality services, meaning that there are many opportunities for innovative new or lower-cost products and services driven by emerging technologies. For example, Ghana has seen substantial growth in demand for financial products over the past few years due to digital financial solutions. According to the World Bank’s Global Findex, the share of Ghanaian adults (over 15 years of age) with a formal financial account increased by 42 percent between 2014 and 2015 due to the prevalence of digital financial solutions. Without sufficient basic digital infrastructure and a workforce with digital skills, Ghana could miss out or get left behind. Spotlight on Ghana’s MSMEs Private sector employment in Ghana is dominated by MSMEs and MSMEs also provide livelihoods to a large proportion of the youth population. According to the 2015 Integrated Business Establishments Survey (GSS, 2017), 98 percent of the 640,000 business establishments in 2015 in Ghana were micro or small. About one-tenth of establishments were formal, with the remaining 90 percent being informal. MSMEs accounted for 83 percent of persons engaged in businesses and for 73 percent of turnover. Thus, promoting the formalization and growth of MSMEs is critical to creating more and high-quality jobs. MSMEs also provide the main job opportunities for Ghana’s youth population. The 2015 GLFS estimates that 40 percent of Ghanaian youth have no education, and only 3.8 percent have acquired a tertiary education qualification. An effective growth strategy will need to provide productive economic opportunities to these individuals and harness their potential in a way that has not been achieved to date. Building the backbone: Digital infrastructure Increasing access to the internet is one of the great challenges of our time and has taken even more importance since the outbreak of COVID-19. As a general-purpose technology, the internet can have transformative impacts. Studies have shown that expanding mobile broadband coverage and connectivity in Africa reduces poverty 25 and increases sustainable development 26 and economic growth. Ghana’s telecommunications sector has experienced impressive growth thanks to early liberalization and deregulation of the market since the late 1990s. Strong competition has resulted in near ubiquitous mobile coverage and a high mobile penetration rate. Ghana has made rapid progress in mobile internet infrastructure and coverage is high In Ghana 2G and 3G mobile internet coverage is high and has almost reached the market frontier. New preliminary research from the GSMA (2021) estimates that 94 percent of the population had 2G coverage, reaching the market frontier, which represents the area which is already covered by a mobile network and is hence is financially sustainable to extend internet coverage to. Coverage in urban areas is either currently or expected to be more than 99 percent. This means that the remaining populations that will not have coverage are almost entirely in rural areas, many of them sparsely populated. 3G coverage stood at 88 percent of the population in 2019, also close to the market frontier, with 99 percent coverage in urban areas and 74 percent in rural areas (see Figure 3.1). 25 See for example GSMA and World Bank (2020). 26 See for example Rotondi et al. (2020). Ghana Rising – Accelerating Economic Transformation and Creating Jobs 81 CHAPTER 3 Technological Transformation and Ghana’s Micro-enterprises FIGURE 3.1 In Ghana 2G and 3G mobile internet coverage is high, while 4G is more limited, particularly in rural areas Share of population with mobile internet coverage by type 2G coverage = 94% 3G coverage = 88% 4G coverage = 68% 0% - 10% 10% - 20% 20% - 30% 30% - 40% 40% - 50% 50% - 60% 60% - 70% 70% - 80% 80% - 90% 90% - 100% 0.0 0.2 100% 0.3 0.3 8.8 90% 0.6 80% 0.3 11.6 70% 99.9 99.4 60% 93.7 88.4 88.3 85.6 74.1 50% 67.7 15.2 40% 40.5 30% National Rural Urban National Rural Urban National Rural Urban 2G 3G 4G Current Market frontier Source. GSMA analysis of data sourced from mobile operators, GSMA Intelligence, Center for International Earth Science Information Network (CIESIN), household survey data and Earth Observations Group. Coverage is calculated based on site data provided either in 2019 Q4 or 2020 Q1 and so may have since increased. 4G coverage is lower at 68 percent of the population, with a stark rural-urban divide, but Ghana performs ahead of many of its peers. 4G coverage is below the market frontier, estimated at just under 80 percent, but Ghana has wider coverage than most comparators, except for Rwanda (see Figure 3.2). The low coverage mainly stems from rural areas, which have coverage of only 41 percent, particularly in the north of Ghana, while coverage in urban areas is high at 88 percent. 3G and 4G coverage are expected to approach 2G coverage, if the right regulations are in place. 4G coverage is expected to increase in the coming years due to the higher expected demand. Almost all the expected gains in mobile broadband coverage will come from upgrading existing 2G-only sites (given that additional coverage from new ‘greenfield’ sites27 is likely to be limited, as highlighted by the market frontier for 2G). 27 ‘Greenfield’ sites refer to the deployment of new mobile sites in their entirety, including passive (e.g. tower, mast) and active elements (e.g. base station or radio network controller). They provide coverage to populations that previously had no network coverage for any technology. ‘Brownfield’ sites refer to the upgrading of existing sites to provide 3G and/or 4G connectivity. Upgrades can either involve the installation of new hardware and equipment or, if single radio access networks are deployed, they can be upgraded simply by activating the 3G and/or 4G radio bearers. 82 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 3 Technological Transformation and Ghana’s Micro-enterprises BOX 3.1 Data for development in Ghana The recent World Bank World Development Report 2021 ‘Data for Better Lives’ highlights the growing role of data in the digital economy and lays out a framework for how data can support development. One pathway is the use of data by governments and international organizations to support evidence-based policy making and improved service delivery. Another pathway is the use of data by civil society to monitor the effects of government policies and by individuals to enable them to monitor and access public and commercial services. A final pathway is the use of data by private firms in the production process — use that fuels their own growth as well as wider economic growth. However, these same pathways create openings for data to be used in ways that harm people. For example, through the government pathway, data can be abused for political ends, such as politically motivated surveillance or discrimination along lines of ethnicity, religion, race, gender, disability. A well-designed data governance framework will be essential for countries to capture the full economic and social value of both public intent and private intent data and leverage synergies between them. Currently, Ghana performs well on many metrics relating to digital freedom and openness of information, offering positive signs for its ability to navigate data governance. This has been one of Ghana’s major advantages and has been cited as a reason for the recent choice of Twitter to relocate to Ghana. Going forward to reap the benefits of data to support development, Ghana will have to strive to maintain this strength and develop a data governance framework that ensures that infrastructure, laws, economic policies, and institutions work together to support the use of data in a way that aligns with each society’s values, while protecting individuals’ rights over use of their data. FIGURE 3.2 3G and 4G mobile internet coverage in Ghana is higher than most comparators Coverage by technology in seven countries, current and market frontier 100% 90% 80% 70% 60% 50% 40% 30% 3G 4G 3G 4G 3G 4G 3G 4G 3G 4G 3G 4G 3G 4G Rwanda Benin Tanzania Ghana Nigeria Sierra Leone DRC Coverage in 2020 Market frontier Source: GSMA analysis of data sourced from mobile operators, GSMA Intelligence, Center for International Earth Science Information Network (CIESIN), household survey data and Earth Observations Group. In Rwanda, a single wholesale network operator provides 4G services, so no market analysis was carried out to determine the additional coverage that might be provided by mobile operators. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 83 CHAPTER 3 Technological Transformation and Ghana’s Micro-enterprises Despite high coverage, two thirds of Ghanaians still don’t use the internet Despite high network coverage, most of the populations is still not connected to mobile internet. Only 37 percent of the population uses mobile internet, with the ‘usage gap’ at 51 percent, while the ‘coverage gap’ stands at only 12 percent (see Figure 3.3). Research from GSMA (2021) shows that mobile users that are aware of mobile internet but do not use it are most likely to cite digital skills and literacy, affordability (including for handsets and data plans) and relevance as the main barriers to adoption. Affordability will remain a key barrier to adoption without policy and regulatory reform. On the demand side, more affordable handsets and data plans have driven an increase in mobile internet adoption, which has enhanced the business case to deploy 3G and 4G. Ghana has met the affordability target set by the Broadband Commission to make 1GB of monthly data cost less than 2 percent of average monthly income per capita. In 2020 the cost was 1 percent of average monthly income per capita, lower than all comparators and the SSA average (see Figure 3.4). As a result, adoption levels in Ghana are higher than the average seen in SSA. FIGURE 3.3 Despite high network coverage, only 37 percent of Ghana’s population uses mobile internet Connectivity, usage and coverage gaps 100% 11.6 11.5 16.8 11.9 24.5 46.0 41.7 51.4 42.6 61.3 50% 62.6 80.3 36.3 47.4 37.0 32.9 27.2 20.6 17.7 10.9 7.8 0% Ghana Nigeria Benin Tanzania DRC Sierra Leone Rwanda Connected Usage Gap Coverage Gap Source: GSMA analysis of data sourced from mobile operators, GSMA Intelligence, Center for International Earth Science Information Network (CIESIN), household survey data and Earth Observations Group. Adoption is calculated based on the number of unique mobile (internet) users relative to total population. The market alone will not deliver universal connectivity. Analysis from GSMA (2021) suggests that based on the current trends of coverage and adoption, the goal of universal connectivity by 2030 will not be met by Ghana. Nationally, mobile internet adoption is expected to reach 53 percent by 2030, though with a significant urban-rural gap. More than 70 percent penetration by 2025 could be met in urban areas, but will be more challenging in rural areas. Policy reforms and public interventions will therefore be necessary to narrow that gap and bring connectivity to everyone. However, the impact of these will be enhanced — and in some cases contingent — on the innovations that are being led by private sector and supported by Governments and international organizations. The emergence of affordable smartphones and ‘smart feature phones’ has been particularly important in reducing device costs in many countries. Enabling policies can increase network coverage and adoption. Analysis from the GSMA (2021) suggests that policy reforms to enable active infrastructure sharing, reduce sector-specific taxes and apply tech-neutrality in spectrum bands could increase mobile broadband coverage by 10 percentage points by 2030 and bring around 2 million people online on their mobiles by 2030. Infrastructure sharing, which can involve the sharing of physical mast and energy supply, sharing of radio access networks or allowing mobile customers to use networks provided by other operators, can reduce costs and investment risks for operators seeking to expand coverage in new areas, as well as increasing service-based competition. Spectrum policies where governments and regulators release sufficient spectrum at affordable prices and allow licenses that are technology neutral can increase network coverage, especially in rural areas. Finally, aligning tax policy with best practice principles could also drive significant gains in both network coverage and adoption. 84 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 3 Technological Transformation and Ghana’s Micro-enterprises FIGURE 3.4 Mobile internet is increasingly affordable in Ghana Cost of cheapest monthly 1GB data plan as a percentage of monthly GDP per capita (2016 and 2020) 50% 46.9 40% 30% 20.4 20% 16.8 9.6 9.2 10% 6.8 4.2 3.3 3.1 3.1 3.1 4.2 2.2 1.5 2.6 1.0 0% Benin DRC Ghana Nigeria Rwanda Sierra Leone Tanzania SSA median 2016 2020 Source: GSMA analysis of Tarifica data. Ghana’s mobile telecoms market is heavily concentrated and heightened competition could decrease prices and expand connectivity. There are four main competitors in the mobile telecoms market in Ghana: MTN, Vodafone, Tigo and Airtel. There are numerous Internet service providers, estimated at 52 by 2020, but MTN controls approximately 70 percent of the mobile market share by number of subscriptions. 28 After MTN was found to possess “significant market power” by the regulator in early 2020, Ghana’s National Communications Authority (NCA) decided to implement a set of policies directed towards the reduction of MTN’s market share and encourage competition among all service providers. Among the specific actions are to offer lower connection rates for smaller competitors of the mobile data market, setting of floor and ceiling pricing on all telecommunication services (voice, data, texts, and mobile money), and enforce non-exclusionary pricing. Malasquez et al. (2021) have simulated the potential effects of increased competition in the Ghanaian mobile services market on poverty rates, estimating that decreasing the market share of MTN from 65 to 30 percent would lead to a price reduction of between 20.7 and 38.5 percent, inducing 5-16 percent of new users and reducing the poverty headcount rate by 0.52. Spectrum licensing prices, in particular, also appear to represent a major barrier to digital infrastructure growth in Ghana. The NCA has generally been quite efficient in developing a strategy and engaging in public consultations to auction spectrum in Ghana (see Box 3.3 for metrics on Ghana’s performance in telecoms regulation). However, the industry considers that prices being achieved through these auctions are prohibitive, and likely to strangle its growth. In 2015, the NCA sold 800 MHz of 4G spectrum for US$67.5 million to MTN, which was the only operator who could afford the high fees (DE4A Ghana, 2019). In addition to these policy reforms, investment will still be needed to make mobile broadband coverage and adoption universal by 2030. Even with additional reforms it is very likely that additional investment will be required to fully achieve universal internet access by 2030. Subsidies to cover the expected losses on unprofitable sites and cover the capex and opex costs that cannot be recovered by expected revenue could further fill the adoption gap. GSMA (2021) estimates that for Ghana, infrastructure and handset subsidies could further increase mobile broadband coverage by 13 percent and bring around another one million people online on their mobiles by 2030. 28 As of the first quarter of 2017, MTN Ghana controlled 47 percent of mobile voice services, 56 percent of mobile data services, and 60 percent of broadband wireless access through its 4G services. Ghana Rising – Accelerating Economic Transformation and Creating Jobs 85 CHAPTER 3 Technological Transformation and Ghana’s Micro-enterprises BOX 3.2 Telecoms regulation in Ghana The cross-cutting role of telecom services in supporting development has become increasingly apparent over the last decade, a role further highlighted by COVID-19, which has prompted even more urgent calls for universal affordable connectivity. To achieve this goal, co-ordinated national strategies are needed which ensure all of the required elements of an enabling telecom regulatory environment are present. The World Bank’s Regulatory Watch Initiative (RWI), made possible by the support of the Digital Development Partnership, provides analysis on some of the key regulatory features in national telecom environments, evaluating the extent to which a country has implemented an enabling telecom regulatory environment — one that encourages private capital mobilization by minimizing barriers to entry while supporting open and competitive markets for telecom infrastructure services. The RWI ascertains the regulatory situation in a country by measuring the best practice “attainment level”. This attainment level corresponds to the gap between the current regulatory situation and the best practice, calculated as a percentage. A 100 percent score is given when the identified best practice has been adopted. The RWI shows that Ghana generally performs well in terms of telecoms regulation, with a few exceptions on international access and spectrum management. Ghana is the top performer in ECOWAS in terms of Licensing and Authorizations and Fair Markets but has a low performance in terms of International Access and on certain metrics related to Spectrum Management and Regulatory Governance (see Figure 3.5). Most notably, Ghana’s worst performing metrics are for having international traffic taxes and limited transparency relating to spectrum management. Ghana has a minimum rate for incoming international traffic, limiting international access and its regulator doesn’t openly publish its National Frequency Plan online, hindering transparency. FIGURE 3.5 Relative to peers, Ghana has a strong overall performance in terms of telecoms regulation, with the exception of international access RWI indicators for Ghana in 2021 Cluster Indicator Market Openness 83% Licensing and Infrastructure Licensing 100% Authorizations Transparency of Award Procedures 67% SMP Regulation in Place 83% Favorability of OTT Regulation 100% Fair Markets SMP Enforcement 67% RIO Availability 50% Exclusivity Not Permitted 33% International Absence of International Traffic Taxes 17% Access Regulation of International Access 50% Procedures 100% Spectrum Tariffs 33% Management Transparency 17% Assignment 100% Independence 50% Regulatory Financing 33% Governance Universal Service Fund 83% Transparency 83% Source: RWI 86 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 3 Technological Transformation and Ghana’s Micro-enterprises Fixed broadband access is far more limited than mobile internet Compared to the rapid growth of the mobile market, broadband infrastructure development in Ghana is less advanced. In particular, the fixed broadband network (including copper, fiber, or cable) is far less widely used. In 2019, the number of fixed broadband users per 100 population was only 0.19 (ITU, 2020). This share of fixed broadband users has also barely changed over the past decade. The end user price of 5GB of fixed broadband was estimated as 12.8 percent of monthly GNI per capita by the ITU (2021). This places Ghana at 11th in Africa in terms of the affordability of broadband, compared to 6th in Africa in terms of the affordability of mobile data. Providing reliable and fast broadband connectivity for ministries, departments and agencies (MDAs), and metropolitan, municipal and district assemblies (MMDAs) across the country is still challenging. The eTransform Ghana project has been providing support to reduce the connectivity gap in government offices and public institutions. Broadband speeds are high, while mobile internet speeds are inadequate for remote working. In light of the high cost and very limited uptake of fixed broadband, mobile internet is the main source of internet in Ghana. According to the Speedtest Global Index, in 2021 Ghana ranks 129th in the world in terms of mobile internet speeds with an average speed of 13.26 and 74th in the world in terms of fixed broadband speed with a speed of 51.93. Ghana’s mobile internet speeds are lower than most comparators. It is clear that countries with the most robust Internet infrastructure also rank the highest in the Global Competitiveness Report: the faster the speed, the more consumers can transact business and access services online. BOX 3.3 How Ghana’s CARES program proposes to boost digitization As part of the CARES program, the Government of Ghana plans to: a. Expedite implementation of Government digital initiatives such as the National ID, digital address systems, land records digitization, Ghana. Gov etc. and consolidate them for synergistic improvements in economic productivity and service delivery. b. Introduce initiatives to digitize fiscal revenue collection, to support a cashless society, online education delivery, etc. c. Invest, consolidate, strengthen, and expand the national fiber network backbone in order to expand and improve internet connectivity. d. Promote increased digital literacy. e. Support Ghanaian technology entrepreneurs to build tech hubs and to export IT-enabled services such as business process outsourcing (BPO), etc. Source: Elaborated from Ghana Digital Acceleration Project Concept Note, using CARES program report, 2020 (Page 14 & 15). Ghana Rising – Accelerating Economic Transformation and Creating Jobs 87 CHAPTER 3 Technological Transformation and Ghana’s Micro-enterprises Investing in people: Foundational and digital skills “Emerging economies are in the middle of a technological shift that is bringing change to the nature of work. Whatever the future holds, investment in human capital is a no regrets policy that prepares people for the challenges ahead” – The Changing Nature of Work, World Bank 2019 World Development Report Foundational and digital skills are required for the workforce to adopt to, and innovate with, new technologies. Digital skills, as defined in Box 3.4, range from basic skills enabling individuals to make rudimentary use of digital devices like mobile phone and computers to advanced skills of specialist professionals in ICT- related occupations. The foundational skills of basic literacy and numeracy have been defined as the necessary stepping-stones to facilitate access to opportunities in education and in the labor market (World Bank, 2020). Digital and foundational skills are essential for individuals to adopt new technologies and reap the benefits of them, as well as avoiding their adverse impacts. Foundational and digital skills are essential for both driving technology adoption in existing firms and enabling workers to transition to more productive firms, sectors and entrepreneurial opportunities. The declining contribution of agriculture to Ghana’s economy and structural change towards the services and manufacturing sectors discussed in Chapter 2 suggests that there are many workers who need to be equipped with the necessary skills needed for job opportunities in services or manufacturing. The limited expansion of Ghana’s highest productivity sectors could also reflect that workers struggle to transition into new firms and industries due to a lack of foundational skills. One of the objectives of the government’s overall theme of ‘Sowing the Seeds for Growth and Jobs’ is to develop leadership skills, quality education, entrepreneurship, job skills, and creative skills. Skills acquired early in life cement the foundation for learning that occurs into adulthood; skills beget skills. People who do not have a strong grasp of foundational skills, including literacy, digital fluency, and numeracy, struggle to attain new or more advanced skills later in life. Like counterparts across other parts of Sub-Saharan Africa, many children in Ghana’s schools are not learning the basics. This lag in learning at the primary stage can cascade through a child’s years of schooling and later affect preparedness for the workforce. Basic digital skills are now among the most demanded skills in Ghana In Ghana, findings from the ‘global digital skills survey’ conducted by the IFC in 2018 suggest that around 60 percent of new online hires in Ghana need basic digital skills. The Ghana section of the global digital skills survey conducted by the IFC in 2018 surveyed around 80 chief executives of global and African education institutions, investors in education, policymakers, and Ghanaian human resource professionals about their demand for digital skills. Results suggested that 60 percent of employment opportunities for new digital hires, so skewed towards white-collar job opportunities, currently require basic digital skills, while 35 percent require intermediate skills and 25 percent require advanced skills. The most demanded digital skills are basic skills such as computer literacy, web research, using basic software, online transactions, social media, and email communication. Among the top 10 most demanded skills in general, two were digital skills: computer literacy and application of technology. These represented just over 20 percent of weighted mentions, a higher share than in SSA and all markets globally. 88 Ghana Rising – Accelerating Economic Transformation and Creating Jobs CHAPTER 3 Technological Transformation and Ghana’s Micro-enterprises BOX 3.4 Defining ‘Digital Skills’ The IFC (2019), building on the work of the United Nations Education, Scientific and Cultural Organization (UNESCO)’s report, Digital Skills for Life and Work, defines digital skills as follows: Basic Digital Skills are “entry-level functional skills required to make rudimentary use of digital devices and applications.” With basic digital skills, users are typically able to operate devices like computers and smartphones, access and store information from online resources, and set up online accounts and profiles. Intermediate Digital Skills enable individuals to use digital tools for more significant task-oriented purposes. Intermediate skills are “the skills that enable an individual to make substantive and beneficial use of online applications and services,” while the OECD defines them as a set of generic information and communication technology skills that can be utilized to complete tasks. They are often required for professional growth and are applicable to a range of job profile requirements. Advanced Digital Skills allow people to use technology in transformative ways. UNESCO defines these as “the group of skills that form the basis of specialist information and communication technology occupations and professions.” These occupations include, but are not limited to, computer programmers, artificial intelligence experts, and data scientists. Source: IFC (2019) FIGURE 3.6 Respondents reported than demand exceeds supply for all skills, but there is a major skills gap for advanced skills Percentage of survey respondents mentioning each skill 2.0% 1.7 Demand signi cantly exceeds supply 1.5% 1.4 1.1 1.1 1.0% 0.8 0.4 0.5% 0.0% Basic skills Intermediate skills Advanced skills Global Markets Ghana Source: IFC (2019). Note: Methodology for demand-supply index: A positive value on the index indicates that demand exceeds supply and a negative value indicates the opposite. The magnitude of the index reflects the extent of the demand-supply gap. For the gap index, the responses have been weighted as per the rank assigned to them with the following weights: D>>S = 2, D>S = 1, D=S = 0, D