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Structural Transformation and Labor Market Performance in Ghana

I am happy to report that a research paper I have been working on at the World Bank has just been published. The study takes stock of Ghana's economic transformation by decomposing growth drivers and reviewing labor market changes over time. We use three rounds of nationally-representative household surveys as well as macro-level data to benchmark Ghana with structural and aspirational peers.

Ghana's post-independence (1957) industrialization strategy focused on large-scale, state-managed manufacturing industries known as import substitution industrialization (ISI). ISI, accompanied by protectionist measures, aimed to develop domestic production and reduce reliance on imports. During the 1960s, Ghana experienced initial success with ISI, witnessing significant growth in the manufacturing sector, which expanded from 2% to 9% of total output by 1969. 

However, the protective measures led to excess capacity, and policy reversals in the 1970s caused balance of payments crises. Import and interest rate liberalization in 1971 resulted in increased imports and rising debt levels. Production and capacity utilization in import-substituting industries declined from the mid-1970s to 1983. 

Stabilization efforts after 1983, including trade liberalization, exchange rate adjustments, and financial reforms, exposed domestic industries to international competition, leading to increased production costs and cuts. The government implemented tax reforms to boost revenue, and by 1983, Ghana shifted from an ISI strategy to export-led policies supported by the International Monetary Fund (IMF) and World Bank.

Between 1989 and 2010, Ghana's manufacturing sector's contribution to economic growth declined, while the utilities, construction, and mining sectors grew. The services sector consistently remained the largest contributor to overall economic growth during this period. The shift in policy from ISI to export-led strategies had positive effects on economic growth and sectoral dynamics.

A decomposition of growth drivers suggests that labor has been moving from primary activities in rural areas to services activities with low productivity growth in urban areas. As such, the nature of structural change in Ghana has not been growth-enhancing. This finding is consistent with other research on Ghana and Africa, implying a need for an industrial policy that can spur productivity growth in services and so called 'industries without smokestacks.' Further, the traditional marker of industrialization, manufacturing, has fallen as a share of value-added, employment, and exports. Again, Ghana is not unique in seeing what has been referred to 'premature deindustrialization.' 

On the labor market side, Ghana has a high employment rate, low unemployment rate, high shares of self-employment, and low shares of wage employment for its level of development. Subgroup differences show that while women, youth, and rural workers are less likely to be engaged in wage employment, their conditional returns to schooling are higher than for counterpart subgroups. The study also finds an inelastic relationship between GDP growth and employment including wage employment. Building on the World Bank’s Ghana Country Private Sector Diagnostic, the study offers an analysis of feasible sectors to promote based on their employment and productivity-enhancing potential, among other factors. As such, the recommendations that follow strengthen ongoing efforts by the Government to industrialize the economy.

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