Ghana, you were doing so well!

Ghana can’t afford to play the game of borrow-and-bailout…Africa needs a development leader

By Noah Smith: So, unfortunately, it’s time for another one of these. By which I mean both a “[Country], you were doing so well!” post, and a “Why [country] is having an economic crisis” post. I thought Ghana was going to be one of my development success stories, and then before I got around to writing about, its economy went into a crisis. The basic story here is that Ghana just defaulted on most of its external debt, and is experiencing very high inflation, and is going to have to be bailed out by the IMF. That’s going to result in financial and economic chaos in the country, a year or two of depressed economic activity, and hardship for the Ghanaian people.

I’m sure Ghana will eventually bounce back. And as I’ll explain, when we look at the particulars of how this crisis has played out, we see that the government is being smarter than many. But overall this is pretty disappointing. So first I’ll talk a bit about why it’s so disappointing, and then move on to the crisis itself.

Why Ghanaian development is important

Obviously Ghana’s development is most important to the ~32 million people who actually live in Ghana. But it’s also important in the broader context of African development, because it’s one of the leading candidates to become the “first mover” in the region.

Africa is really, really poor. Not just compared to rich countries like the U.S., but compared to other developing regions. In 1990, fewer than 1 out of every 7 people living on less than $2.15 a day (the poorest of the poor) lived in Sub-Saharan Africa; by 2019, it was 3 out of 5.

Here’s the income of Sub-Saharan Africa compared to South Asia, Latin America, and the Middle East and North Africa — the other regions we typically call “developing”. (Note: The World Bank defines these regions, so if you think it’s weird that the African continent is split up like this, go take it up with them!)

South Asia has started to climb out of poverty, while Latin America and the Middle East are stagnant at a middle income level. Sub-Saharan Africa is the only major region that’s both stagnant and very poor. That’s a human disaster, not just for the people living in the region today, but for the increasingly large percent of humanity that will live there in the century to come.

Currently, with the exception of a couple of tiny island countries in the Indian Ocean far from the rest of the continent, there is no African country that you could really call “industrialized” — not even South Africa. Resource extraction dominates the region’s export economies, and local services dominate its domestic economies. Some economists like Joe Stiglitz and some others are pessimistic about African industrialization, and claim the continent needs to find a new path to wealth; I personally tend to agree with the people who think industrialization is still the best route out of poverty.

But regardless of which growth model is the best, I believe that Africa needs a country or countries that pioneer that model. This is a pattern we’ve seen in Europe, East Asia, and Southeast Asia. In Europe, it was British industrialization that provided the model for continental Europe (though they made their own tweaks). In East Asia, Japan led the way. And in Southeast Asia, Singapore and Malaysia were the first movers. These “regional seed” countries didn’t just provide institutional and business models for their neighbors to follow — they provided financing, created supply chains, and gave birth to regional agglomeration and clustering effects. And I’m guessing that they also exerted an inspirational effect — poor neighbors probably saw the first movers get rich and thought “If they can do it, we can do it too.”

Sub-Saharan Africa, which is far from those other clusters, has no such “seed” country right now. Two main candidates, which a lot of people were keeping a close eye on, were Ethiopia and Ghana. Ethiopia, which Tyler Cowen and I were both bullish on, looked like it was starting to develop a robust manufacturing sector, based in large part on Chinese private investment in labor-intensive industries. Sadly, that country’s civil war largely put a stop to its promising growth, at least for now. Ghana, in contrast, is a resource exporter:

More here.