ECON 215 Introduction to Economy of Ghana Session

ECON 215 Introduction to Economy of Ghana Session 8 – Economic Planning Part 1 Lecturer: Dr. Augustine Gockel Contact Information: fagoc 12@yahoo. com College of Education School of Continuing and Distance Education 2014/2015 – 2016/2017

Session Overview • Session Overview: One of the critical tools for national development is planning. In this session, students will be introduced to the basics in economic planning and the basis for long term economic planning. The session ends with a preliminary discussion of economic planning in Ghana. Goals/ Objectives: At the end of the session, the student will • Understand the basic concepts in economic planning • Be able to examine the rationale for economic planning • Be able to appreciate the timeline of economic planning in Ghana Slide 2

Session Outline The key topics to be covered in the session are as follows: • Topic One: Introduction to Economic Planning • Topic Two: Argument/Rationale for Economic Planning • Topic Three: Economic planning in Ghana Part 1: Before Independence (1957) Slide 3

Reading List • Refer to students to relevant text/chapter or reading materials you will make available on Sakai Slide 4

Topic One INTRODUCTION TO ECONOMIC PLANNING Slide 5

Definition of Economic Planning • According to Todaro and Smith (2003), economic planning also known as development planning is a deliberate governmental effort to coordinate economic decision making over a specified period of time. • It is undertaken with the aim of influenced(influencing), directing and in some cases controlling the level and growth of key macroeconomic variables such as income, consumption, employment, investment and inflation in order to achieve programmed development objectives. • The difference between an economic plan and economic planning is that an economic plan is a specific set of quantitative economic targets to be achieved in a given period of time while economic planning refers to the implementation process of an economic plan. Slide 6

Types of Economic Plans • There are two main types of economic plans: the partial/indicative economic plan and the comprehensive economic plan. • Partial/indicative plan covers only a part of the national economy such as agriculture, industry, public sector, etc. This type of plan relies entirely on the market mechanism for the allocation of resources and commodities. • Under such plans, economic projections are made by the government in consultation with the private sector in an attempt to influence its investment decisions (but on a pure voluntary basis) Slide 7

Types of Economic Planning Cont’d • Comprehensive plan is one that sets its targets to cover all major sectors of the national economy. In the case of comprehensive planning, distinction can be made between project plan and multi-sectoral plan. These types of comprehensive plans are widely used by governments of Less Developing Countries (LDCs). • Project plan is the most disaggregated and detailed of all the kinds of plans. It involves drawing up of a project, undertaking a cost-benefit analysis and programming its execution so that all the requisite inputs are available at the right time. • Multi-sectoral plan involves the identification of the various sectors of the economy and analyzing the interdependencies among them in order to provide the linkage. The primary objective of this plan is the optimal allocation of investments in a consistent and efficient manner among the various sectors of the economy so as to produce the desired sectoral output Slide 8

Planning Process • Every plan goes through fundamental process and these are: • Identifying the main objective of a plan In Ghana, government identifies its social and economic objectives, for example to reduce unemployment, inflation and fiscal deficits. • Setting targets to realize the set objectives The government of Ghana might decide to reduce inflation from 40% to 8%. • Laying down the framework within which to implement, coordinate and monitor the development plan. Slide 9

Dimensions of planning • Space dimension of planning is concerned with the plan’s coverage. It could be the distribution of the plan over the various regions, districts, or constituencies of a country. • Time dimension of planning is concerned with the time frame within which the plan spans. There are three time horizons within which economic planning spans: • Annual plan: An economic plan with a life span of one year. This essentially could be equated with the annual budget. • Medium-term plan: Normally last for five years • Long-term plan: They are also known as perspective plans and they could range from 10 -15 years. Slide 10

Topic Two ARGUMENTS/RATIONALE FOR ECONOMIC PLANNING Slide 11

The Market Failure Argument • One of the reasons why a country should embark on economic planning is the existence of market failure. • Most countries rely on market mechanisms rather than government controls , to allocate goods and services. • Despite the advantages enjoyed from the efficient operation of the price mechanism (freedom of choice/preference, flexible and easily adapt to demand conditions, creates incentives for growth, etc), there are instances where the market mechanism, left to itself, fails to operate efficiently. • When this happens the country is said to have experienced market failure. Market failure therefore refers to the inabilty of the price mechanism to optimally or efficiently allocate scarce resources. Slide 12

The Market Failure Argument Cont’d • As a result of market failure, it is believed that a country should have an economic plan to direct the its allocation of resources. Market failure prevails under the following conditions: • The existence of public goods A good or service is said to be a public good when it is non-rival in consumption and non-excludable. This implies for any given level of output, consumption by one individual need not diminish the quantity consumed by someone else (non-rivalry in consumption) and it is prohibitively expensive to exclude anyone from enjoying the benefits of the good (non-excludability). Obviously, no profit-maximizing firm will supply at all or under-allocate such public goods. Thus governmental intervention is crucial for the optimal allocation of public goods and this is achieved through economic planning Slide 13

The Market Failure Argument Cont’d • Monopoly power (Increasing Returns to Scale) Another factor that may cause market failure is the existence of monopoly power. In theory, market fails to work efficiently, if a single firm sells an essential commodity for which there are no close substitutes. When a firm wields so much market power for a commodity it can under-supply the essential commodity in order to over-price the commodity . Thus the lack of competitiveness undermine(undermines) the efficiency of the price system in allocating resources. The government intervenes to correct such anomalies through the planning mechanism. • Externalities Another factor that may cause market failure is the presence of externalities. An externality exists when the production or consumption activity of an economic agent affects the productivity or well-being of another economic agent and no compensation is paid or received for the externally generated costs or benefits. Slide 14

The Market Failure Argument Cont’d • The effects are external to the price system and therefore not taking(taken) into account in the pricing of the good in question. Obviously firms tend to overallocate when there are external diseconomies/detrimental externalities and under-allocate when there are external economies/beneficial externalities. Thus, in the presence of externalities, the competitive price system fails to allocate resources efficiently. For this reason, there is a need for government to put place mechanisms that will ensure the efficient allocation of resources through planning. • Risk and Uncertainty The market left on its own to allocate resources mat(might) fail to supply the optimal quantity of a commodity if there is a high level of risk or uncertainty about the production, pricing, and the marketing of such commodity. Most firms are risk averse and will not partake in the production of such goods. Slide 15

The Market Failure Argument Cont’d For example, the construction of railways, dams, and roads involve huge sunk cost such that the profit-maximizing firm will not venture into the provision of such services. For this reason, the proponents of economic planning believe that government should intervene by providing goods that the private sector finds too risky and cover with a lot of uncertainties. • Information Asymmetry Access to perfect information is a prerequisite for the smooth running of the price mechanism. However, this is not the case in the real world especially in Less Developing(Developed) Countries (LDCs) where information on output and pricing are poorly disseminated. Information asymmetry gives wrong signals to and thereby the failure of the market in the optimal allocation of resources. Governmental intervention is therefore needed in correcting the distortions created by the price system in order to maximize social welfare. Slide 16

Other Arguments for Economic Planning • Resource Mobilization and Allocation Argument It is believed that there is limited financial and skilled manpower in Less Developed Countries (LDCs). However, these limited financial and skilled manpower resources in LDCs are channeled into unproductive ventures. Manpower should be used in the most optimal way especially when there are spillover effects on the economy. Thus there is the need for development planning to coordinate investment projects so as to channel these scarce factors into productive uses. • The Attitudinal or Psychological Argument It is often assumed that a detailed statement of national economic and social objectives can have an important attitudinal or psychological impact on diverse and often polarised populations in LDCs. Such detailed plans any(may) succeed in whipping up public support and enthusiasm in a national campaign to improve the welfare the citizens. The Foreign Aid Argument It is argued that the formulation of detailed and feasible development plan with specific objectives has often been a prerequisite for the inflow of bilateral and multilateral aid. Such a detailed plan signals donors that the receipts may be used in the most efficient manner Slide 17

Topic Three ECONOMIC PLANNING IN GHANA PART 1: BEFORE INDEPENDENCE (1957) Slide 18

Guggisberg’s 10 -Year Development Plan (1920 -1930) • • • The first development plan to have been embarked upon in Ghana (the then Gold Coast) was a 10 -year development plan launched under the colonial governorship of Sir Gordon Guggisberg in 1919. Even though the plan was scheduled to run from 1920 -1930 it only lasted up till 1927. Between 1920 and 1927, only 50% of the planned expenditure was used in the implementation. The Guggisberg 10 -year development plan covered areas such as physical infrastructure and social services. The plan essential(essentially) provided a platform for accelerated economic growth and development in the Gold Coast. Under the physical infrastructure, the following were achieved (i) By 1927, about 333 km of new railway lines had been constructed to link the mining areas (i. e Western Railways lines) (ii) construction of several roads aimed at opening the economy to strategic areas (iii) development of water supply system and (iv) the construction of the Takoradi Harbour in 1928. With regards to social services, although education and health were not given prior consideration in the plan (probably they were grouped under town improvements), they benefitted tremendously from the plan such as the (i) establishment of Achimota School formerly the Prince of Wales College in 1927 to train administrators for colonial purpose and the (ii) establishment of Korle-Bu Teaching Hospital, Tarkwa Hospital and 17 other hospitals. Slide 19

The 10 -Year Plan of Development and Welfare (1946 -1956) • • • The next major attempt at planning after Guggisberg Plan was the drafting of another 10 -Year Development Plan (1946 -1956) which was launched in 1951. The Plan stemmed from a general colonial plan because other colonies under the British Crown also run the plan contemporaneously. The plan primarily sought to enhance infrastructure (development) and social services (welfare augmentation). The 1946 plan was an excerption to the generally ambitious plans of Ghana. For instance, the estimated for capital expenditure of 11. 4 million was far less than the 24. 8 million of the Guggisberg Plan. During the period, the self-government campaign initiated by Nkrumah’s C. P. P which had gained ground by the 1950 s led to the election of the first African majority of government in 1951. This is shortly after the introduction of the 10 -Year Plan of Development and Welfare. Consequently, Nkrumah’s C. P. P government decided to transform the ongoing 10 -Year Plan of Development and Welfare into a 10 Yea Plan for Economic and Social Development of the Gold Coast (19511961) which was to be phased into two 5 -year plans instead of 10 -year, although considerable additions were made to the original plan (i. e 19461956), the basic structure of the plan remained unchanged. Slide 20

Nkrumah’s 10 -Year Development Plan (1951 -1961) • This was a more significant plan because it was under the leadership of an African government. The primary objective of the plan was the development of economic and productive services. The plan was supposed to use 74 million as the implementation fund • Although the primary objective of the plan was the development of economic and productive services, there was allocation problem because 68. 4% of the amount was devoted to the building of infrastructure (roads, railway, etc), and only 16. 9% was allocated to economic and productive services which was the main objective. • In addition, 14. 8% went to common services and administration thereby further emphasizing allocation and prioritizing problem. In terms of implementation, it operated from 1951 to 1956 because it coincided with the independence of Ghana. Then from 1958 to 1959, there was the consolidated plan aimed at putting things together in preparation for the second 5 -Year plan, which existed between 1959 and 1964. Slide 21

Nkrumah’s 7 -Year Development Plan (1963/1964 -1969/1970) • This plan could be described as the most comprehensive plan to be formulated in Ghana because it virtually encompassed all the major sectors of the economy. The fundamental objective of the plan was to modernize agriculture and develop industry on the basis of a socialist society. The plan was to operate under the politicoeconomic philosophy of work and happiness. • Under the plan there were major achievements: (i) Extensive infrastructure development: Tema Township, Tema Motorway, Tema Harbour, Akosombo Dam (ii) Massive development of education such as the establishment of KNUST and 26 secondary schools under the Trust Schools Scheme (for example, Ghana National College, Sunyani Secondary School, Dormaa Secondary School, Mfantseman, Asankragua, St. Johns, etc. ; (iii) Establishment of several factories Slide 22

Nkrumah’s 7 -Year Development Plan (1963/1964 -1969/1970) Cont’d In spite of the significant achievements, the plan had some failures. Reasons for the failures include: • The economy depended heavily on the vagaries of the weather resulting in low agricultural output and this problem still persists in the development process • Instability in the world market; the economy was facing unfavourable terms of trade for its major export earner – cocoa. The plan’s expectation of 400 per ton for cocoa never materialised since the actual prices in 1964 and 1965 were 356 and 276 respectively. • There was controversy between the technocrats (economists) and the politicians on certain policy areas. For instance, while Nkrumah and his team of politicians were emphasizing industrial development, the technocrats were considering the modernisation of agriculture as the bases for industrialization. • There were situation in which, instead of raising the capacity levels of existing enterprises, new enterprises, which were not included in the plan, were established • There were no requisite Cost Benefit Analysis (i. e. feasibility studies) in undertaking projects and nepotism in the award of contracts. • There was lack of fiscal coordination between the plan and the annual budget Slide 23

Acheampong’s 5 -Year Development Plan (1975/76 -1979/80) • The Plan was formulated to tackle three problems: (i) the high level of unemployment in the system; (ii) the persistent balance of payments (BOP) deficits and (iii) the inflationary pressures in the economy. • The primary aim of the plan was to build an independent national economy which would be firmly structured on the potentials of the economy in line with Acheampong’s philosophy of self-reliance. There were six specific goals: • The acceleration of the growth of real GDP. An average growth rate of 5. 5% per annum of real GDP was envisaged • To ensure the full employment of the nation’s resources – human and natural • To ensure equitable distribution of the internal integrity of the cedi through the control of rapid inflation. • Promotion of national economic independence in terms of the creation of effective links between sectors of the economy so that development becomes mutually re-enforced Slide 24

Acheampong’s 5 -Year Development Plan (1975/76 -1979/80) Cont’d The targets set in the plan were not fully realised. Several factors accounted for the failure of the plan, among which were: • Delay in the launching of the plan; it was not until April 1977 that the plan came into effect, thus the growth targets announced as early as 1975 could have not(not have) been achieved. • Constant fluctuations in price of primary products • The inability of the industrial sector to expand enough to absorb the products from agricultural sector • The incomes policy of the government was also assumed to be partly responsible in that the minimum wage was too high, and this affected employment of labour leading to massive excesses of labour • The price elasticity of cocoa was low • High rates of inflation; in some cases reaching 3 -digits as in 1977 where inflation reached 117. 6%. Such high rates of inflation raised the cost of implementing the projects. Slide 25

References Slide 26