Successive governments in Ghana have made promises and some attempts to create an environment that promotes growth and an equal opportunity for all to make wealth. Yet enormous gaps exist between reality and the goal. Governance and public service delivery, in the judiciary, central government, local government, state owned enterprises, defense and security, are constantly riddled with corruption, bureaucracy, and delays which affect the freedom and speed with which citizens and businesses make economic decisions.

Studies, as mentioned below, have shown that countries that uphold economic freedoms are more likely to be able to optimally distribute scarce resources and provide equal opportunity for all. These countries can then achieve the goals of facilitating the creation of billion-dollar industries, creating sustainable jobs, reducing poverty levels and growing the economy beyond aid, to name a few.

What is Economic Freedom?

Economic freedom is the ability of individuals and families to make their own economic decisions. It allows producers and sellers to compete freely against each other on equal terms, unhobbled by bureaucracy and regulation, which all too often are designed to give the advantage to the powerful and restrict the freedom of others. It is easy to see how economic freedom promotes prosperity and well-being; any transaction freely agreed to must benefit all parties as consumers who are free to choose will only be attracted by superior quality and price^[1].

In an economically free country, producers and sellers, including new ones, are welcome to the market place and must constantly improve the price and quality to meet customers’ demands. Billions of mutually beneficial transactions occur every day, powering the dynamic that spurs increased productivity and job creation throughout the economy^[2].

Is Economic Freedom Necessary for Development?

Intuitively, one would expect that economic freedom would have a positive impact on economic growth because economic freedom creates a climate that allows individuals and business to allocate their resources to the highest end use. However, the question is ultimately an empirical one. More than 600 fact-based studies in top academic journals have shown that economic freedom promotes growth, prosperity, and other positive outcomes^[3]. One of the first studies, Easton and Walker in 1997 found that changes in economic freedom have a significant impact on the steady-state level of income even after the level of technology, the level of education of the work force, and the level of investment are taken into account^[4].

De Haan and Sturm (2000) show empirically that positive (negative) changes in economic freedom lead to positive (negative) changes in economic growth rates^[5]. Using the economic freedom index published in Gwartney, Lawson, and Block (1996)^[6] and per-capita GDP data for 80 countries, their results indicate that, after educational level, investment, and population growth have been taken into account, changes in economic freedom have a significant impact on economic growth. Figure 1 below indicates the level of correlation between per capita income in Ghana and the level of economic freedom in Ghana between 1975 and 2014.

Gwartney and Lawson (2004) also examined the impact of economic freedom on economic growth but with a specific focus on investment and productivity. The study found that economic freedom strongly promotes investment. Nations with a score below 5 for economic freedom (on a scale from zero to 10, where a higher value indicates a higher level of economic freedom) attracted US$845 in investment per worker over the period from 1980 to 2000 and only US$68 per worker in foreign direct investment. Nations with an economic freedom score above 7 attracted US$10,871 in investment per worker, including US$3,117 of foreign direct investment. Moreover, investment is more productive in economically free nations. The study found that investment in economically free nations (with a score above 7) was 70% more productive than investment in nations with poor levels of economic freedom (score below 5)^[7]. Other studies have also found economic freedom to reduce poverty levels and improve general well-being^[8]. On the other hand, a handful have studies (Bergh and Nilsson 2010[9]; Apergis et al. 2014[10]) have found mixed positive and negative associations when using regression analysis to test the relationship of economic freedom and income inequality.

Given that Ghana’s rank of 103 on the Economic Freedom of the World Index in 2015 is in the bottom 50% of global rankings, improvements need to be made to ensure that Ghanaians have a fair shake and opportunity for all. By expanding economic freedom, Ghanaians could have the ability to develop economic policies that will lead to prosperity and safeguard hard won freedom, democracy, and peace.

What is Economic Freedom of the World (EFW) Index?

The Economic Freedom of the World (EFW) Index measures the extent to which policies and institutions of a country promotes economic freedom. The foundations of economic freedom are personal choice, voluntary exchange, freedom to enter markets and compete and the security of a person and property owned by the person^[11].

EFW Index uses 42 variables in 5 key areas to measure economic freedom. The five key areas are; the size of the government, legal systems and property rights, sound money, freedom to trade internationally and regulations. Each variable for each country receives a rating on a scale of 0-10. These ratings are then averaged and used to obtain a component rating for the 24 components under the 5 key areas. The component ratings are then averaged to give an area rating with the five area ratings then in turn being averaged to give a country rating[12]. The index thus provides both a description of an economy and, by examining the individual variables, a prescription for policy improvement. Nobel Laureate Douglass North has called the economic freedom index the best available description of “efficient markets^[13]”.

Economic Freedom of the World (EFW) report is published by the Fraser Institute. The 2017 EFW report ranks economic freedom of 159 countries based on data from 2015^[14].

Ghana’s Rank on the EFW Index

Historically, Ghana’s economic freedom, as reported by the Economic Freedom of the World has generally been rising. In recent years however, Ghana’s economic freedom has declined^[15]. Figure 1 depicts Ghana’s improvement in economic freedom between 1975 and 2015. As shown by the graph, economic freedom has been on the decline since 2009.

In the 2017 EFW annual report, Ghana ranked 103 out of 159 countries in the world. Ghana was the 16th most economically free country in Africa following      countries like Mauritius (1st) Rwanda (2nd), Seychelles (3rd), Botswana (4th) and Liberia (9th). Ghana however beat West African neighbours like Nigeria, Cote d’Ivoire and Togo. Figure 2 shows Ghana’s overall economic freedom and Ghana’s rank in the 5 key areas of economic freedom, namely size of government, legal systems and property rights, sound money, freedom to trade internationally and regulation^[16].

Size of government

As government spending, taxation, and the size of government-controlled enterprises increase, government decision-making is substituted for individual choice and economic freedom is reduced.  Ghana ranked 55th out of 159 countries on the size of government indicator. This indicates a relatively efficient size of government. However, under this indicator, Ghana scored a rank below 7 on the components Government consumption, Government enterprises and investment, and the Top marginal income and payroll tax rate. This could indicate over stretched government spending, as well as an excess of government enterprises and investment.^[17]. In April 2018, Ghanaians expressed their disappointment with the current size of presidential staffers. The general consensus was that, the office of the president was overstaffed especially in light of the 110 ministers of state^[18]. Given Ghana’s ratings under this indicator, for an improvement to occur, critical questions need to be considered include: how efficient is government spending? Is government spending in Ghana politicised? Is tax collection in Ghana fair and broad-based? Are state-owned enterprises providing Ghanaians value for money?

Legal Structure and Security of Property Rights

Protection of persons and their rightfully acquired property is a central element of both economic freedom and civil society. Indeed, it is one of the most important functions of government. Ghana ranked 69 out of 159 countries in the area of rule of law. Though Ghana is ahead of both the West African and other African averages, it is well behind other African countries like Botswana and very far behind the global top 10^[19]. An efficient market economy is not possible without a sound and predictable legal structure that protects property rights and contracting for all, equally and fairly[20]. Despite the relatively good score, improvement here may be Ghana’s greatest challenge and opportunity. No nation, except perhaps some “petro states”, has achieved rich nation status without a strong rule of law^[21]. The legal structure and security of property rights indicator considers issues such as protection of property rights, military interference in rule of law and politics, integrity of the legal system, legal enforcement of contracts, and the reliability of the police^[22]. These issues critically affect the freedom with which businesses can use their resources. For example, on average, it takes 710 days for a contract to be enforced in court and costs 23% of the claim value. The long, costly process of enforcing a contract could be detrimental to the profits of businesses[23].

Access to Sound Money

The sound money indicator focuses mostly on inflation and the freedom to own foreign currency bank accounts. Inflation erodes the value of rightfully earned wages and savings. Sound money is thus essential to protect property rights. When inflation is not only high but also volatile, it becomes difficult for individuals to plan for the future and thus effectively utilise economic freedom. Sound Money was one of the worse performing indicators in the 2015 economic freedom report; Ghana ranked 137 out of 159 countries^[24]. Inflation has though reduced quite significantly in recent times. Inflation in Ghana has fallen from 15.4% in December 2016 to 9.6% in April, 2018^[25]. Efforts must be increased to consolidate gains made.

Freedom to Trade Internationally

Ghana’s low rank (115^th) on freedom to trade is worrying, especially because a ‘Ghana beyond aid’ is only possible with an efficient trading system^[26]. Ghana needs the world as its marketplace and not just for its resources but as a market place as Ghana develops advanced products. The freedom to trade indicator considers topics such as tariff and other non-tariff trade barriers, and controls on the movement of capital and people. Critical questions, relating to the obstacles in Ghana in international trade, the reasons compliance costs for trade are so high, how both official and unofficial barriers to trade can be removed, and how Ghana can be opened up to international investment, amongst others, need to be answered.

Regulation of Credit, Labour, and Business

This area of economic freedom measures the limits on economic freedom caused by excessive regulation in the area of credit, in the labour markets and in business. Ghana scored poorly in this indicator with a rank of 90 out of 159 countries. Though there have been small improvements in recent years, administrative requirements, bureaucracy costs, and the cost of tax compliance all slow business formation and weaken existing businesses^[27]. Are the red tapes and delays intentionally created by the bureaucracy to create the opportunity for bribes? Reducing red tape will diminish extra payments given that heavy administrative requirement and bureaucracy cost feed the big problem of corruption. Ghana scored particularly low on the component for Extra payements/bribes/favouritism. Further highlighting the issue, Ghana dropped 11 places from the 2016 Corruption Perception Index (CPI) to place 81 out of 180 countries in the 2017 CPI^[28].

Conclusion

Though Ghana compares favourably in economic freedom with countries in the West African sub-region, a rank of 103 out of 159 countries is still poor, especially in light of the agenda for Ghana to Go Beyond Aid.

Reference 

^[1] Gwartney J., Lawson R., and Hall J. (2017), “Economic Freedom of World Annual Report”, Vancouver: Fraser Institute, Available at: https://www.fraserinstitute.org/sites/default/files/economic-freedom-of-the-world-2017.pdf, Accessed on May 23^rd, 2018.

^[2] Gwartney J., Lawson R., and Hall J. (2017), “Economic Freedom of World Annual Report”, Fraser Institute

^[3] Fraser Institute (2018), “Improving the Economic Freedom of the People of Ghana”, Workshop Briefing Material.

^[4]Easton, Steven T., and Michael A. Walker (1997). “Income, Growth, and Economic Freedom.” American Economic Review 87, 2 (May): 328–32.

^[5] De Haan, J., and J-E. Sturm (2000). On the Relationship between Economic Freedom and Economic Growth. European Journal of Political Economy 16: 215–41

^[6] Gwartney, James, Robert Lawson and Walter Block (1996). Economic Freedom of the World: Annual Report 1996. Vancouver: The Fraser Institute

^[7] Gwartney, James, Robert Lawson and Joshua Hall, (2014). Economic Freedom of the World: Annual Report 2014. Vancouver: The Fraser Institute.

^[8] Norton, Seth W., and James. D. Gwartney (2008). Economic Freedom and World Poverty. In James Gwartney and Robert Lawson, Economic Freedom of the World: 2008 Annual Report (Fraser Institute: 2008): 23–40

[9] Bergh, A., & Nilsson, T. (2010). Do liberalization and globalization increase income inequality? European Journal of Political Economy, 26(4), 488-505. doi: 10.1016/j.ejpoleco.2010.03.002

[10] Apergis, N., & Cooray, A. (2015). Economic Freedom and Income Inequality: Evidence from a Panel of Global Economies- A Linear and a Non-Linear Long-Run Analysis. The Manchester School, 85(1), 88-105. doi: 10.1111/manc.12137

^[11] Gwartney J., Lawson R., and Hall J. (2017), “Economic Freedom of World Annual Report”, Fraser Institute

[12] Gwartney J., Lawson R., and Hall J. (2017). Economic Freedom of the World: 2017 Annual Report. Fraser Institute. 3-4; 263-275

^[13] Fraser Institute (2018), “Improving the Economic Freedom of the People of Ghana”, Workshop Briefing Material.

^[14] Gwartney J., Lawson R., and Hall J. (2017), “Economic Freedom of World Annual Report”, Fraser Institute

^[15] Ibid

^[16] Ibid

^[17] Ibid

^[18] Ghanaweb (25^th April, 2018), “998 Presidential Staffers: CDD Disappointed in Akuffo Addo”, Available at: https://www.ghanaweb.com/GhanaHomePage/NewsArchive/998-Presidential-staffers-CDD-disappointed-in-Akufo Addo-646171, Accessed on 21^st May, 2018.

^[19] Fraser Institute (2018), “Improving the Economic Freedom of the People of Ghana”, Workshop Briefing Material.

[20] Bufford, S. (2006), “International Rule of Law and the Market Economy – An outline, Penn State Law. Available at: https://elibrary.law.psu.edu/cgi/viewcontent.cgi?referer=https://www.google.com.gh/&httpsredir=1&article=1161&context=fac_works

^[21] Ibid

^[22] Gwartney J., Lawson R., and Hall J. (2017), “Economic Freedom of World Annual Report”, Fraser Institute

[23] Doing Business in Ghana – World Bank Group. (2017). Available at: http://www.doingbusiness.org/data/exploreeconomies/ghana#enforcing-contracts

^[24] Ibid

^[25] BoG (2018), Summary of Economic and Financial Data – May 2018. Available at: http://bog.gov.gh/monetary-policy/press-releases/3572-summary-of-economic-and-financial-data-may-2018, Accessed on May 23^rd, 2018.

^[26] Gwartney J., Lawson R., and Hall J. (2017), “Economic Freedom of World Annual Report”, Fraser Institute

^[27] Gwartney J., Lawson R., and Hall J. (2017), “Economic Freedom of World Annual Report”, Fraser Institute

^[28] CPI (2017), Corruption Perception Index, Available at: https://www.transparency.org/research/cpi/overview, Accessed on 22^ndMay, 2018.