The objective of this master’s thesis is to diagnose the binding constraints of economic growth in
Ghana by using the Growth Diagnostics framework developed by Ricardo Hausmann, Dani Rodrik
and Andrés Velasco (2005). The key idea of the framework is to identify the binding constraints of
economic growth in a given economy and focus attention on remedying those. This framework
provides a new approach to reforms that is instrumental in figuring out policy priorities in the
developing countries where reform capital is scarce. In order to identify the most binding
constrains, Hausmann et al. propose a methodology that can be conceptualized as a decision tree. In
this master’s thesis, I apply the decision tree to Ghana with the objective to diagnose the binding
constraints of economic growth.
The thesis starts by reviewing the economic development and reforms in Ghana since
independence. As one can conclude, Ghana’s economic growth performance has been mixed.
Despite its auspicious start at the time of independence in 1957, Ghana was not able to attain solid
economic growth. On the contrary, the decades following independence witnessed turbulent
economic growth largely owing to destructive economic policies and political conflicts. The
economy started to stabilize only after 1984, following the adaptation the Economic Recovery
Program. Since then, growth has been relatively stable at around five percent, and in 2006, GDP per
capita reached its highest level ever since independence. Nevertheless, several key economic
indicators remain unsatisfactory, and the current economic growth rate is insufficient if Ghana
wishes to reach the middle-income status by 2015.
Given the broad range of development areas and the limited amount of reform capital, the Growth
Diagnostics framework becomes a helpful tool in figuring out policy priorities on how to accelerate
economic growth in Ghana. Based on the Growth Diagnostics exercise conducted in this thesis, one
can identify four major constraints of economic growth in Ghana. These include inefficient
financial intermediation, poor supply of electricity, sub-optimal tax regime, and low technology
adaptation. The findings suggest that Ghana can attain significant welfare gains by prioritizing
reform capital to these areas.
