The binding constraints of economic growth in Ghana

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School of Economics | Master's thesis
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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.
Ghana, binding constraint, economic growth, economic reforms, growth diagnostics
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