Diagnosing the "Dumsor" (Power/Energy) Crisis in Ghana: Who is to Blame - Urban Planning or Engineering? (PART I)

Power outages are not alien to the African continent. In a visit to Lagos in Nigeria, Africa’s most populous country I couldn’t hold back my shock in view of the frequent power outages. Arguably, Africa’s most advanced economy, South Africa is also having its own share of power rationing in recent times. Whiles there are many other African countries in similar quagmire of darkness and managerial inefficiencies, I would like to focus my intellectual energy on the energy/power problem in Ghana, which has gain notoriety as “DUMSOR”. In the abundance of definitions, dumsor has assumed similar and varying meanings. This in my opinion will depend on a person’s location in Ghana and one way to simplify and understand the locational dimension to dumsor is to adopt the Planners’ classification. Planners classify society mainly into two: rural and urban. For communities that have never had electricity (very typical rural areas), dumsor is in no dimension a problem. No one can take away what you do not have. Those in the mainland rural areas may have some consents because their lights are also taken occasionally, and I mean occasionally, at least according to media reportage of power rationing schedules and hearsay evidence. 

Despite my deficiency of knowledge in urban planning, I contend in this article that dumsor is more of an urban problem and for that matter a revelation of the weakness in urban planning systems in Ghana, not merely and engineering phenomenon. It is in fact also a sociological and management problem. However, if I assume that Planners are urban managers, then I dare say that dumsor is first and foremost an urban planning problem and engineering a derivative ― depends on the former. Thus, attempts to blame the engineers solely without throwing the mud at the planners and society may be a wrong attribution and an exercise in futility. In my candid opinion, whiles the energy/power generation function is mainly dependent on the engineers, the management function is multi-dimensional depending on themselves, the planners and the wider society. Thus, irrespective of generation capacity, if urban planning is not taking serious, we may never see the light of sustainable power supply. In this article, I will focus on the role of stakeholders in sustainable infrastructure development. I will start with some definitions and concepts, and facts about current energy/power supply projects in Africa and in Ghana in particular; and examine the role of some of the most important stakeholders.

By definition, the concept of Dumsor is basically an economic disequilibrium problem which result from power shortages – demand of power exceeds supply ― such that power is rationed between households and firms to maximize its use within the constrained framework of economic growth and development. Of the installed capacity of about 2,800 megawatts, we are running just about 1,200 megawatts (MW). According to African Centre for Energy Policy (ACEP), the four major power crises in Ghana occurred during the periods 1982/83, 1997/98, 2002/3, 2006/7 and the fifth one in currency. Our history has shown that from 1985 when the Ghana Generation Planning Study was completed, our country should have increased generation capacity by about 3000MW by the end of 2012; if we were adding about 300 MW of power every three years (ibid.). There are two main components of dumsor: planned power rationing and intermittent outages. It appears to me that the former is not so much a problem as the latter because it disorganises planning and productivity. Although we are made to believe that dumsor is being managed with planned schedules, intermittent outages seem to have made the whole idea useless and ineffective. Intermittent outages are uncontrolled and occur randomly. There are two sides to this: (1) uncertainties and (1) risk. Uncertainty is different from risk (calculated) basically because it cannot be predicted scientifically unless through so magic or prophesy mainly because of the lack of data on its occurrence.

With historical data, we are able to predict trends and any deviation from the expectation is called risk. Risk has direction (either positive or negative) and its magnitude simply measured as the difference between actual value and the expected value (usually the mean). Much of science is based on the availability of data, which facilitates the management of this expected deviation called risk. Consider this example, if you are blind-folded, taken to a dark room for the first time and asked to pick a cup, you are unlikely to locate the cup because you simply don’t know the relative position of the cup. However, if you have been to the same room a number of times and therefore know the relative position of the cup, your chances of picking it even if blind-folded is enhanced. And for many of us, this is what helps us to locate the lamb and candles when we experience dumsor. This is called risk whiles the first example is uncertainty; they are however interchanged loosely even by experts sometimes. In relation to energy/power supply, uncertainty is typified by arts of God including droughts, thunders and lightning. Elements of risk on the other hand include faulty infrastructure and machines, faulty wiring and shocks to supply due to too much pressure on the energy/power stock (what is available) beside others. Solving this particular problem will require huge investment in replacing old-inefficient infrastructure, which government tax revenue is too little to deal with. A reason to investigate proposals for private generation.

Whiles uncertainties are mostly out of the control of man, dumsor, resulting from those elements of risk listed above are due to mismanagement by man. This is where I believe the debate lies and the question of who is to manage begs asking? To some NDC commentators like Sam George, the incompetence of engineers working with the utilities providers including the Volta River Authority, Electricity Company of Ghana and Gridco are to blame. This view seems popular but very limited. I think that other stakeholders, particularly the Urban Planners and consumers including you and me must take the greater blame. We will come back to examine this question in detail after we have looked at investments in energy and power in Ghana.

Africa’s Infrastructure Deficit: Electricity Coverage and Generation Capacity

A critical look at Table 1 below reveal that Africa is substantially behind in the development race not only in relation to the advanced economies but also relative to other low income countries (LICS) outside Africa in terms of electricity coverage and generation capacity. For instance in terms of pave-road density, Africa’s low income countries (LICs) and middle income countries (MICs) fall short by approximately as much as four and two times respectively, compared with other LICs and MICs around the world. However, a striking feature is the total road density benchmark. Africa’s road density is higher and this could be attributed to two main factors – size and approach to development. Africa is relatively bigger – second largest continent - and the horizontal approach to development adopted by most Africa countries requires the construction of more roads to connect human settlements. This is however not an advantage, rather maybe a problem because most of these roads are unpaved and of poor quality. In fact, the horizontal development approach is associated with low population densities and appears inefficiency, expensive and could contribute to the increasing infrastructure deficit. Technically, this embodies the characteristics of what the Planners refer to as suburbanization and exurbanisation. Suburbanization is the increased movement of people/services and industries from the centres of inner urban areas outwards and onto the edges of the built-up area. Exurbanization is the growth of low-density, semi-rural settlements beyond the built-up urban periphery of cities. The most part the people who live in the settlements remain functionally linked to the city.

Table 1: International and Interregional Infrastructure Deficits

Normalized Units	Africa LICs	Other LICs	Africa MICs	Other MICs
Generation capacity	39	326	293	648
Electricity coverage	14	41	37	88
Paved-road density	34	134	284	461
Total road density	150	29	381	106
Normalized Units	ECOWAS	EAC	SADC	CENTRAL
Generation capacity	31	16	176	47
Electricity coverage	18	6	24	21
Paved-road density	38	29	92	4
Total road density	144	362	193	44

Source: Yepes, Pierce and Foster (2008)

Note: Road density is measured in kilometers per 100 square kilometers of arable land; generation capacity in megawatts per million population; and electricity coverage in percentage of population.

LICs: Low Income Countries  

MICs: Middle Income Countries

EAC = East African Community; ECOWAS = Economic Community of West African States; SADC = Southern African Development Community.

Still on table 1, Within the African region, the SADC has proved to be a force and leader in infrastructure development, followed by ECOWAS, EAC and then Central Africa. South Africa, Namibia, Botswana and Lesotho remain the major powerhouses in the SADC region. Most of the countries in the SADC are middle-income countries which may explain their commensurate relatively high investment in infrastructure in the Africa region. Nigeria, Ghana, Liberia and Sierra Leone typify infrastructure investment in the ECOWAS region; while Kenya and Ethiopia account for most infrastructure investment in the EAC. The lag in infrastructure investment in the Central Africa could be attributed to its classification as a fragile region troubled by civil wars coupled with low-income levels.

Developing economies have substantial infrastructure gaps with a perennial estimate at US$31 billion per year^[1]. Underlying the deficit is the fluctuation of investment which dipped by US$50 billion in 2003 after a peak at US$131 billion in 1997, before rising again to $158 billion in 2007^[2]. A number of studies attribute the anomaly to project delays^[3]. The lags in project delivery could lead to significant construction cost escalations, prolonged duration and poor quality of workmanship. Notwithstanding, a report by Deloitte (2013) shows some of the major infrastructure investments in Africa. About 322 ground breaking construction projects each valued at not less than US$50 million each, totalling about US$222,767 million are underway. Energy/Power projects are the major focus of recent investments constituting about 36% of all projects. Ghana and Nigeria are the main infrastructure development hotspots in West Africa. Among Ghana’s energy projects include the Ghana National Gas Project (USD 850 million) and Sunon Asogli Power Plant. Other generation expansion programmes started in 2007 following the power crisis of 2006/2007 with the Bui Hydroelectricity Project, the Tema Thermal Plant 1 and 2, the Mine Reserve Plant, kpone Thermal Plant and the reactivation of the Osagyefo Barge. These projects were expected to add 1100MW of generation capacity to the grid. So far only 375MW has been added. Other emergency projects are expected to generate additional 1,000MW in the short term according to Dr. Kwabena Donkor (Minister of Power). The Volta River Authority, Ghana's main power generator had projected about US$1.5 billion is needed to improve the country's power generation, while President John Dramani Mahama indicated the country required to generate at least 220 megawatts every year to end the crisis.

Conclusion

It is obvious from this brief discussion on infrastructure deficits in Africa and in Ghana that there has been efforts to increase generation capacity since 2007 but insufficient compared with demand. Both supply and demand can be measured in real and nominal terms, but for the purpose of this article, we shall equate real supply to nominal supply and just refer to it as supply. It is important in economic analysis to hold supply constant to make it easier to examine the demand-side effects. The demand problem is best understood by distinguishing between ‘nominal demand’ and ‘real demand’. Given this difference, I contend that the urban planning system contributes immensely to the managerial inefficiencies of our energy/power stock. All other things equal, it could be our lack of understanding about the nature of demand that continues to create the impression that we need more energy. In other words, inefficient management of real demand increases nominal demand and for that matter the need to increase generation capacity to catch up. The equilibrium level of power should be when supply equates real demand, not nominal demand. Thus, the excess over real demand should be understood as a product of inefficiencies in managing demand. In part two of this article, I will focus on the demand-side problem to explain my reason for incriminating the urban planning system in Ghana as to blame for the energy and power crisis, if we are to find the culprits.

---

[1] Foster and Briceño-Garmendia (2009)

[2] Platz, 2009; UNECF (2008); Beck et. al. (2007); Martell and Guess (2006); Kehew et. al. (2005)

[3] Fugar and Agyarkwa-Baah (2010); Abd El-Razek, et al. (2008); Sambasivan and Soon (2007)

Growth in Africa: It Can Be Done

BY JEFFREY SACHS

ECONOMIST JEFFREY SACHS HAS BEEN A prominent adviser to governments seeking to reform their economies and raise economic growth. He has also been a critic of the World Bank and the International Monetary Fund (IMF), the international policy organizations that dispense advice and money to struggling countries. Here Sachs discusses how the countries of Africa can escape their continuing poverty.

In the old story, the peasant goes to the priest for advice on saving his dying chickens. The priest recommends prayer, but the chickens continue to die. The priest then recommends music for the chicken coop, but the deaths continue unabated. Pondering again, the priest recommends repainting the chicken coop in bright colors. Finally, all the chickens die. “What a shame,” the priest tells the peasant. “I had so many more good ideas.” Since independence, African countries have looked to donor nations— often their former colonial rulers—and to the international finance institutions for guidance on growth. Indeed, since the onset of the African debt crises of the 1980s, the guidance has become a kind of economic receivership, with the policies of many African nations decided in a seemingly endless cycle of meetings with the IMF, the World Bank, donors, and creditors.

What a shame. So many good ideas, so few results. Output per head fell 0.7 percent between 1978 and 1987, and 0.6 percent during 1987–1994. Some growth is estimated for 1995 but only at 0.6 percent—far below the fastergrowing developing countries. The IMF and World Bank would be absolved of shared responsibility for slow growth if Africa were structurally incapable of growth rates seen in other parts of the world or if the continent’s low growth were an impenetrable mystery. But Africa’s growth rates are not huge mysteries. The evidence on cross-country growth suggests that Africa’s chronically low growth can be explained by standard economic variables linked to identifiable (and remediable) policies. Studies of cross-country growth show that per capita growth is related to:

• the initial income level of the country, with poorer countries tending to grow faster than richer countries; the extent of overall market orientation, including openness to trade, domestic market liberalization, private rather than state ownership, protection of private property rights, and low marginal tax rates;
• the national saving rate, which in turn is strongly affected by the government’s own saving rate; and
•   the geographic and resource structure of the economy.

These four factors can account broadly for Africa’s long-term growth predicament. While it should have grown faster than other developing areas because of relatively low income per head (and hence larger opportunity for “catch-up” growth), Africa grew more slowly. This was mainly because of much higher trade barriers; excessive tax rates; lower saving rates; and adverse structural conditions, including an unusually high incidence of inaccessibility to the sea (15 of 53 countries are landlocked). If the policies are largely to blame, why, then, were they adopted? The historical origins of Africa’s anti market orientation are not hard to discern. After almost a century of colonial depredations, African nations understandably if erroneously viewed open trade and foreign capital as a threat to national sovereignty. As in Sukarno’s Indonesia, Nehru’s India, and Peron’s Argentina, “self sufficiency” and “state leadership,” including state ownership of much of industry, became the guideposts of the economy. As a result, most of Africa went into a largely self-imposed economic exile.

Adam Smith in 1755 famously remarked that “little else is requisite to carry a state to the highest degrees of opulence from the lowest barbarism, but peace, easy taxes, and tolerable administration of justice.” A growth agenda need not be long and complex. Take his points in turn. Peace, of course, is not so easily guaranteed, but the conditions for peace on the continent are better than today’s ghastly headlines would suggest. Several of the large-scale conflicts that have ravaged the continent are over or nearly so. The ongoing disasters, such as in Liberia, Rwanda and Somalia, would be better contained if the West were willing to provide modest support to African based peacekeeping efforts.

“Easy taxes” are well within the ambit of the IMF and World Bank. But here, the IMF stands guilty of neglect, if not malfeasance. African nations need simple, low taxes, with modest revenue targets as a share of GDP. Easy taxes are most essential in international trade, since successful growth will depend, more than anything else, on economic integration with the rest of the world. Africa’s largely self-imposed exile from world markets can end quickly by cutting import tariffs and ending export taxes on agricultural exports. Corporate tax rates should be cut from rates of 40 percent and higher now prevalent in Africa, to rates between 20 percent and 30 percent, as in the outward-oriented East Asian economies. Adam Smith spoke of a “tolerable” administration of justice, not perfect justice. Market liberalization is the primary key to strengthening the rule of law. Free trade, currency convertibility and automatic incorporation of business vastly reduce the scope for official corruption and allow the government to focus on the real public goods—internal public order, the judicial system, basic public health and education, and monetary stability.

All of this is possible only if the government itself has held its own spending to the necessary minimum. The Asian economies show how to function with government spending of 20 percent of GDP or less (China gets by with just 13 percent). Education can usefully absorb around 5 percent of GDP; health, another 3 percent; public administration, 2 percent; the army and police, 3 percent. Government investment spending can be held to 5 percent of GDP but only if the private sector is invited to provide infrastructure in telecommunications, port facilities, and power. This fiscal agenda excludes many popular areas for government spending. There is little room for transfers or social spending beyond education and health (though on my proposals, these would get a hefty 8 percent of GDP). Subsidies to publicly owned companies or marketing boards should be scrapped. Food and housing subsidies for urban workers cannot be financed. And, notably, interest payments on foreign debt are not budgeted for. This is because most bankrupt African states need a fresh start based on deep debt-reduction, which should be implemented in conjunction with far-reaching domestic reforms.

Source: Economist, June 29, 1996, pp. 19–21.

Path Dependence on Colonial Extractions: A Perspective on the High Cost of Housing in Ghana (Part I)

Housing is undoubted more than one third of global wealth. All over the world, meeting the need for housing in adequate terms especially for low and middle-income households have been difficult due to the high cost of housing. In essence, the prices of the houses in the market are beyond the affordability levels of about 90% of households in Ghana, which translates into a housing deficit of about 1.6 million units for a population of about 25 million. The term affordability can be construed in two ways; first in terms of households’ ability to purchase outright with cash from savings and secondly, in terms of being able to service mortgage repayments if such housing finance facility is available. Affordability is mainly a demand-side factor linked to the level of income, which stems the housing financing debate.

This article only discusses the supply-side to housing provision and its possible linkages to colonial legacies. It is widely debated that the colonial history of most developing economies and the adoption of colonial legacies by these countries have had a devastating effect on how far they have reached on the development lather; thus, the concept of colonial extractions and path dependence respectively. So, we trace the colonial legacies of building standards and rent controls in Ghana and attempt to find meaning and linkages with the current high cost of housing in Ghana.

All cities need building standards: London has had them since the early Middle-Ages (1216), when thatched roofs were banned due to the hazard of fire[1]. The link between building standards, housing costs and housing affordability is quite simple. High building standards all things equal are expected to increase the cost of housing, which reduces affordability. In 1947, Britain suddenly and substantially raised its housing standards (the Parker-Morris standards) after the Second World War during the rebuilding process of the country as part of a much larger social reform programme introduced by the British government of 1945-50. These standards were implemented through the Town and Country Planning Act. This was during the “Golden Decades” of growth in Europe which experienced substantial increases in household incomes. In other words, housing affordability increased all things equal, since the rise in income suggested that most people could afford better housing than they had at a premium. Despite the income rise, these new standards were arguably too high as argued.

Subsequently, these new building standards were implemented in the British colonies at a time when the average income in Ghana was about one-twentieth (1/20) of Britain’s. This will undoubtedly increase the cost of housing especially in the urban areas, since the old “atakwame”- mud and thatch buildings were forbidden as the case was in London. Homebuilders were to use sandcrete and concrete blocks which had better resistance to fire and were more durable. The trade-off between using these new materials (in the wake of shortages) and the cost of housing was a compromise on affordability. It wasn’t obvious in the urban centres at the time because these areas were small and mainly occupied by the elite, who had incomes equable to their British counterparts and/or lived in houses provided by the colonial government. In essence, these elites may not have paid out of pocket to enjoy these new houses and hence, didn’t anticipate the impact on the cost of housing of implementing the British Town and Country Planning Act of 1947 in Ghana.

It would be erroneous to suggest that these building standards were forcefully handed over to us by the colonial government upon Independence. This is because, our leaders had the option to accept or reject. Options actually give us the right but not the obligation to enforce these standards, which were perhaps inappropriate for the low level of incomes in Ghana. Adam Smith’s classical invincible hands that worked against cutting our cloth according to our size was the fact that it would have been an act of extraordinary courage and insight for newly installed governments to lower building standards to suit income levels at the time. According to Collier and Venables (2013), “the new African political elite wanted to join modernity not to dilute it. And so Africa was stuck with building regulations which, had they applied to 19th century London, would most probably have frustrated formal housing for ordinary households”. In fact, they were too ambitious for Ghanaian household incomes and in my candid opinion remains so today.

Regulations cover building standards, such as wall thickness, room size, and depth of foundations, and also the minimum size of plot. Now, we have to build largely with foreign materials mainly because our industries cannot efficiently produce them locally. Given the ever macroeconomic instability, underpinned by the cedi’s depreciation in Ghana since the days of Adam, not Adam Smith, the cost of these materials keep increasing although income growth is as sluggish as a snail. Implied from the renowned economist Thomas Malthus, the economic progression of housing cost outpaces the arithmetic increases in income; thus, the reduction in housing affordability and increasing housing deficits in Ghana. So, we have gotten to where we are today because of decisions we made in the past (path dependence) and this limits the opportunities available to us today. Can the elites in government today opt to reduce building standards when such a decision in the minds of many could indicate “backwardness” instead of progress in this times of materialism?

The typical evidence of the impact of these standards in Ghana is our desire to build big houses on large tracts of land, which are expensive and unaffordable. Has it ever occurred to you the origins of these desires, which are typically not indigenous to Ghanaian rural folks? Deductively, most of these were inherited from the British building standards as determined by the Town and Country Planning Act of 1947; contained and shared by the colonial elites who worked for the British government. But shouldn’t we also abandon such desires even now that our teachers have long abandon such desires and adherence to such draconian building practices? In fact, the British along the line reduced those building standards in the UK because of this same housing affordability problems they perpetuated. In effect, these building standards have beyond the economic impacts, given us an insatiable social lifestyle which is only sustainable in luxury. However, housing is first and foremost a necessity, not an ostentatious good (Luxury). Can we choose to meet necessity rather than luxury and social status? Maybe not.

Since the adoption of capitalist principles, which required a total shift from government provision of housing to market provision, where governments are expected to play the role of facilitators and enablers, housing affordability has even become more of a problem than HIV/AIDS in Ghana. Going forward, we need to delink the connection between the luxury type of building materials we use and building styles we design as well as the building standards that specify and enforce them. Perhaps, utilizing the vertical space in the form of flats, terrace buildings and condominiums may be well suited as a cost-cutting tool; but this requires a lot of research and social engineering.

The direct impact of high cost of building materials resulting from these high building standards could be mitigated by finding or developing building materials whose prices do not correlate with foreign exchange fluctuations. And this reminds me of the many research works conducted by the College of Architecture and Planning of the KNUST that lie on dusty shelves unused. During an exhibition two years ago in the same institution, laterite blocks were developed but up to now has had little to no impact in the market. By this approaches, we would be able to reduce the compounding impact of an unstable macroeconomy on the cost of building materials, labour cost and the ultimate housing cost. Further, reducing our room sizes and plot sizes by reforming our Building Codes and Standards could be cost-cutting, which will lever affordability. After all, we still enjoy the small rooms in the UK; don’t we? Some may typically qualify as store rooms as per Ghanaian standards.

However, I am not suggesting this on the back of weak research and no evidence-based. I rather believe that the starting point is to commission a comprehensive research on the impact of Building standards on housing cost and affordability in Ghana. Such evidence would be instructive on where the latitude lies for reducing some of the luxury building standards to attune to “necessary” standards. In summary, our colonial legacies and extractions might have influenced housing cost and affordability; perhaps negatively and continues to do so today – path dependence.

Kenneth Donkor-Hyiaman

---

[1] Collier and Venables (2013)

Yes, Employees are entitled to make Pension Investment Decisions in DC Schemes

Pension fund management in Ghana has undergone numerous reforms, yet the basic lessons are neglected to the detriment of pensioners. Given the long history of meagre pension pay-outs, the new National Pension Act, 2008 (Act 766) was enacted to provide the impetus for another reform intended to maximize the pensions of contributors. Whiles this is laudable, a number of ambiguities and uncertainties in the Act could perhaps be the reason for the impending public sector strike action. My PhD research work borders largely on the 2^nd tier mandatory occupational pension scheme, but concentrates on Section 103 (2) of the new Pension Act, which enables contributors to borrow to acquire a primary mortgage against their 2^nd tier benefits as security. In this regard, I am motivated to make another contribution to the ongoing debate on pension fund management in Ghana.

In this brief article, I seek to discuss one of the uncertainties in the new Act in an attempt to provide a lead on whether the government is justified in appointing a pension trustee to manage the 2^nd tier pension contributions. My opinion is largely underscored by the theoretical and international empirical evidence about the operation of Defined Contribution Schemes, which the 2^nd tier is a typical example. The conclusion reached after a critical examination of the theoretical and empirical evidence is that, employees are entitled to make the decision as to which trustee manages its contributions. Government as an employers has no right in this regard to appoint the so-called Pension-Alliance Trust Limited to manage employees’ contributions.

Pension Schemes, Contributors’ Rights and Risks

A fair understanding of pension plans is perfect for understanding the arguments raised in this article. In spite of the varying terms, three basic designs (types) of pension schemes are common globally including defined benefit (DB) plans, defined contribution (DC) plans or both. DC plans by nature specifies contributions as a predetermined fraction of salary without certainty of benefits upon retirement unlike DB plans. DC by nature specifies contributions as a predetermined fraction of salary without certainty of benefits upon retirement unlike DB plans. The latter is a promise by a sponsor bearing responsibility to pay a fixed life annuity; sometimes inflation-adjusted and benefits are a function of both years of service and wage history. With DC schemes, benefit levels depend entirely on the total contributions and investment earnings of the accumulated contributions (primarily market-based and independent of retirement-period).

Whereas member contributions are ring-fenced and individually invested in a DC model, DB enables the pooling and group management of funds. Individual loans to members reduce the investment pool and can compromise the funds DB commitment upon borrower defaults; defeating its traditional guarantee of pensions. Trading off flexibility and a right to determine investment preferences with performance tracking possibility, contributors in a DC plan bears all the investment risk mainly including interest rate risk in unpredictable inflationary economies like Ghana; unlike a DB plan (Bodie, et al., 1988).

Investment risk is emergent at two levels; investment performance uncertainty and the real value of income streams or lump sum generated at retirement. Therefore, DB plans offer superior risk-sharing properties that are not captured by DC models. Hence, whereas the DC framework focuses on the value of the assets currently endowing a retirement account, the DB plan focuses on the flow of benefits which the individual will receive upon retirement. In Ghana, the 1st and 2nd tiers pensions are DB and DC schemes respectively.

The new National Pensions Act, 2008 (Act 766) establishes a contributory three-tier pension system which requires employers to contribute 13% and workers 5.5% of gross income, making a total contribution of 18.5%. This is as distributed below as:  

• First tier basic national defined benefit (DB) social security scheme (13% out of total contributions); which is managed by the SSNIT is mandatory for all employees in both the private and public sectors. 2.5% out of 13% is a levy for the National Health Insurance scheme;
• Second tier mandatory occupational (or work-based) “defined contribution” (DC) pension scheme (5% out of total contribution) is “fully funded” by employees and privately-managed by approved Trustees assisted by Pension Fund Managers and Custodians. It is designed primarily to give contributors lump sum benefits. This tier is the bone of contention between government and public sector workers;
• Third tier voluntary provident fund and personal pension schemes, supported by tax benefit incentives for workers in the informal (blue collar) and formal sectors (white collar).

Implications of Government (Employee) Appointing Trustee

After a long history of pension system failure, mainly administered previously by the SSNIT to provide adequate incomes for pensioners, the new system was designed to give contributors more room to determine how their contributions are invested. Thus, the 2^nd tier DC scheme was included in this regard to facilitate this intention. Aptly, the part of the 18.5% that is remitted to the 2^nd tier is the 5.5% of employees’ monthly income. This is just in line with the principle underlying the DC scheme. In other words, contributions remitted to the 2^nd tier are employees’ own money unlike the 1^st tier DB social security scheme paid by employers (government) for these public sector workers.  The 2^nd tier is therefore a sort of compulsory contractual savings scheme to help employees raise enough capital for their future. However, the new Pension Act has a “lacuna” which in my opinion is the cause of the current tensions regarding the management of the 2^nd tier. The Act fails to explicitly confirm the right of investment choice decision making on employees as is principle and international evidence of DC schemes. This gap is what government is exploiting by arrogating to itself the right to appoint a trustee. This is a matter of law and in the event that no “consensus ad idem” is reach, the law courts remain the last hope for employees.

The implication of government (employer) making the decision of a choice of trustee is a breach of the principle of DC schemes, which could create adverse selection and moral hazards for contributors. This is already the case with SSNIT’s management of the 1^st tier scheme. Hence, employees would be bearing unjustifiable risks for which they have not contracted. In that case, the 2^nd tier becomes just the DB 1^st scheme which is solely managed by SSNIT without employees input. Employees make no input in the investment of the 1^st tier social security because government “guarantees” the social security benefits of public sector workers. This means that irrespective of the investments’ performance, certain minimum pension pay-outs would be made to pensioners. Thus, government accounts for any shortfall in returns on investments.  In a way, this is the reason for the government’s excessive borrowing of pension funds from SSNIT for its activities. The 2^nd tier however has “no government guarantee”, potential lump sum benefits are determined by the market. The history of government’s pension guarantees in Ghana has however not improved pensioners’ standard of living. Therefore, government’s decision to appoint a trustee with the intention of guaranteeing the 2^nd tier in my opinion cannot be trusted. In other words, it reveals that without the so-called intended guarantee by government, employees are entitled currently to make their pension investment decisions.

Secondly, the government’s action represents bad leadership, in that, it could empower and signal private sector employers to act in a similar manner, which is likely to jeopardize the original intent of the 2^nd tier scheme. Reports already points to the fact that some private sectors employers are not paying the basic social security of their workers. For which reason, George Agudey, the erstwhile CPP Presidential candidate was sentenced to imprisonment. On the international front, employees in DC schemes determine which trustees manage their contributions, not government or any employer.

As rightly opined by Charles Osei Akoto, CEO of Stallion Trust stated “When you think about the fact that 45 percent of the formal sector workers are from the public sector and government lumps all these people and give them to one corporate trustee -  obviously that corporate trustee has a competitive advantage and that is what we are talking about”. Lets bear in mind that, the Pension Alliance Trust Limited is newly formed and may not have any track record, no evidence-based to support the reason for this favour, unless it for political expediency. So, the questions lingering on borders on how and why this trustee was selected. Stakeholders need to be informed.

Conclusion

The theoretical and empirical construct of the DC 2^nd tier mandatory occupational pension scheme bequeaths employees rather than employers (i.e. government in the case of the public sector) the right to determine which pension trustee manages their 5.5% pension contributions. The governments persistence in claiming to having the right to appoint a trustee to manage the 2^nd tier contributions of public sector workers is completely wrong and cannot even be cured by its intention to provide guarantee for the 2^nd tier scheme like the 1^st tier scheme, because of the distasteful performance of previous guaranteed schemes, such as the latter (1^st tier DB social security scheme). Since the 2^nd tier is not government’s money, the government should rather be much more concerned about the 1^st tier which is managed by its quasi institution, the SSNIT.

Going forward, the current agitation is good for aligning the risks and rights of employers and employees regarding issues of pension fund management in Ghana. Stakeholders should seize the opportunity to inform and educate the general populace especially contributors about the structure and nature of pension fund management in Ghana as provided by the new Pension Act, 2008 (Act 766). Enlightened people are better equipped to determine their future.

Kenneth A. Donkor-Hyiaman, MPhil (Cantab)

PhD Real Estate & Planning Candidate

Henley Business School

University of Reading, UK.

kwakuhyiaman@gmail.com

Dr. Kwakye of IEA could be Telling a "True-Lie"

Ghana is an interesting place to be at this time of economic turmoil. I support the view that knowing the problem could be an inch to the solution. Economics as a subjective science therefore means that every man potentially has an answer to the economic crisis of our economy based on their “understanding” of the problem, which is not politics-blind. Therefore, I embrace the many proposed untested theories of academics, politicians and the ordinary Ghanaian alike in demonstration that there is no “black or white” answer to the problem – that is to say events are not independent and mutually exclusive. By this, I mean all these untested theories could be true or a lie at the same time or in varying combinations at different times. However, whether right or wrong, our choice is based on the implicit assumption that there is a standard measure against which these dual mutually exclusive outcomes are derived, which is not likely. The former president’s attribution of the economic woes of Ghana to the 2007 redenomination exercise was received less seriously until the learned Dr. Kwakye re-echoed same with some reason unlike the mere and usual roar of the former. 

In the midst of varying antithesis of Dr. Kwakye’s redenomination-economic crisis argument – referred to in this article as the “KWAKYE EFFECT” - , I present my views, stemming from my ongoing research on the “Content of Inflation and the Development Nexus”. I basically explain why I think Dr. Kwakye could be telling a “true-lie”, in other words a half truth. This is because his redenomination argument in my opinion is just one of the “symptomatic”, not a root cause component of inflation and its depreciating effect on the purchasing power of the Cedi. I therefore propose an alternative framework (model) anchored on “market failures” and “value creation” for a superior attribution of the economic performance of the Ghanaian economy. The content of inflation provides us with a robust measuring index of economic performance; that is whether caused by market failures and or as a result of value creation. The lack of such an objective index could be the reason for too many theories of Ghana’s woes – some very incredible.

I will proceed by presenting a summary of Dr. Kwakye’s argument and complete the presentation with my comments on it. Dr. Kwakye’s logic is summarized below:

"If there is an increment in pricing, say something that should be increased from 5 pesewas to 7 pesewas, it automatically jumps to 10 pesewas because of the absence of lesser denomination. A continuous repeat of this in no time certainly will have adverse effects on the economy or to limit it people's economies and the nation’s economy on a large scale".

Analysis of the Kwakye Effect

Basically, Dr. Kwakye is simply saying in other words that the HIGH INFLATION or simply inflation is the cause of the current economic quagmire, resulting from the 2007 redenomination exercise. It is difficult to agree with him on the basis because smaller currency denominations including 1pesewa coins were provided for trading purposes. Therefore, price increments from 5pesewas to 7pesewas will not automatically jump to 10pesewas because two of the 1pesewa coins could be added to the 5pesewas to make 7pesewas. However, the logic of the redenomination as the cause of high inflation “could hold true” because the 1pesewa coin is practically not in use. This doesn’t mean that high inflation is the problem, rather the causes of high inflation should be our necessary examination. I perceive that Dr. Kwakye’s has lump two arguments into one argument. I present these two arguments as H1 and H2 and H3 as his conclusion below:

H1: Redenomination is the cause of high inflation

H2: High inflation is the cause of the current economic crisis

H3: Therefore, redenomination is the cause of the current economic crisis

This kind of logic is pretty simple (for this high level of economic analysis) and assumes a linear function but creates an implicit impression that any event which could create inflation could be the cause of the economic crisis – that could also be true. Therefore, judging by Dr. Kwakye’s own logic, the profligate spending of the NDC government during the erstwhile 2012 election period could also be the cause of the problem. In fact, this logic by extension also means that  all the triggers of inflation, including the redenomination, profligate spending, import-export imbalances, high cost of production, inefficient economy, bla bla bla beside others could at the same time be the reason for this problem. Hence, the cause of the problem in my opinion is not a “black or white” answer (define above) at this stage, but of multiple continuous accumulative causation. Therefore, for Dr. Kwakye to assert that the 2007 redenomination exercise is “THE” cause of the current economic crisis in Ghana, he implicitly assumes that among all the causes of inflation (some listed above), the redenomination exercise is the most significant (Relatively important) force in causing the problem; although, he did not originally recognize that all these factors are in the vending machine. Without a robust evidence-based indicating these parameters of relative importance of the causes of inflation and their linkages to the current economic crisis (which I think is the crux of the debate), the” Kwakye Effect” which appears to be based on a careful conjecture is not a very useful model to warrant our considerable time. Moreover, the “Kwakye Effect” is a second-level argument which ignores the (root) primary causes of inflation. Inflation doesn’t cause itself, so whether prices jumps from 5pesewas to 10pesewas instead of 7pesewas, there are fundamental causes which must be dealt with. Hence, the “Kwakye Effect” will actually be a “mirage” in a well-managed or deflationary economy, although such an economy like Japan comes with its own challenges.

Market Failures and Value Creation: An Inflation Framework for Economic Performance Attribution

I will attempt to explain from a classical economics point of view of inflation and latter introduce my perception of inflation with a revelation of an element of inflation –i.e. value creation -  which is barely spoken about in the inflation debate by the many street economists in Ghana, and sometimes omitted by certified economists. I will create a model of inflation and explain the relationship between the elements of inflations as my view for better attribution of the economic crisis, not the “Kwakye Effect” above.  

In economics, inflation is accepted as a sustained increase in the general price level of goods and services in an economy over a period of time (Blanchard, 2000; Wyplosz & Burda, 1997; Barro, 1997; Abel & Bernanke 1995). When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. Economists generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply (Barro and Grilli, 1994). However, money supply growth does not necessarily cause inflation. Some economists maintain that under the conditions of a liquidit trap, large monetary injections are like "pushing on a string" (John Makin,  2010; Paul Krugman; Gauti Eggertsson). A liquidity trap is a situation, described in Keynesian economics, in which injections of cash into the private banking system by a central bank fail to decrease interest rates and hence make monetary policy ineffective.  A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war (Krugman, 2008). Notwithstanding, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth (Mankiw 2002, pp. 81–107 and Abel & Bernanke 2005, pp. 266–269).

In my view as earlier deducted from the Kwakye Effect, inflation is multi-dimensional; hence, I contend that the notion of redenomination (one-dimensional) as the sole cause of the current economic mess is preposterous and an over-simplification of the problem. In my opinion, the causes of inflation (I) can be classified under two broad categories: (1) market failures (MF) and (2) value creation (VC). Any measure of inflation in any economy at any point in time is a combination of these two factors. This is represented mathematically as:

	I = Ʃ MF + VC          t =1

A market failure is a situation where the market fails to allocate resources (goods and services) efficiently or fairly – in the right quantities to the people who need it most. Market failures are often associated with “time-inconsistent preferences”, “information asymmetries”, “non-competitive markets”, “principal–agent problems”, “externalities”, or “public goods” (Stiglitz, 1989, Palacios-Huerta, 2003; Wilson, 2008; Stiglitz, 1998; Laffont, 2008). The existence of a market failure is often the reason why self-regulatory organizations, governments or supra-national institutions intervene in a particular market (Arrow, 1969; Gravelle, Hugh; Ray Rees, 2004). However, government policy interventions, such as taxes, subsidies, bailouts, wage and price controls, and regulations (including poorly implemented attempts to correct market failure), may also lead to an inefficient allocation of resources, sometimes called “GOVERNMENT FAILURE” (Weimer, David; Vining, 2004).

Value on the other hand is basically the ability to satisfy wants, which could be economic, social, political etc, achieved at a cost. Value therefore becomes a fundamental relationship between function (what the goods and services produced in an economy must do – benefits) and cost. In a business sense then, value creation is the performance of actions that increase the worth of goods, services or even a business. Many business operators now focus on value creation both in the context of creating better value for customers purchasing its products and services, as well as for shareholders in the business who want to see their stake appreciate in value. From a financial perspective, value is said to be created when a business earns revenue (or a return on capital) that exceeds expenses (or cost of capital).

In an economy, the interplay of market failures and value creation determines the rate of inflation in my opinion. The size of the rate of inflation is however dependent on the stage of a country in the development Life cycle, that is, Birth or Growth or Maturity or Decline. At the growth stage where Ghana seems to be, the potential for value creation is very high unlike an already developed economy like the US and the UK. Pursuing value creation at a growth stage in the development cycle could actually create inflation. In the maturity stage of development as experienced by the US and UK, value creation has limits and is more likely to fall unless supported by extreme innovation, which is also scarce and expensive. Low rates of inflation in the US and UK is therefore as a result of optimum value creation over less market failures. That is, while there is an inverse relationship between inflation and “optimum” value creation (time constrained), inflation relates positively to market failures at all times.  Thus, the high potential for value creation in the Ghanaian economy at this stage could lead to increases in price of goods and services. But, potential is not the same as actual, because value creation in Ghana is practically meagre. Further, the likelihood of market failures is as high as the prevalence of the causes of market failure including government failure as highlighted above. Value creation is positive and over a sustained period in the maturity stage of the development life cycle stagnates and subsequently falls; thus, reducing its contribution to inflation. Market failures on the other hand are continuously negative and prudent economic management is the only way for reducing its contribution to inflation.

Per this nominal reasoning, the high incidence of sustained market failures and the high potential for value creation could constitute the first level root causes of high inflation regime in Ghana and the seeming economic crisis. However, in Ghana, it is clear that the contribution of market failures to inflation is higher than value creation. For instance, increases in prices of utilities like electricity and water is as a result of inefficiencies in the production process which normally comes at a high cost compared to improvement (value created) in the services provided. Another example is the case of excess supply and excess demand of goods and service. This could lead to over-consumption or under-consumption of goods and services, which is a clear case of an inefficient market. For instance, fuel shortages lead to under-consumption of fuel and price hikes transmitted across the real economy: agriculture, industry and services. Another example is the oversupply of money during the 2012 election period and the persistent corruption in our economy. This increased the purchasing power of beneficiaries leading to over-consumption of goods and services in the economy.

It should be noted in our explanation of inflation above, that oversupply of money in an economy not accompanied by an equal measure of economic growth causes inflation. Economic growth is the sustained increase in the market value of the goods and services produced by an economy over time. This results from value creation due to a more efficient use of the nations resources according to economic growth theory. Thus, inefficient use of national resources leads to less value creation and subsequently less economic growth and vice versa. In the last two years, unproductive spending could therefore be blamed for the dwindle fortunes of Ghana’s economic growth potential. This evidence supports my opinion that  among the two causes of inflation in Ghana and the consequent economic hardship, market failures due to bad economic management is RELATIVELY IMPORTANT than value creation (from efficient use of resource) in explaining the current economic turmoil.

From this framework, Dr. Kwakye’s redenomination argument fits into the typical case of a market failure when inefficiencies in the production process results in high inflation. But the redenomination phenomenon is only a symptom of a real underlying cause of inflation, which the “Kwakye Effect” fails to explain. I must admit that the “Kwakye Effect” could be created by excessive value creation but that is far remote and not the case in the Ghanaian economy, making his argument subprime in attributing the current economic crisis. His argument is just a component of the bigger problem.

Conclusion
Summarily, I have demonstrated through economic reasoning that Dr. Kwakye’s attribution of the economic woes of Ghana to the redenomination is an over-simplification of the problem, a second-level argument which ignores the first level primary causes of inflation in the Ghanaian economy in the first place. However, the persistence of market failure and the potential for high value creation associated with Ghana’s stage in the development life cycle in my opinion presents a stronger, complete and a more robust model for attributing the problem at hand. Ghana deserves better.

Kenneth A. Donkor-Hyiaman

Department of Land Economy

University of Cambridge

United Kingdom

kwakuhyiaman@gmail.com