Scrap the Rent Tax and Maintain the Real Estate Sales Tax in Ghana

After over 3 decades of policy vacuum, characterized by piece-meal attempts to recognize housing in some policy documents by succeeding Governments, a new National Housing Policy was promulgated in 2015. This article argues that the 8% existing Rent Tax should be scrapped while the VAT on real estate sales maintained for reasons discussed below. The new Housing Policy is premised on pro-market principles aimed at creating and encouraging private sector leadership in housing delivery. This view is crystalized in objectives 1 and 2 of the new National Housing Policy as:

1.     To promote greater private sector participation in housing delivery;

2.     To create an environment conducive to investment in housing for rental purposes.

Policy initiatives to achieve these objectives include:

1.     Providing fiscal and monetary incentives for increased private sector investment in housing infrastructure for those benefitting lower-income households. The details of these incentives are contained in the country's investment code;

2.     Reviewing the Rent Act, Act 220 (1963) to streamline rent regulations and empower the Rent Department to encourage investments in the construction of rental housing as well as the protection of vulnerable households from abuse by house owners.

However, Government fiscal policy appears to stand in direct contradiction to the ideals espoused by the new housing policy. Lets consider these contradiction below:

Rent Taxation

The introduction of the rent tax in the same year 2015, when the new Housing Policy with a beautiful vision was promulgated is a policy worth considering in terms of its potential effect on real estate investments in general and housing delivery in particular. The Income Tax Act, 2015 (ACT 896) was passed to introduce a Rent Tax - 8% in the case of residential premises and 15% in respect of commercial premises of the gross rent paid to Landlords/landladies - to be withheld by tenants and remitted to the Ghana Revenue Authority. Rent tax reduces investors’ cashflow and increases the risk of profitability, which could make investment in private rented housing relatively unattractive and thus render the vision of the policy elusive.

Most private rented housing in Ghana were constructed with private equity. In the strict sense of corporate finance, equity financing does not provide any tax deductibility advantage as using debt. Look at it this way. Interest payments on debt are considered a cost in the production of goods and services. So, most countries including Ghana allow investors to deduct interest payments from revenues before paying tax. Therefore, the capital structure of an investment matters, and using debt financing provides a tax saving advantage over equity. The effect is that the tax savings increase the cash flow to equity shareholders and thus increase the value of the investment, as per the popular Modigliani and Miller theorem. Therefore, given that most private rented housing is equity financed, most landlords would pay more in taxes compared to the case of using debt financing, which is simply unavailable or available at a extreme high cost to investor.

Coupled with low rent levels in Ghana, landlords are more likely to pass the tax to tenants in the form of high rents, if enforcement is effective. This effect would increase housing cost and thus the cost of living of most low- and middle-income households and reduce their standard of living, ceteris paribus. Considering the capital structure of real estate investments, particularly housing in the light of the 1.7 million housing deficits, it is first and foremost, welfare maximizing and secondly, a possible stimulant of new housing investments to scrap the 8% rent tax.

Nevertheless, I argue that the VAT on real estate sales should be maintained against the backdrop of calls by the Ghana Real Estate Developers Association (GREDA) to scrap it. Two principal arguments could be advanced in this regard. First and most factual, most houses constructed by the GREDA are already out of the reach of the median income household, below which we find the masses, even most middle income households. With average prices around US$100,000, and priced in dollars in the face of an incessant depreciation of the cedi, their clientele is cut in high-income households, expatriates, foreigners and residents living abroad, who earn superior incomes and currencies. A survey shows that more than 50 per cent of the clients of GREDA are foreigners and residents living abroad. Thus, this tax has little to no adverse effect on the ability of low and middle-income households (who constitute the majority of the populace) to afford their houses. It will serve government well to continue with this tax. In other words, the target clientele of GREDA are more likely to afford the additional 8% VAT on real estate. Thus, the government would benefit if it maintains the tax.

Should there be a need to review the VAT on real estate, it should not be an exemption for all real estate developers. Policy provides an indispensable avenue to promote affordable housing development to reduce the huge housing deficit. In this regard, affordable housing developers should be exempted from the VAT, but not luxury home developers. I must say that implementing such a policy requires a proper definition of affordable housing in Ghana and mechanisms put in place to monitor delivery. In Ghana, almost all real estate developers claim to be developing affordable homes although their prices a way above the median house price. The new Housing Policy defines affordable housing as:

“The ability of a household to spend up to thirty percent (30%) of its gross annual income on the rent or purchase price of housing where the rent or purchase price includes applicable taxes and insurances and utilities. When the annual carrying cost of a home exceeds thirty percent (30%) of household income, then it is considered unaffordable for that household” (Ministry of Water Resources, Works and Housing, 2015).

However, this definition only measures the “housing affordability” concept in affordable housing. It therefore says little about the definition of affordable housing and it is fraught with challenges especially because it contradicts the practice in the banking and finance industry, where 40% (maximum) of household income is considered a measure of affordability. Lets consider this situation for instance; would houses priced at US$100,000 be considered affordable housing (given the income levels in Ghana) just because someone can afford it? Certainly no!

The old Planning Policy Statement 3 of the United Kingdom (UK) acknowledging the conceptual difference between “affordable housing” and “housing affordability” defines the former as particular products outside the main housing market; and the latter as a measure of whether housing may be afforded by certain groups of households. These particular housing products according to the UK National Planning Policy Framework (2012) is the sum of affordable rent, social rent, intermediate rent and affordable home ownership provided to specific eligible households whose needs are not met by the market (Woo and Mangin, 2009); subject to rent controls that require a rent of up to 80 per cent of the local market rent (including service charges, where applicable). Eligibility depends on local authority allocation policies, local incomes and local house prices depending on the type of affordable housing. Also, Peter O’Brien of the Royal Town Planning Institute (RTPI) in the UK provides a quantitative benchmark, making reference to past EU definitions that equate what is affordable as 75 to 80% of the market price or rent.

Notwithstanding that affordable housing is priced below the market house price, the material quality and quantity of rooms and services are specified. According to the National Affordable Housing Summit Group in Australia, two main concepts in this regard: (1) "reasonable adequacy” in standard and location, and (2) “sustainability” are worth considering. The KPMG (2010) reveals that reasonable adequacy means a 300 – 1200 Sq. Ft. house in Indian, which varies in other countries. There is also the agreement on quality design standards as one of the chief measuring tools, although it makes affordable housing expensive (Quigley and Raphael, 2004). What then is the value of design in so basic the need as housing? A common view is that good design costs more, and that while architects add value and quality to buildings, they rarely add economy (Davis, n.d). Housing is not merely shelter, or basic protection from the elements; it must also bestow on its inhabitants a sense of dignity. To ignore this aspect of housing or to consider it a perquisite for those who can afford market-based rate housing is to invite both social and financial disaster.

Moreover, those who can afford these skyrocketing house prices are those who finance them with mortgages. They then enjoy the tax deductions on the repayment of their mortgage interests, which can be considered as government subsidizing housing for the rich and high-income households, rather than the low and middle-income households, who need it the most. Therefore, the VAT on real estate somehow offsets the interest deductions allowed if they use a mortgage. Again, this interest rate subsidy provides an avenue for government to use policy to promote mortgage financing for the burgeoning middle-income class in particular and raking in some more revenue if properly targeted and aligned.

In summary, I wish to propose to the incoming government that a comprehensive study of the fiscal policy on real estate investment and development be done for efficient taxation and efficient delivery of real estate in Ghana. On the surface, it appears that scrapping the rent tax and maintaining the VAT on real estate sales would be prudent policy. I also propose for a review of the definition of affordable housing in the National Housing Policy so as to ensure that standards are met and delivery easily monitored. Last but not the least, another study should be conducted to properly target and align interest rate subsidies in Ghana.

Kenneth A. Donkor-Hyiaman

Finance and Real Estate Economists

Property & Planning Institute of Technology

Housing Policy Reversionism and Contradictions in Ghana?

Housing Policy development can be traced as far back as the 1920s when the Dispossessed Person’s Housing Scheme was operationalized to provide some compensation to people whose houses were compulsorily acquired in the so-called public interest. After over 3 decades of policy vacuum, characterised by piece-meal attempts to recognise housing in some policy documents by succeeding Governments, a new National Housing Policy was promulgated in 2015. This brief article raises two main issues - policy reversionism and policy contradictions - for further consideration; shows their interconnectedness and how they combine to contradict the spirit of the current housing policy.

Housing Policy Reversionism

First, the issue of policy reversionism becomes clear after a review of housing policy change in Ghana from 1920 to 2015 (see Kugbega, 2015; Arku, 2009). Reversionism is the principle of reverting to the conditions, customs, ideals of an earlier era. This process is similar to reversionism and recidivism in theology and criminal justice theories respectively (Sarfoh, 2010).  In theology, reversionism is viewed as the process of a Christian backsliding after having been reformed. In criminal justice, recidivism entails the process of “reversion of an individual to criminal behaviour after he or she has been convicted of a prior offense, sentenced, and (presumably) corrected” (Malt, 2001:1).

So, what is the evidence of reversionism in housing policy development in Ghana? Between 1920 and 1984, housing delivery was largely state-led. However, the period was also characterised by reversionism. The Military Government led by the National Liberation Council (NLC) and the first civilian Government (Progress Party) after the overthrow of Nkrumah, liberalized housing policy through privatization, deregulation and non-budgetary allocations to subvented state enterprises. The idea was to encourage a private sector-led delivery of housing due to inadequate state resources. Privatization of state assets was however alien and unfavoured by the populace. Thus, coupled with economic hardship, ripe conditions returned the Military to power, led by the National Redemption Council (NRC) and subsequently the Supreme Military Council (SMC) I & II. It is believed that for populist reasons as a way of legitimizing their actions, these military governments reverted to state-led housing delivery in a grand style, despite inadequate state resources.

Secondly, during the Armed Forces Revolutionary Council (AFRC) regime (another military government in 1979), price, rent and exchange rate controls were stringently reinforced without recourse to legal systems (Jeffries, 1982). These draconian approaches and populism were meted out as punished to so-called economic saboteurs – essentially targeted at the rich, landlords and traders who were not necessarily rich (Sarfoh, 2010) - in the name of probity and accountability. Further, the Rent Act, 1963 (Act 220) forbade rent advance payments exceeding 6 months. Fast forward 2015, history is repeating itself. The Rent Act is currently under review. The Draft Rent Bill seeks to reform the existing rent regulations, remove inherent constraints on housing supply, while maintaining the protection it offers low-income and vulnerable tenants from abuse and arbitrary actions by landlords. One of its propositions according to the Deputy Minister for Housing, Mr Sampson Ahi, is to control rent advance period by reducing the rent advance period from 6 months to 1 month. This is a clear instance of housing policy reversionism to an ideal – rent control - established as debilitating to housing market development (cf Malpezzi et al, 1990; Willis & Tipple, 1991).

Housing Policy Contradictions?

Objective 1 and 2 of the new National Housing Policy are:

1.      To promote greater private sector participation in housing delivery;

2.      To create an environment conducive to investment in housing
for rental purposes.

Policy initiatives to achieve the objectives include:

1.      Provide fiscal and monetary incentives for increased private sector investment in housing infrastructure for those benefitting lower-income households. The details of these incentives are contained in the country's investment code;

2.      Review the Rent Act, Act 220 (1963) to streamline rent regulations and empower the Rent Department to encourage investments in the construction of rental housing as well as the protection of vulnerable households from abuse by house owners.

However, Government fiscal policy appear to stand in contradiction to the ideals espoused by the new housing policy. Two of such government actions are identified below:

Rent Tax

In the same year - 2015 - when the new Housing Policy with a beautiful vision was promulgated, the Income Tax Act, 2015 (ACT 896) was also passed to introduce a Rent Tax - 8% in the case of residential premises and 15% in respect of commercial premises of the gross rent paid to Landlords/landladies - to be withheld by tenants and remitted to the Ghana Revenue Authority. Rent tax reduces investors cashflow and increases the risk of profitability, which could make housing investment relatively unattractive and thus render the vision of the policy elusive.

Rent Advance Payment Reduction

As indicated earlier, there is a proposal to reduce the rent advance payment period from 6 months to 1 month. Already, most landlords require on average 2 years rent advance in the major cities because the 6 month rent advance may not be worth their investment. From an investment perspective, rent advance is a mechanism to reduce investors' risk and increase their initial yield, to help them recoup upfront some portion of the substantial investment they have made in housing. A reduction in the rent advance period increases investors' risk and reduces their initial yield, which make housing investment relatively unattractive. Empirical evidence shows that as rent control laws became restrictive, availability of rental accommodation declined with house owners unwilling to be subjected to excessive control over rent pricing (Sarfoh, 2010; Malpezzi et al, 1990; Willis & Tipple, 1991). Rent controls were historically adopted as political instruments whenever governments (the Socialist and Marxist political administrations- PNDC) wanted to garner support of the masses to legitimise their stay (Sarfoh, 2010). It appears the socialists and Marxists are back with a policy reversionism tactic in rent control, perhaps for the sheer populism to garner electoral votes since the polls are about two weeks away. A few important questions arise.

Pertinent Questions

1.      Now, in spite of the need to rake in more revenue for Government, how and in what ways does a rent tax and a reduction in the rent advance period help to achieve the policy objectives of the new National Housing Policy?

2.      Is the reversion to rent control an exercise of populism against the economic saboteurs – landlords and investors - or an act of exercise justice for poor tenants in a corrupt housing market?

3.      Was the new National Housing Policy dead on arrival?

Kenneth A. Donkor-Hyiaman, MPhil (Cantab)

Doctoral Researcher (Real Estate and Planning)

Managing Partner, MeTis Brokers (Private Equity Real Estate Investment Firm)

Housing Policy Contradictions in Ghana?

In 2015, a new National Housing Policy was promulgated after over 3 decades of policy vacuum (since the 1970s despite piece-meal attempts to recognise housing in some policy documents by succeeding Governments). Two of the policy objectives are:

1. To promote greater private sector participation in housing delivery;

2. To create an environment conducive to investment in housing
for rental purposes.

Policy initiatives to achieve the objectives include:

1. Provide fiscal and monetary incentives for increased private sector investment in housing infrastructure for those benefitting lower-income households. The details of these incentives are contained in the country's investment code.

2. Review the Rent Act, Act 220 (1963) to streamline rent regulations and empower the Rent Department to encourage investments in the construction of rental housing as well as the protection of vulnerable households from abuse by house owners. 

While the Government has embarked on some laudable housing projects in some respect directly and in partnership with the private sector, the effect of two major Government actions on the nation's ability to achieve these objectives require some careful analysis.

1. RENT TAX

The Income Tax Act, 2015 (ACT 896) introduces a RENT TAX - 8% in the case of RESIDENTIAL PREMISES and 15% in respect of COMMERCIAL PREMISES of the gross rent paid to Landlords/landladies - to be withheld by tenants and remitted to the Ghana Revenue Authority. Rent tax reduces investors cashflow and increases risk, which could make housing investment relatively unattractive.

2. REVIEW OF RENT ACT, 1963, (ACT 220)

There is a move to review the Rent Act in recent times. One of its propositions according to the Deputy Minister for Housing, Mr Sampson Ahi, is the reduction in the rent advance period from 6 months to 1 month. Already, most landlords require on average 2 years rent advance in the major cities because the 6 month rent advance may not be worth their investment. From an investment perspective, rent advance is a mechanism to reduce investors' risk and increase their initial yield, to help them recoup upfront some portion of the substantial investment they have made in housing. A reduction in the rent advance period increases investors' risk and reduces their initial yield, which make housing investment relatively unattractive.

Now, in spite of the need to rake in more revenue for Government, how and in what ways does a rent tax and a reduction in the rent advance period help to achieve the policy objectives of the new National Housing Policy?

Is the new National Housing Policy dead on arrival?

Review of the Rent Act must be Evidence-based and not driven by mere sentiments 

At the maiden Youth in Construction Conference held at the La Palm Royal Beach in Accra, Mr Kenneth Donkor-Hyiaman, a Research Fellow of the Property & Planning Institute of Technology (PPIT) speaking on “The need for research impact in the construction and real estate industries in Ghana” questioned the basis for the proposal to reduce the rent advance payment period from six months to one month. He challenged the Deputy Minister for Water Resources, Works and Housing, Mr. Sampson Ahi to produce the evidence-based (data and research) that supported this eminent policy change.

Mr Kenneth Donkor-Hyiaman acknowledged the need to update some portions of the rent act to reflect current circumstances but bemoaned the possibility that the basis for a theory of change appears to be informed more by sentiments than data and research.  It is a fact that some landlords take more than six month’s rent advance from prospective tenants amidst increasing rents. This situation has made it difficult for some people to secure decent accommodation or lose their accommodation to the highest bidders. He argued that this situation is fundamentally a result of the huge housing deficits in Ghana and the best solution is to increase housing supply and not to legislate the problem away.  This latter he christened as “picking the low hanging fruits” – the easy but less effective approach.

The Youth in Construction Conference was organized by the Global Communities as part of the Youth Inclusive Entrepreneurial Development Initiative for Employment (YIEDIE) project on August 10, 2016. Referring to the extant literature, the PPIT Research Fellow expressed doubt about the successful implementation of this proposal when passed into law without dealing with the housing supply constraints. He indicated that the history of rent controls in Ghana and other parts of the world is debilitating and has often worsened housing conditions wherever they were implemented. On a practical side, the PPIT predicts that such a law and policy is most likely to starve the housing market of the needed future investments since investors may not achieve their expected returns given this legal restriction and risk. Rational investors will begin to reallocate their resources to other investment assets like stocks, bonds and infrastructure, beside others that provide better returns with less or the same risk. 

The PPIT is of the view that the prolonged culture of policy making without robust data and research might be the natural outcome of the lack of research in general and research impact in the real estate and construction industries to be specific, beyond academic impact – where research findings are published in academic journals. Making reference to previous and established definitions of research impact as the: outcomes, benefit, payback, translation, transfer, uptake and utilisation (Beacham et al, 2005; Carden, 2004; Flint, 1998), he therefore presented a framework for evaluating research impact in the construction and real estate industries in Ghana. He highlighted the need for more research of the pertinent and rising issues in the construction and real estate industries, but research that demonstrates change either real or potential beyond the research process and its primary outputs.

The Property & Planning Institute of Technology, a research Institute focused on real estate, construction, and infrastructure planning and policy research is leading an advocacy to maximize the impact of research in the real estate and construction industries in Ghana. The PPIT seeks to lead demand-driven impact research for evidence-based policy making in the management of real estate, construction industry and environmental resources in Ghana. He called on private and public institutions to use the services of the Institute.

Urbanization, Economics and Politics: Lessons from the Talensi By-Elections

The Talensi by-election is over and political parties are counting their losses and gains. Despite the few skirmishes of attacks on some NPP and NDC members from unidentifiable persons (so far), it is reported that the actual voting exercise was successful. Despite the so-called economic hardships in Ghana, the ruling NDC-led government recaptured their old seat. To some social commentators and political analysts, the Talensi seat has always been an NDC seat, so it is not surprising they won. To some economists like Sydney Casely-Hayford, a win for the NDC provides no additionality to parliamentary checks and balances. All of these reasons are good and are context-specific. It appears that these reasons are traditional and do not draw implications for future elections. An alternative reason may therefore be additive.

In this brief note, I suggest that the dynamics between the level of urbanization and macroeconomics play a major role in influencing political decision-making. Very often, the free market philosophers like some NPP sympathizers and activists cite illiteracy and tribalism as the major reason why the rural areas usually vote for the NDC.  Timeously, just when I was looking for a reference, John Boadu, the National Organizer of the NPP availed himself opining as cited by Okoampah-Ahoofe (2015) that: “I was thinking that the people of Talensi would look at the maladministration, the incompetence and corruption of this government and vote against them. Impoverish the people, [and] if it is time for election, come and pretend as if you are bringing development to win their votes, which is a sad day for Ghana. My view is for the people of this country to get state institutions to do the right thing” Interesting!!!

I wish to state here that it is this entrenched notion of somehow wrong diagnosis of the factors that determine voting decisions that may cause the NPP the 2016 election. What is my point? A better understanding of the dynamics of the rural/urban divide vis-à-vis the macroeconomics can influence the political fortunes of the NPP and the NDC. The NDC has very often gotten this strategy right. No doubt that most NPP commentators are good at analysing the macroeconomic effects on national development in the media and they expect everyone to care about macroeconomic mismanagement and corruption etc. however, when it comes to winning elections, well-informed strategy is indispensable other than the parading of macroeconomic lessons. Therefore, as cited by Kades (2002) and recently by Arthur Kennedy of the NPP, Tip O’Neal’s adage that “all politics is local” may be true. “In Talensi, campaigning on “Dumsor” and the struggles of the Cedi against the dollar proved to be at best inappropriate” (Kennedy, 2015). However, from O'Neal's adage, the word local is vague and subject to different interpretations and questions like: what is the meaning of local? How do we define the geographical boundaries of local? Is it possible for external factors to influence local politics?

Based on these questions, I contend that it is rather the level of urbanization than just local politics that determine voting trends. This is because the level of urbanization in an area determines which external factors can influence local politics. In other words, if we define local to mean the geographical boundaries of Talensi, then local politics will determine voting trends in so far as Talensi is rural and cut-off from national trending issues like “Dumsor” and the cedi’s depreciation etc. This is where deductive reasoning is constrained because logically, the geographical boundaries of Accra or any of the other cities (urban areas) can also be considered as local, however, it is not only the local politics in Accra that determine voting trends in same. External factors  including international issues like the recent global financial crisis and broad macroeconomic issues like exchange rates fluctuations, high unemployment, high and volatile inflation and interest rates greatly influence the well-being of voters in the urban area (and to a lesser extent voters in the rural area), and thus will influence voting trends greatly. In effect, it rather the degree to which the local economy is integrated into the national economy (typically described as contagion in economics and finance) that determines which factors influence voting decisions. Further explanation to this phenomenon is what this article seeks to provide.

It is also fair to make a comment on Arthur Kennedy’s assertion that: “nearly 6 in 10 of the voters in Talensi rejected the NDC candidate. It means that translating this into Presidential terms, the NDC can be beaten in 2016 in Talensi. This should give a lot of encouragement to the NPP and worry the NDC quite a bit, particularly since this is in the north where they are supposed to be strong”. First, how this statistic was calculated and the inputs used are unknown. Even more important is the fact that this statistic tells us very little about future elections in Talensi just like the claims of the President and the NPP’s Presidential flagbearer: Talensi will predict how 2016 national elections go. From Arthur Kennedy’s article, the benchmark based on which this conclusion was made is also unknown. For this conclusion to hold, a trend analysis is required and it should satisfy the condition that, previous statistics of this nature should be that less than 6 in 10 of voters in Talensi rejected the NDC candidate. That means that the NDC performed better previously compared with the recent by-election. In summary, this conclusion is a complete statement that need justification to be valid and reliable.

To proceed, the definition of macroeconomics is useful to enhancing our understanding of the arguments made in this note. Macroeconomics deal with aggregated indicators of economic growth, prices of goods and services and the factors that affect these parameters, such as inflation, interest rates, exchange rates, unemployment rates etc. These macroeconomic indicates have systematic effects, in that it affect a large portion of the national economy, depending on the degree on integration of the local economies. In well-integrated economies, the effects of macroeconomic indicators and hence contagion (the spreading of an effect) are higher. Just a look at these macroeconomic measures provides some explanation to why despite the profuse critique of the NDC-led government as bad managers of the economy, the party still won the Talensi by-election. So why is it that NDC-led governments are usually characterized for high inflation, astronomical interest rates, high unemployment rate and exchange depreciating, yet the party keeps winning seats in the rural areas? At least, barring all irrationalities such as the popular reference – illiteracy and ethnicity songs sung by the opposition – does bad macroeconomic management influence the political decisions made by the rural folks? Generally yes, but critically no and this is due to the level of urbanization in a country ― the degree to which the local economy is integrated into the broader national economy.

The modernization of space due to urbanization is implicitly linked with the urban economy and subtly to the rural economy. Thus, the rural/urban economy divide is an important consideration usually ignored by most of the social commentators, political analysts and economists. This is why it is important. Every economy must produce the goods and services it needs, and where the economy is unable to produce these goods and services, it must import them if the economy is open.  Within a country, there is a difference between the goods and services consumed by the rural economy and those consumed by the urban economy. When modernity requires the consumption of some goods and services that the local economy does not produce, and in the case of Ghana goods like cars, fashion, building materials like tiles, clinker for cement production and some finishes, amidst macroeconomic fluctuations, the urban economy suffers directly while the effect are slight on the rural economy. This is because the rural economy is largely delinked from the use of these goods and services. I will discuss these goods and services mainly in terms of basic necessities like food, shelter, transportation, education etc., which normally constitute the large proportion of expenditure in low-income countries.

First, most buildings like the “atakwame” buildings in the typical rural areas are built with unstandardized materials like mud for the walls with sticks for reinforcement and thatch for roofing, which are usually free. Very little foreign materials are used and so owners are quite insulated from the effects of building cost inflation. On the other hand, the urban economy must abide by planning standards and building codes that require the use of building materials whose prices are affected by macroeconomic fluctuations.

Second, in a business sense, the rural economy is usually agragrian and relies on unsophisticated farming tools. They barely borrow from financial institutions to buy sophisticated machines like harvesters and planters etc. and hence are rarely affected by the increases in interest rates, which most urban people talk about daily. Third, in terms of food, the agrarian nature of the rural economy - on a subsistence basis – means that people eat what they produce and sell or store the surplus. There are rarely modern food shops like restaurants and fast food joints where one can buy food that has foreign (imported) components and for that matter affected by effects of bad economic management like inflation or exchange rate depreciations. They don’t usually drink sachet water and bottled water, as is the case in urban centres, which are all affected by high inflation.

Fourth, in terms of education, most of the schools in these rural areas are public and usually free at least at the basic level. This is where most of the rural folks end their academic journey, and so they do not feel the pressures of high school fees and costly text books, high transportation cost to school etc., which is a major feature in urban areas. In fact, the major mode of transaction in the rural areas is usually by foot. Apart from walking long distances to the farm and back, fewer distances are covered should the rural folks visit their families and friends due to the compactness of rural settlements. Most often, family members lived in the same house and friends are just nearby, so there is very little need for modern transportation equipment like cars and their associated costs. The nature of rural settlements actually offers cost-saving opportunities. Fifth, on employment, it could be said that there is full employment in the rural settings. Almost everybody has a farm or work in a farm or some other informal job. The so-called high unemployment rate is just an urban phenomenon.

From this brief discussion of the characteristics of the rural and urban economies, it is clear that there is a vast difference in the factors that influence political decisions. It is clear that in the urban areas, national macroeconomic variables like inflation, interest rate and exchange rate movements as well as unemployment may be significant and important. Conversely, in the rural areas, social factors like family ties, ethnicity etc. may be the major determinants of political decisions-making. It is not that the rural folks are irrational, as political activists tend to present to us; rather it is simply information asymmetry and the inefficient transmission of hardship resulting from economic mismanagement to the rural economy due to the disjoint between the rural economy and the urban economy.

Implications of Economy Characteristics for Political Strategy and Campaign

Simply, the rural economy is quite insulating from the macroeconomic effects of economic mismanagement. So, campaigning on economic hardship as a result of high inflation, high interest rates and exchange rates will not fly because the rural folks barely feel the effects of bad economic governance and management. Politicians must focus on the social issues like getting closer to the poor folks and showing them some respect – these are more important. This is where the elites and their parties like the NPP may have some challenges. They should stop talking about macroeconomic mismanagement when they campaign in the rural areas because the rural folks are not even likely to understand all the jargons they sometimes use.   For the government in power, focusing on small infrastructure development in the rural areas has a higher effect on the lives on the rural folks than on urban citizens. This is because; it may be a major solution to a protracted problem and will be novel in the eyes of the rural people. The effect of a small infrastructure project in the urban area is lower because the urban guys have a comparative measure from the developed world and so are not able to appreciate them unless they are equivalent to the infrastructure found in the West. 

The implications are that, if government wants to stay in power for long, it must focus on small infrastructure in the rural areas – build more toilets, provide bole holes, schools, provide basic agricultural tools like machetes, fertilizers etc. In the urban areas as places of modernity, the government must concentrate on building world-class infrastructure and focus on the macroeconomy; reduce inflation, interest rates, and exchange rates, provide jobs etc. This is a simple approach to winning and sustaining power in countries with low urbanization levels, like Ghana. 

In essence, there is a strong link between the level of urbanization in a country and economics as they affect political decision-making. The level of urbanization in a country determines the degree to which all the local economies in are integrated into the broader national economy and hence the speed with which macroeconomic effects affect the lives of the rural economy and people. These factors therefore influence how the ruling government is assessed by the rural folks and then determine the effect of macroeconomic performance on voting. Maybe, we should review the traditional view that illiteracy and tribalism determines voting patterns in some areas like the North!

Kenneth A. Donkor-Hyiaman