Professor Edward Ghartey
A Senior Fellow of the Institute of Economic Affairs (IEA), Professor Edward Ghartey has called on government to direct national resource policies toward promoting economic growth in order to ensure financial development in the country.
According to him, such recommendation does not in any way suggest that government should stop the direct financing of projects.
“There are goods and projects which the government can and must finance directly with national resources and taxes to promote economic growth. These are public goods and services that a third party who has not contributed to their production can consume.
“They include government financing of infrastructural projects such as the construction of roads, bridges, street light, drilling boreholes to provide good drinking water to rural communities, etc. They are necessary for promoting economic growth and improving the welfare of the society.”
Reacting to a column in this paper which misinterpreted his recent lecture during an IEA roundtable in May this year, he said his lecture was based on empirical study which revealed that financial development, which is captured by proxies such as real private domestic credits, real cash balances, real quasi-money which includes time, savings and foreign currency deposits, currency ratio and market capitalization as a ratio of GDP, are important contributors to economic growth of the nation.
“In particular, elasticities of most of the proxies are greater than unity. This means that a unit increase in those financial development proxies with the exception of market capitalization ratio which is used to capture the role of the stock market contribute more than a proportionate increase to economic growth.
“However, a unit increase in the stock market development contributes to less than six percent of economic growth.”
Prof Ghartey said notwithstanding the fact that most financial development proxies are elastic, financial development does not drive economic growth in the country.
On the contrary, the empirical results show that generally economic growth drives financial development in the nation.
Explaining further, he said as Ghana’s economy grows “it will bring along in its trail an increase in financial development which is defined as demand for financial services, instruments and institutions.
“In my lecture, I recommended that government should not directly finance private goods that are produced by businesses which a third party who has not contributed to their production can be excluded from consuming. To illustrate my point, a sewing machine, a laptop computer, a bicycle, a car, etc. are private goods that the government is better off not to directly finance with taxpayers money.
“Finally, it is important that in Ghana, the government desists from directly financing individuals or businesses to produce private goods. Instead, the government should channel through financial intermediaries like banks at a subsidized rate, any national resources or government revenues it wants to assist start up SMEs or individuals or businesses to produce private goods, and rather specialize in using national resources or government revenues to efficiently produce public goods and services.”
He said indirect financing of private domestic businesses through loans offered by financial intermediaries on behalf of the government is devoid of political trappings.
Such loans can be recovered even if the government of the political party that initiated the loan is out of power. Additionally, financial intermediaries like banks, unlike governments, face relatively little asymmetric information problems.
They also keep records better and can enforce restrictive covenant associated with collateral securities, he indicated.
By Samuel Boadi