Dipak Mazumdar

The Structure and Determinants of Inequality and Poverty Reduction in Ghana, 1988-92

Using three rounds of the Ghana Living Standard Survey, conducted between 1988 and 1992, the authors present findings that shed light on the structure of inequality among different socioeconomic groups in different geographic areas, in the context of poverty reduction. First, poverty reduction can be attributed mainly to improvements in both average levels of income and the pattern of its distribution in the informal and nonfarm sectors in other cities and rural areas outside the capital city, Accra. Second, an analysis of different measures of inequality reveals that the most important changes in the degree of inequality took place at the lower end of the distribution. But the direction of change was different in Accra compared with the localities outside Accra. In Accra, while inequality increased overall, the inequality in the lower part of the distribution increased much more. In other cities, there was a more or less uniform improvement all along the distribution. But in the rural areas, there was a significant improvement at the lower end, but a deterioration at the upper end. Third, structural adjustment - which aimed to cut back public sector employment and stimulate activities in the private sector - raised living standards in rural areas and other cities, but not in Accra. The public sector is much larger in Accra than in other cities and rural areas. Contraction of the public sector in other cities and rural areas was compensated for by income growth in the informal and nonfarm sectors. But contraction of Accras large public sector dominated the local economy, so living standards declined in both formal and informal sectors. Accras economy will probably grow as its private and informal sectors grow. Fourth, major shifts in the population occurred in all localities from the formal to the informal sector, but the magnitude of the shift was largest in Accra - in fact, several times more than in the other localities. The deterioration of the income at the lower part of the distribution in both the formal and the informal sectors is mainly responsible for the decline in the welfare of the low income households in Accra. These findings suggest that an integrated regional strategy, taking into account the local socioeconomic structure, is necessary for achieving economic growth and poverty reduction in all regions. Another important finding: The poor do not benefit as much from education as the nonpoor do because there is very low return (in income) to primary education, the highest level most poor Ghanaians can hope for. Education helps increase, rather than decrease, inequality, so primary education for the poor should be designed to provide them with income-earning skills. Developing economic strategies for sustainable poverty reduction will require further research on activities in the informal sector. Another issue that requires investigation is the role of different administrative regions in the determination of household welfare that seems to have changed over the period under study. Findings from such an analysis will facilitate the design of appropriate regional strategies for poverty reduction in Ghana.

East Asian Labor Markets and the Economic Crisis: Impacts, Responses and Lessons

The sudden, and often painful consequences of the financial crisis in East and Southern Asia, led to disappearing employment, and earning opportunities in the formal sector, reduced incomes, and meager social assistance. Thus, these difficult events of the late 1990s, raised questions for the regions countries, regarding the labor market aspects of the crisis, and the needed labor policy reforms for the long term. It is in this framework that the World Bank, and the International Labor Organization (ILO) sponsored a series of papers on policy options, i.e., unemployment benefits, active labor market programs, support for vulnerable groups, and social dialogue, which were presented at the Tokyo Workshop in October 1999. This book includes those country reports, and international policy papers, in a revised form to reflect the seminar discussions. It describes how regional labor markets were affected, and how governments, and communities responded, and, looks forward in setting out the labor policy options for the future, based on international experience. A follow-up project, will focus on the application of active, and passive labor programs, to be discussed at a regional seminar in early 2001.

Employment, Labor Markets, and Poverty in Ghana: A Study of Changes during Economic Decline and Recovery

An awareness on the part of policymakers that the formal sector is only a small part of Ghanas labor market is a necessary precondition of appropriate employment policy. If the government is unwilling to reduce public employment or to alter public spending to invest more in agriculture, and infrastructure employment conditions will worsen, high public-wage policy will fuel inflationary pressures, reducing such investment even further. An active labor policy and employment creation is necessary for sustainable poverty reduction. The slowdown and possible reversal in the rural-to-urban flow of labor in Ghana is symptomatic of a basic shortcoming in the country`s economic recovery: the inadequate growth of the productive sector in the nonagricultural economy. The rate of growth of GDP has been adequate but much of the growth has been fueled and led by the services sector, which (at more than 46 percent) has surpassed agriculture as the main contributor to GDP. In some way growth in the services sector has been positive, but arguably it is a once-for-all adjustment to recover that cannot be sustained at this growth rate without commensurate growth in both agricultural and nonagricultural production. Evidently, stabilization and liberalization measures have not been sufficient to put the industrial sector on a path of sustained growth. There is too little skilled labor in Ghana, and demand for industrial goods has been weak, in part because the cost of credit is high and savings are too low for inefficient, state-run enterprises to buy the equipment they need. Returns to higher (especially university) education are high in Ghana, largely because of high wages for government services. Because of inadequate technical and vocational education, returns to secondary education are low. Employment trends have mirrored the deficiency in output growth. Every year since 1987, industrial employment has fallen. The growing labor force, which agriculture could not absorb productively, has spilled over into service activities and the informal sector. Ghanas large informal sector is symptomatic of an economy with low growth potential. In the medium term, the surest way to absorb labor would be to increase investment in the agriculture sector. And the only way to increase investment in that sector is to change the composition in public spending. As long as the public sector wage bill remains a sizable part of government expenditure, an increase in wage levels not compensated by reduction in employment will create strains in the budgetary balance and will defeat the most important instrument of increasing the growth rate of employment-higher levels of public investment in agriculture. It is possible that a vicious circle is complete. Higher wages in the public sector might be necessary to increase efficiency, without which productive public investment is not possible. But if the government is not willing or able to reduce public employment, and is further unable to alter the composition of expenditure to provide more finance for agriculture-related public investment, a high wage public policy will merely fuel inflationary pressures reducing the real investment ratio even further. The only way out of this vicious circle, if it exists, is a larger infusion of foreign and private investment than has been seen so far, supplemented by corrective monetary policy. This paper - a product of the Human Development Technical Family, Africa Region - is a background paper for World Bank Economic Sector Work on Ghana: Labor Markets and Poverty.

Openness and Within-Country Inequality

Increasing globalization is a fact of life. Dramatic reductions in transportation and communication costs, and colossal increases in capital flows, are knitting together the world economy as never before. Although some of the recent trends are not dramatically different from the past,2 there are some new patterns, such as the marked rise in manufacturing exports by a group of developing countries in East Asia. Should other developing countries, particularly those in Africa, go against the grain of this globalization, or should they work towards complementing it? While resisting global trends is most likely a futile activity, the issue of complementary policies is important because, in our view, closer integration of the world economy poses significant tradeoffs — while it holds out the prospect of higher growth it also carries dangers of increasing inequality in the short to medium run, particularly because of the interaction of globalization and new technology with existing skill and educational inequalities.