Ghana’s Export Performance: The Role of Exchange Rate Volatility, Exchange Rate Policies and Challenges to Export Diversification

Abstract

The thesis is divided into three empirical papers to address the core issues regarding the main drivers of Ghana’s export performance both at the macro and micro levels with focus on the role of exchange rate volatility and exchange rate policies, and the constraints to Ghana’s export diversification effort by examining its economic complexity levels as well as the product space and the prospects for structural transformation. The empirical chapter one, titled “Ghana’s Export Performance: The role of Exchange Rate Volatility and Exchange Rate Policies” investigates the heterogeneous responses of the various components of total export (cocoa beans export, natural resources export, and nontraditional export) to exchange rate volatility and exchange rate policies. By using a linear ARDL technique on quarterly data for the period 2000 to 2016, the impact of exchange volatility on total export and its components is not statistically supported in the immediate short run. On the contrary, the results from a non-linear ARDL technique that decouples the exchange rate volatility into negative and positive effects suggest that a negative short-run response of non-traditional export and total export to negative exchange rate volatility (excessive depreciation) is statistically supported in Ghana. Besides, the results from the nonlinear ARDL suggest that exporters of natural resources (gold, crude oil, and other minerals) respond positively to positive exchange rate volatility (excessive appreciation) in the short run, which could be attributed to their ability to secure risk mitigating schemes. This may have implications for capital outflows if appropriate measures are not instituted to check the orderly transfer of profits by owners of the capital used for the exploitation of these natural resources, who tend to be foreigners. However, neither the linear nor the non-linear ARDL techniques statistically support a response of cocoa beans export to exchange rate volatility in the immediate short run. This outcome may be attributed to the protection offered against short term risk due to the marketing arrangements established by the Ghana Cocoa Board over the years. In the long run, the results from both the linear and non-linear ARDL techniques provide evidence in support of the argument that exchange rate volatility depresses non-traditional export performance. The outcome is however different for total export conditioned on whether the linear or the non-linear ARDL technique is applied. On the role of exchange rate policies, results from the ARDL techniques support the argument that an increase in anti-export bias policies undermines the performance of non-traditional export, which is not the same for natural resources and total export. Cocoa beans export appears not to be adversely affected due to the protection that cocoa farmers enjoy from the purchase’s arrangements established by the Ghana Cocoa Board. The empirical chapter two, with the title “Ghana’s Economic Complexity and Product Space: Implications for Export Diversification” assesses the fundamental challenges confronting Ghana’s quest to achieve a more diversified export base. The study is anchored on the theoretical arguments of Hausmann, Hwang and Rodrik (2007) and Hidalgo, Klinger, Barabási and Hausmann (2007) that the nature of the products, constituting a country’s export basket, which reflects the productive capabilities acquired over the years, matters a lot in any diversification effort. Hence, the study employs the concepts of Economic Complexity Index (ECI) and Product Complexity Index (PCI), Product Space and Revealed Comparative Advantage (RCA) generated based on trade data at the HS 4-digit classification level for 1240 products, for the period 1995 to 2016, to undertake comparative analyses between Ghana and some selective countries (Nigeria, Singapore, and Malaysia) to address the question relating to why Ghana’s export basket is less diversified. The study also examines sectors that have emerged from the products that the country has established a comparative advantage and how that has contributed to its structural transformation effort. The study further identifies new products of strategic value that Ghana can easily deploy its acquired productive knowledge to promote future export diversification efforts and at the same time develop such products for the ECOWAS market. The study provides evidence to show that Ghana and other similar countries in the sub-Saharan African region are caught in the trap of producing and exporting products that are of low sophistication level (low PCIs) reflecting in low and negative ECIs for their export baskets. This suggests that the productive capabilities or the collective know-how embedded in these products are limited. Thus, the opportunities for Ghana to leverage on the productive capabilities acquired over the years to chart new paths for structural transformation and subsequent diversification of the economy is constrained. This puts Ghana in a vicious circle or quandary as far as its diversification effort is concerned. The empirical chapter three, with a title “Firm-Level Assessment of Exchange Rate Uncertainty on Ghana’s Non-Traditional Export Performance” revisits the exchange rate volatility and export performance nexus, but this time around at the firm-level, where the exchange rate volatility issue is cast within the context of macroeconomic uncertainty. Based on the resources base view and contingency theories, a plethora of academic research has been undertaken to investigate both the internal and external factors that drive export performance at the Firm-level. Besides, the study investigates the possible institutional constraints resulting in Ghana missing out on the US$ 5 billion target for NTE set for the end of 2017 as envisioned under the Ghana National Export Strategy Plan, 2013-2017. A survey was conducted on NTE firms in Ghana to elicit responses, which were used to construct subjective measures for export performance and the key predictors. Some 87 firms responded to the survey, representing a response rate of 45.8 percent. A similar survey was conducted for some institutions to elicit their views on the possible constraints encountered in the implementation of the Ghana National Export Strategic Plan, 2013-2017. In this case, three out of five institutions contacted unreservedly offered their perspectives on the issue. From both the descriptive and econometric analysis the study provides empirical evidence to support both the resource base view that firms can leverage on their internal resources to enhance their comparative advantage and competitiveness, as well as the contingency theory that assesses the firm's capabilities to overcome external headwinds. Specifically, the results from the study suggest that firms demonstrating moderate to average levels of export commitment and at the same time displaying moderate to average levels of product development capabilities are less likely to report low export performance. At the same time, average to high levels of export performance are more likely to be predicted by firms that demonstrate a high adoption rate of export promotion programmes. The study also finds moderate to average and high levels of macroeconomic uncertainties are more likely to predict low export performance and less likely to predict average to high levels of export performance. From a descriptive analysis of the responses from firms and government agencies, the study suggests that the Ghana National Export Strategy Plan, 2013-2017 suffered from both awareness and financial resources deficits, thus affecting the attainment of set targets. To the extent that most of the key stakeholders demonstrated limited awareness of the strategic plan, it was equally possible that not many activities were executed to actualise the objectives of the strategy. Besides the vehicle intended to provide funding support for firms, EDAIF appeared not to be effective in delivering the volumes of credit required. Meanwhile, the implementing agency, GEPA, was starved of the requisite funds to executive the priority projects.