Vicious cycle of poverty; The reason West Africa economies are unable to break free.

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Author: Boadi Patrick Kwaku

Multi Credit Savings and Loans

Ghana.

The vicious cycle of poverty sums up the unfortunate situation which most West African economies are ‘glued’ in. At the micro level, most households and individual firms  in West Africa continue to produce less – receive less income(revenue) – save less , and this ensures poor capital formation – production(consumption )will be less again , and the cycle continues like a maze which has its tail swallowed by its mouth. The situation is no different at the macro level when the aggregation of performance of individual households and firms are done. The basic knowledge in Economics we obtained made us come to the realization that, for such a cycle to be broken in the short run, there should be an introduction of an external factor, and in the long run, a consistent postponement of present consumption (saving) and proper management of the economies can help in adequate capital formation which in turn can redeem these ‘accursed’ economies from the ancient trap. There seems to be little or no hope for West Africa when one considers both the demand and the supply side of the vicious circle of poverty of Africa. In Nigeria, as at December, 2016, 70% of the total population was still below the poverty line (that is 70 out of every 100 Nigerians cannot get $ 1.9 (approximately $2) to live on in a day)). In Ghana and in Ivory Coast, the figures were 24.2% and 42% respectively as at 2016 (CIA World Fact Book Report, 2017).  This acute level of comfortability of West Africa on the ‘bed’ of destitution  springs from many other factors of which poor management of the economy by politicians, worsening terms of trade and poor international trade relations with the rest of the world , and  high population growth rate stand prominent.

It is rather unfortunate that the managers of the various economies in West Africa turn out to be politicians with adequate ‘African’ mentality. Most of the countries in West Africa are endowed with many natural resources, and one expects that, the availability of these resources should bring about a sustainable growth (development) to these West African countries. Yet, after a period of over five decades of modern technological advancement which the world has experienced in the production of goods and services, West Africa has not been affected in any better way. The managers of West African economy (Politicians) play politics and toy  with major economic decisions such as what to produce, when to produce, how to produce what to produce, to whom to produce , and the effective channel to be used to distribute what has been  produced. No country can play with these major economic decisions and still progress. Most politicians in West Africa do not produce what their countries need, and even if they do, production mostly take place on the  ‘ eve’ of Election Day to score political points(a time that does not allow effective planning for proper production of public goods). Politicians are running the economies of West African states on debt and grants (they are borrowing more than necessary). Loans are granted to countries in West Africa by their developed counterparts at a very high interest rate. It comes as no surprise that every year, interest paid on foreign loans takes an elephant share out of Gross Domestic Product (GDP) of these countries. Also, most grants given by foreign donors to these developing countries also have suicidal strings attached to them. One wonders whether developed countries are  schematic in keeping West Africa in this ‘web’ of poverty .Moreover , the right production mix (efficient combination of capital and labour)  are not being used in the production process in most West African states. Unemployment is very high in West Africa  because the managers of the economies have consistently resorted to the employment of expensive Western ‘machines’ over the cheap labour in their own countries. Such a production mix preference of  capital intensive method of production to labour intensive method of production in Africa (a continent where labour supply is very high and the  price of labour very low ) has only brought about a continuous increase in the unemployment level in the sub-region. It will also interest you to know that , majority of natural resources found in West Africa are exported overseas in their very crude state for a little value to be added to it only to be imported  at a very escalated price- West Africa  indirectly create employment overseas and continue to linger in tattered penury. Why should Ghana export  crude oil she obtain from her Jubilee Field , and later export crude oil with little or no value added to be refined by her Tema Oil Refinery? , and why should Nigeria export all her crude oil and import refined oil when they still have lots of refineries? It is about time West Africa either used what they have  , produced what they can, leave  what they cannot produce efficiently for the western world to produce ; West Africa can later resort to exchange(international trade)  and become better off through international trade if they  . Inspiration can be drawn from Malaysia.

Worsening terms of trade and weak international trade relationship with developed countries also continue to keep West Africa in the shell of poverty.  In reality, there is nothing like a closed economy; all economies are open to international trade. For a long period of time , West African Economies have suffered more than they have gained from their close association with Europe and the rest of the world. Poor regulation of import and export tariffs has caused the death of most infant local industries as they battle with giant multinational companies from overseas for consumers. Not only are these giant companies from Europe, Asia and America able to produce goods with minimum cost (partly because they enjoy economies of scale, and due to the availability of modern technology), and as such, they are able to offer better goods and services to the West African market at a comparatively low prices; they are also able to package their products properly, and run effective advertisements for the goods and services they produce .

Most Local industries from West African countries can only produce goods and services with maximum cost partly because of low level of technology. In effect, unlike their foreign competitors, local companies are not able to offer their goods to the local market at a lower price. Sometimes they are forced to offer their goods at a relatively cheaper price just to clear their stock, and in effect breaking-even even becomes a problem. Why would any Congolese buy a locally produced bag of rice which is poorly packaged at a higher price when a well-packaged bag of perfumed long-grain rice from overseas (which probably tastes better) goes for a relatively lower price? All other things being equal, a solution to this menace should be the imposition of high import tariffs and, or outright ban on some imported goods to help the local industries enjoy some sort of monopoly over goods and services they produce in West Africa. With time, since these local industries will enjoy some sort of monopoly, they can improve the quality of goods and services they produce, expand and enjoy economies of scale. Yet, West Africa continues to open her boarders for her local industries to receive unfair competition from foreigners. Most local industries continue to close down operation due to lack of market. This affects total domestic output negatively, reduces income, reduces aggregate saving and finally leads to low demand (consumption).

Moreover, West African countries commit to the production of goods and services which they have comparative disadvantage in their production, leaving those they have comparative disadvantage in their production. Majority of West African countries are blessed with the production of raw materials (primary production) while their counterparts from Europe, America and Asia are blessed with turning the goods in the raw state into finished goods (Secondary production). The principle of international trade explains that two or more countries which engage in trade should specialize in the production of goods and services that they can produce efficiently -with least cost of production and with fewer resources.  When this is done, effective trade (exchange) can therefore be made and countries from West Africa will be better off. However, most West African countries have shifted concentration from primary production (which they have comparative advantage) to secondary and tertiary production which they have comparative disadvantage in. Africa is endowed with better soil and favorable weather condition for agricultural production. However, In Ghana, Agriculture remains the lowest constituent of GDP (19.5%), while service provision remains the highest forming 56.4% of GDP.  This simply shows that the Ghana, like most West African Countries, does not produce at the area it has comparative advantage. In the United Kingdom, 80.2% of GDP comes from service provision(tertiary production) while only 0.6% of GDP comes from Agricultural (area they have least comparative disadvantage in production due to poor weather and poor soil for raising crops and raising animals)

One way of breaking away from the vicious cycle of poverty in West Africa is through savings. Savings here is defined as part of present consumption postponed.   Almost every year, expenditure of West African countries exceeds their income. So they are left with very little or nothing to save.  Accumulating debt has been weighing these countries down as they even go to the extent of borrowing from developed countries to supplement consumption. These debts come with very high interest rates which saddle these developing countries. Servicing the interest on accumulated debt alone is a huge burden on these African countries. Subsequent governments also come and borrow more, and pass the burden of repayment of the principal and interest unto the next generation.  How can countries which are unable to save much be able to raise adequate capital for investment? A comparative study of the economies of Nigeria, Ivory Coast and Ghana, three of the giants of West Africa, depicts that expenditure exceeded revenue by $9.81 billion, $ 1.3 billion and $ 2.48 billion respectively (CIA World Fact Book, 2017). With such unfavorable figures, net savings will definitely turn out to be low in these countries? West African economies(Politicians) should live within their means- cut down unnecessary consumption, minimize corruption , and start committing resources to servicing their ancient  debt so that , in the few decades to come , they can start saving enough to break away from the vicious cycle of poverty . West African countries remain poor because they do not save to raise adequate capital resources for investment. With low Investment, productivity will continue to be low. Low productivity will lead to low income and low per capita income. For a country with low per capita income, level of saving will be low again and the cycle will keep traveling in an endless ring.

Rapid Population growth remains prominent among matters holding West Africa in the vicious cycle of poverty. Most West African countries are overpopulated. Where there is overpopulation, efficiency of production turns out to be very low as a whole lot of labour will be fighting over limited resources to work with. Most of the resources in the various West African countries are used with no plans of sustaining them for the future generation. In effect these resources are depleted, and as the population growth rate remains high, overpopulation occur (The resources in West Africa are not enough to support the rate of population growth). There is no denying the fact that the quality and quantity of resources like gold, timber, diamond, bauxite, petroleum, forest reserves and arable land in West Africa are not as they used to be formerly. Year-in and year-out, an increasing population (labour) has to fight over   diminishing resources to work with. This results into low efficiency in the production of goods and services. When efficiency is low, total output falls, and a fall in total output is a flashpoint of low income, which will consequently result in poverty. With a population growth rate of 2.43 % , Africa continue to lead the other continents of the world in 2017; Europe recorded population growth rate as low as 0.038% , and even Asia recorded 0.914 % population growth rate(World Population Review Report, 2017) . Until West Africa maintain optimum population which will ensure that resources combine effectively with the level of population, other things being equal , poverty will continue to be high.

West Africa does not lack resources; what West Africa lacks in her battle with poverty is good Managers of the economy. I must admit, that African politicians are very bad managers of economy. Until the day when a proper ‘demarcation’ will be made between Politics and Economics in West Africa, we will forever remain in tattered penury.


Patrick Kwaku Boadi
Multi Credit Savings and Loans Ltd.
Ghana

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