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CEPA cautions govt. of Dutch disease

By Kofi Ahovi
The Centre for Policy Analysis (CEPA) has called for effective management of the country’s exchange rate to ensure that it avoids the Dutch Disease.

At the launched of a document, last week, titled “The Year 2010: From a Cocoa Economy to an Oil Economy,” CEPA observed that the Ghanaian economy appears set to move from what may be called a cocoa economy to an oil economy.

“Effective management of the exchange rate will therefore be critical, if oil is to enhance our growth prospects and if Ghana is to avoid the ills of the Dutch Disease,” the executive secretary of CEPA Dr. Joe Abbey cautioned.

According to CEPA, Anecdotal evidence has it that some Ghanaians desire that the exchange rate of the cedi reverts to parity with the US dollar, which it believes would be the onset of the Dutch Disease.
The Dutch disease is a concept that purportedly explains the apparent relationship between the increase in exploitation of natural resources and a decline in the non oil sectors. The theory is that an increase in revenues from natural resources will de-industrialize a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive and public services entangled with business interests. It originated from the nominal and real appreciation of the exchange rate that resulted from the large inflows of foreign exchange earnings from the Dutch export of gas in the 1960s.

There have already been signs of the cedi appreciating against key currencies in the first quarter of this year, 2010 and this trend is expected to continue for the rest of the year.

CEPA cautions that, this steady and creeping appreciation of the cedi comes with associated risks of choking off the growth and employment potentials of non-oil sectors, in particular, agriculture and manufacturing. “The lessons from the experiences of other African oil producers, in which windfalls in foreign exchange earnings have had a number of negative economic repercussions, need to be fully learnt.”

Comparing Ghana to China, Dr. Abbey, noted that these developments and tendencies on the foreign exchange front are the exact opposite of what is currently happening in China. “The Chinese appear willing to sacrifice a measure of current well-being in exchange for jobs. Ghana, a much poorer country, even if unconsciously so, appears bent on choosing the opposite a preference for current well-being even at the expense of having less jobs. Chinese policymakers do not use the Yuan as a tool for managing inflation. They use it instead as a tool to maximize exports and employment a tool they appear not yet ready to give up. China is seen to have kept the value of its currency artificially cheap, thus implicitly subsidizing its exports while taxing its imports.”

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