1. The External Sector Econ 215: Introduction to the Economy of Ghana 1
Instructor: Dr. Emmanuel Codjoe

2. The External Sector
Ghana’s external sector is a very important part of the economy.
Ghana would be much poorer if it had no trade with the rest of the world.

3. Background to External Sector
We can distinguish between two broad periods; pre-1983 and post-1983.
Pre-1983 was marked by greater controls and interventions by government.

4. Background to External Sector
Pre-1983 was characterized by several restrictions on trade and capital movements.
These included, restrictions on international capital flows,
quantitative restrictions on trade and high import tariffs.

5. Background to External Sector However, post-1983 marked the commencement of a marked and significant shift in economic paradigm away from a more interventionist regime.

6. Background to External Sector
Currently there are few restrictions on trade and capital flows.
Ghana is actively engaged in attracting foreign investments as well as seeking to expand trade with other regions of the world.

7. External Sector Developments
In recent decades, the importance of the external sector has become apparent because of the important role in economic development.
This is especially so given the expansion of global trade in goods and services and that fact that many economies of the world have become increasing linked.

8. External Sector Developments
The growth in world trade and the associated interconnectedness of the economies of many countries has been described by the term
GLOBALISATION.
Thus, we are now in a globalised world, where the fortunes of individual economies are affected, either directly or indirectly, by the performance of other economies, especially the major economies of the world.

13. External Sector Developments
But in its core economic meaning, globalisation refers to the increased openness of economies to international trade, financial flows and direct
foreign investment.
Thus, by choosing to engage economically with the rest of the world a country obtains the following benefits:

14. Importance of the External Sector
Access to foreign goods and services, especially those that are not/cannot be produced locally.
Access to foreign markets for domestically produced goods and services
Access to foreign expertise and know-how as well as to technology and capital that is needed for development

15. Importance of the External Sector
Because of the economic relations with the rest of the world, there is increased diversity and variety in respect of the goods and services available to Ghanaians.
Moreover, there is increased competition which forces domestic firms to increase their level of efficiency, productivity, and competitiveness.

16. Concerns About External Sector
It is worth noting, however, that increased
integration with the world economy also raises
several concerns for many economic agents.
These concerns include:
increased inequality within countries and between countries,
degradation of the environment,
increased dominance of world economy by the richest countries

17. Concerns About External Sector
In Ghana, many domestic firms have expressed several concerns about the effect on domestic firms’ competitiveness as well as their operational viability in the face of relatively cheap imports.

18. Assessing the Performance of the External Sector in Ghana
It is well established that the performance of the external sector cannot be independent of the performance of both the domestic and global economies as well as policies that are pursued domestically and internationally.

19. Assessing the Performance of the External Sector in Ghana
Many developing countries are powerless when it
comes to policies pursued within the international
economic framework, despite the fact that many
developing countries are members of the major
international organisations or agencies that affect
the fortunes of the global economy (IMF, World
Bank, UN, WTO, etc).

20. Assessing the Performance of the External Sector in Ghana
Besides, with an increasingly globalised economy, it can
also be argued that domestic economic policy making is
constrained by external influences, such as membership
of international organisations and the rules that govern
membership.
Thus, countries cannot pursue policies that contravene
the general objectives of WTO towards promoting free
trade, or restrictive foreign exchange policies which goes against the general policy direction of the IMF.

21. Assessing the Performance of the External Sector in Ghana
Ghana’s external sector, measured by the balance of payments, the current account deficit, exports and imports, terms of trade, exchange rate, and foreign investment inflows, provides important indicators on the health of the economy.

22. External Sector Performance Trade: Exports and Imports

23. External Sector Performance Trade: Exports and Imports

24. External Sector Performance International Inward Remittances

25. External Sector Performance
Movements in the Exchange Rate (Cedi-Dollar)

26. External Sector Performance Trends in Foreign Direct Investment

27. The External Sector: Some Important Relations
Remember!!!
Y ≡ (S-I) + (T-G) – (X-M) (1)
If we assume for a moment we are dealing with a closed economy, then all output is either consumed or saved/invested.
Where we have an open economy, then the identity above sheds some interesting light on the interactions between the economy and the rest of the world.

28. The External Sector: Some Important Relations
Y ≡ (S-I) + (T-G) – (X-M) (1)
Here we observe that net national saving which is made up of net private/household saving (S-I) and net government saving (T-G) must result in the net consumption of foreign goods and services.
In other words, national savings equals net exports (X-M) or the trade balance.

29. The External Sector: Some Important Relations
Y ≡ (S-I) + (T-G) – (X-M) (2)
An alternative expression of (3) can be given as follows:
(S-I) + (T-G) = (X-M) (3)
The left-hand side indicates net national savings or in an open-economy framework net capital outflow.

30. The External Sector: Some Important Relations
If net national saving is positive, then it indicates that domestic residents (Ghanaians) are lending to the rest of the world.
If net national saving is negative, it means domestic residents (Ghanaians) are borrowing from the rest of the world to finance activities within the economy.

31. The External Sector: Some Important Relations
Further, where net national saving and net exports are positive, we have a trade surplus => we are net lenders in world financial markets.
On the other hand, if net national saving and net exports are negative, we have a trade deficit => we are net borrowers in the world markets.
If both are exactly zero, we have balanced trade.

32. Questions and Comments
The External Sector
Questions and Comments