Given the potential role of pro-cyclical policy and growth volatility in Ghana and the recent literature on macroeconomic frameworks in Sub-Saharan Africa (Calderon and Boreux, 2016), we also re-estimated the baseline model with the 5-year standard deviation of growth in the respective 5-year period as an additional explanatory variable.<sup>14</sup> According to our estimates, cyclical volatilities cost Ghana about 0.3 percent of growth p.a. over the whole 2000-2015 period, with the strongest drag on growth in the early 2010s (0.7 percent p.a.). This is in line with the magnitudes of cyclical volatilities documented in Figure 6 and supports our interpretation that the deviation of our growth model from the observed growth rate is mostly due to the cyclical nature of growth after 2010.

Overall, these results suggest that Ghana should revert to more conventional stabilization policies and prioritize structural reforms going forward. On the one hand, pro-cyclical fiscal spending and associated macroeconomic volatility have been a restraint to economic growth. Correspondingly, recent inflation developments also show a trajectory towards highly critical levels. While economies like the Ghanaian clearly do not need a level of price stability similar to most-industrialized countries, some modest improvement in macroeconomic stabilization and inflation containment would potentially lead to large benefits (see Kremer et al., 2013). On the other hand, potential output and its long-run drivers have developed much slower than actual GDP for other reasons as well. Hence, structural improvements are needed to increase potential output and sustain the recent growth performance. Given fiscal and political constraints, it is important to assess which reforms will potentially bring the highest output improvements or, put differently: which current areas are most constraining to growth of potential output. The next section will offer such an assessment.

# **5. The long-run challenges of economic growth: A comparative analysis**

In this section, we compare Ghana to two groups of countries: a ‘comparator’ group and a group of ‘aspirational peers’.<sup>15</sup> While the former are economies that are structurally similar to Ghana and stand at similar income levels, the latter have overtaken Ghana’s income level at some point. We compare Ghana to these peer groups by a benchmarking exercise covering levels and historical trends in those key drivers of income and growth presented in section 4 and furthermore look in more detail at patterns of structural change in four countries from the group of aspirational peers. This exercise informs prioritizing policy and structural reforms in the context of fiscal constraints, as identified in the previous section, and also helps understanding Ghana’s development from a comparative perspective.

**<u>Table 4: Benchmarking groups and levels of GDP p.c. (PPP)</u>**

|<br>**Comparator group**||<br>**Aspirational peers**||
|---|---|---|---|
|Myanmar|5,344|Republic of Korea|35,104|
|Nicaragua|4,453|Malaysia|23,158|
|Mauritania|3,409|Belarus|20,290|
|Kyrgyzstan|3,359|Algeria|12,812|

14 This somewhat alters other results of the model, see also the results in Araujo et al. (2016: Table B.20) who use the output gap and fluctuations around potential output as volatility measures. Results for the overall regression are available upon request. Note that our result of a growth drag of 0.3 percent hence cannot be simply subtracted from the prediction results of Table 3 and Figure 5.

15 The countries selected as comparator and aspirational peers are identified using the same methodology of the parallel Systematic Country Diagnostics, which was carried out in 2017 and 2018 through the World Bank Group Country Team working on Ghana. See Annex 1 for details: World Bank 2018. However, we added, on a normative basis the Republic of Korea, Malaysia, and Vietnam to the group of aspirational peers, as they are prominent in the contemporaneous policy discourse in Ghana.

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