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By Isaac Ato Mensah
Accra – 1 April, 2019
Greetings sir,
Someway somehow your erudite expose of the recent Cedi depreciation blabbing by the “economist” advisor to H.E. Dr Bawumia, Ghana’s vice president was brought to my attention.
I read every single line carefully including your probe of the advisor’s background from his LinkedIn page.
You did an excellent job.
I have always asked myself this question, ‘Why has no economist responded to Dr Bawumia since 2010?’.
Let me explain why this question is important.
In May 2012, I attended the Ferdinand Ayim Memorial Lectures delivered by Dr Mahamudu Bawumia at the auditorium of the Ghana College of Physicians and Surgeons, Ridge, Accra.
That was when Bawumia first made his famous statement, ‘If the fundamentals are weak the exchange rate will expose you’.
That lecture gave further publicity to his book, ‘”Monetary Policy And Financial Sector Reform In Africa: Ghana’s Experience (Aug 31, 2010).
The first print of that book had a typo or grammatical error on virtually every page, and was withdrawn from circulation.
Towards the end of this article, I will show why those errors mean a lot.
In that book, Dr Bawumia gathered data from the Bank of Ghana spanning 1957-2010, mainly on account of his work as special assistant to Dr Paul Acquah, the governor at the time.
But one could also tell that Bawumia loves economic history, and that is the focus of this article.
In the said lecture, Dr. Bawumia used the decades-old tool of economic analysis, that is, a two variable analysis, while holding ‘all OTHER things equal’, in Latin, Ceteris paribus.
He presented various graphs showing relationships between two variables, to buttress the argument of the historical trend of Cedi depreciation/stability in Ghana.
He did well by excluding periods when the Ghanaian currency was controlled by administrative fiat.
The most important one which drew rapturous applause from the audience was the graph that showed that while the inflation line was pointing downwards, the Cedi depreciation against the US dollar, and other selected currencies, was pointing upwards, almost in a direct inverse relationship or like OPPOSITE reflections of each other in the Cartesian plane.
There was a standing ovation!!!
‘Something artificial must be happening to the Cedi,’ he added after the applause had died down.
‘If the fundamentals are weak the exchange rate will expose you,’ he declared.
Listening to Dr Nii Moi Thompson, an economist, on “Good Evening Ghana” with Paul Adom Otchere last week, he brought clarity to two fundamentals, namely, policy fundamentals and economic fundamentals.
President Akufo-Addo has delivered speeches over many years (he was at the said Ferdinand Ayim Memorial lecture).
Qualitative content analysis of his speeches indicate that he had always believed ‘economic fundamentals’ as the means for transforming the Ghanaian economy.
This is captured in his oft repeated expression, ‘The structural transformation of the economy…. an integrated aluminium industry’.
One can therefore suggest there is a possible ‘mutual mistake’ in the contract reached between President Akufo-Addo and his vice president.
But as the debaters in your chat agreed, this is not about the advisor to the vice president, and indeed my argument is not even about the vice president.
Mine is a call to open the study of economics in Ghana to public scrutiny.
Permit us to quote generously from your social media analysis;
‘Experts in this field know that, for several decades, traditional models of the exchange rate determination failed to empirically explain and forecast fluctuation in exchange rates (Meese and Rogoff, 1983; Engel,
Mark and West, 2007).
This does not mean that current fundamentals do not matter. It means that expected future fundamentals weaken the relationship between current fundamentals and the exchange rate. Recent models have included order flows in forex markets in exchange rate determination. Order flow is defined as the net of buyer- and seller-initiated currency transactions (especially by large currency traders like banks), and is a measure of net buying pressure for a particular currency and a proxy for expectations of future macroeconomic fundamentals (Lyons, 2001).
According to Rime, Sarno, and Sojli (2010): “Previous research has found that order flow has strong explanatory power for exchange rate movements, whereas macroeconomic fundamentals have weak explanatory power. .. We provide evidence that (i) order flow is intimately related to a broad set of current and expected macroeconomic fundamentals and (ii) more importantly, order flow is a powerful predictor of daily movements in exchange rates in an out-of-sample exercise. This finding may provide a rationale for the high explanatory power of order flow found in the literature. Furthermore, it suggests that macroeconomic fundamentals are indeed relevant for exchange rate determination, but that the order flow channel is key to link exchange rates to fundamentals.”
Thank you Dr. Amegashie……..when mists beguile our sight; turn Thou our darkness into light.
Interestingly, when Dr Bawumia gave the lecture in 2012, these research findings had been available for 11 years and two years respectively.
This brings to mind many things I have heard from my mentor including his rant when so called experts make simple unbelievable didactic errors, ‘Do these Ghanaians have libraries in their homes; what journals do they subscribe to; do they even read anything important?’.
On account of inherent assumptions of economic analysis (based on a two factor relationship while holding all OTHER things constant), Niall Fergusson, a British economic historian, has received very low scores in reviews by his colleague economists in the US, for example.
Fergusson, like Bawumia may write or say things that will make them popular because they resonate with lay people, but cannot stand rigorous intellectual analysis.
So going forward, I will be grateful if;
You write regularly for a much wider audience; our platform writersghana.com is also available to you.
You could propose new ways of looking at Ghana’s secondary school Economics syllabus. It is clear that our gurus have feet of clay, so our children are probably being taught inaccurate models of economic theory formulation.
You could update the Ghanaian public with the latest publications on Economics relevant to trending discussions. These include Ghana Beyond Aid; ‘Smart borrowing’ which is now being copied and continued (as a rebased GDP allowing us to borrow more, and converting short term debt through 31-year, 50-year and century bonds).
And now back as promised to the typos and ‘silly grammatical errors’ in Bawumia’s book.
Does this not show why the Ghanaian society is in a mess?
Clearly that poor showing by his associates and the printing press demonstrates why we are not ready for prime time.
Is it not true that spelling mistakes in e-commerce sites reduce sales by at least 50%?
Clearly if the fundamentals are weak, be they economic fundamentals, policy fundamentals or writing fundamentals, the exchange rate will expose you.
Sincerely,
Isaac Ato Mensah
PUBLISHER’S NOTE.
Small print for Kokonsa people! There should be no apprehension about this article making references to group chat / board content, so long as sound ethical principles are followed. We all need more education, not less!
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