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The Activities Of Walmart In Ghana Economics Essay

Wal-Mart is the regarded the largest company in the world in terms of its massive revenues. It can be found in 14 different countries and has about 2980 stores worldwide offering a wide variety of products. It offers employment for a great number of people and makes use of the local market. Customer satisfaction is very high and covers most of America.

Wal-Mart is not very popular outside the US market. And due to its wide variety of products and sale in several countries, sometimes the quality of the goods is questionable. It makes huge profits while its supplier’s profit margins are on a lower scale.

With the emerging economies, it is clear to see the increased demand for consumer products. Wal-Mart can take advantage of this taking into consideration that they are mostly low and middle income earners. Most retail organizations are facing heavy challenges with regards to decreasing disposable income. Wal-Mart can capitalize on this by virtue of the fact that they acquire products from suppliers at very cheap rates. This enables Wal-Mart provide customers better bargains than their known retail shops thereby increasing Wal-Mart’s customer base.

More and more retail companies are entering the International market and creating competition by matching prices for the same products as Wal-Mart’s and creating stiff competition. This competition will compel product substitution and decrease quality of products. This could lead to poor customer satisfaction and loss of customers. Also entering the world market means that there is now competition on every level from local, national to international and increased risk i.e. political instability

Country Overview: Ghana

Ghana is a low-income country in West Africa with an estimated current population of 24 million with population growth rate for of about 2.1%.

It is a politically stable country and has twice shown its democracy through the peaceful transfer of power between two political parties in the past 18 years.

Ghana is a member of the UN, WTO and ECOWAS. Being a member ECOWAS, it has access to the ECOWAS market, which allows the movement of goods and services freely with its 15 member countries of over 260 million people. Association with ECOWAS means Ghana benefits from the removal of certain Customs duties, taxes and tariffs imposed on imports and export within the region.

Ghana also offers easy access to US and EU markets through US –AGOA and APC-EU which have several incentives to help boost its Economy. Ghana is endowed with arable land for cultivation of cash crops such as cocoa, timber products, coconuts and other palm products and Shea nuts crops. It has a relatively rich and diverse natural resource base and exports minerals, mainly gold, diamonds, manganese ore, and bauxite. Large quantities of oil have recently been discovered which should boost the economy in the coming years, if managed well.

Economic Indicators

Ease of doing Business

According to the World Bank’s Ease of Doing Business Index, data taken from June 2009 through May 2010, ranked Ghana as 5th in Sub-Saharan Africa and 67th compared to 183 countries around the world.

Ghana has shown significant improvements in the index. Compare its position in 2006 which was 109th and dropping to 82nd in 2007 and currently 67th since June 2009 to May 2010.

GDP

The real GDP estimate for 2009 is GH¢ 827.72 million and the nominal GDP is GH¢ 21,746.80 million. The change of real GDP in 2009 over 2008 is GH¢ 794.82 million. In other words, the real GDP grew at a rate of 4.1% in 2009, compared to a 7.2% growth rate in 2008.

Fig.1 Sector Distribution of GDP

Source: Ghana Statistical Service

Fig.1 shows the Ghana’s high dependence on agriculture. This sector, contributed the most to the GDP of the country accounting for 34.5% of the total GDP and recording the highest growth of (5.8%).

Inflation

Inflation is normally in double digits. Inflation has been declining steadily declining since the beginning of the year and currently at 9.38. This downward climb has been due to two factors; the strength and stability of the Ghana Cedi against the dollar and the development of Money market through the continuous lengthening of the maturity structures of the Treasury bills, bonds etc. This has also increased the demand for foreign investors.

Inflation is projected to drop to 8.5% by the end of September 2011 if the current states of the macro economic conditions are kept.

Fig.2 Inflation rates from Jan 2005 to 0ct 2010

Data Source: Bank of Ghana

Infrastructures

The Bank of Ghana has continued to inject funds into infrastructure such as Roads, electricity, Telecommunication thus attracting businesses. Evidence is seen in the budget statements of Ghana.

Employment

As presented by a local Newspaper agency, Daily Guide(2008), Unemployment in Ghana as at 2008 was 20% according to the 2008 World fact book ;

Mr. Abuga Pele, Coordinator of the National Youth Employment Programme (NYEP), was said to have observed that youth unemployment in Ghana is a critical issue that must be tackled dispassionately. This was according to the GNA(2010).

It showed show that several youths go through education but come out with no jobs. Wal-Mart can tap into this and create jobs for the people of Ghana and also have skilled labour readily available to the company.

Trade

Ghana’s export and import partners are listed in the table 2.1 and 2.2 respectively.

As stated in Salvatore D. (2010), “The Gravity Model postulates that (other things being equal), the bilateral trade between two countries is proportional, or at least positively related, to the product of the two countries’ GDPs and to be smaller the greater the distance between the two countries.”

This is seen to be not exactly true with regards to trade with its neighbouring countries as seen from the tables. Trade with Togo, Ivory Coast and Burkina Faso does not even compare with the trade with China, US and South Africa in the past.

The difference between the percentage of the export and import goes to show that Ghana has a comparative advantage in Agricultural produce. See Table 3 and 4. And compare with the Export and import partners in Tables 2.1 and 2.2.

This shows that it trades in labour intensive goods for capital intensive ones.

Ghana is rich in natural endowments, such as Arable Land for agric production and makes use of its rich labour to produce labour intensive products and export. While importing capital intensive produce, just as Heckscher-Ohlin theory states.

Initially Ghana a trade strategy after independence was import substitution industrialization, a strategy that was aimed at reducing the economy’s dependence on trade. 2004-2007 saw the trade deficit increase from 23.96% of GDP in 2005 to 26.94% of GDP in 2007, a trend due to a climbing import bill.

Corruption index

The latest report by the Transparency International, an international anti-corruption body, ranked Ghana as the 7th least corrupt country among 47 African countries and 62nd among 178 countries. Ghana scored 4.1 out of 10 in the latest results of the Corruption Perception Index. The score was previously 3.9 in 2009.

Resilient Economy

The global recession did not hit Ghana’s economy as much. Strong commodity exports in terms of robust cocoa and gold export prices softened the impact and of the tight policies and low remittances from migrants abroad experienced during the period.

The outlook for the rest of the year remains positive and hinges strongly on the continued improvement in the macro fundamentals.

By the end of October 2010 the Gross international Reserves was a GH¢ 3,973 million, exceeding three months of import cover. Unlike 2008 when the Gross international Reserves was GH¢ 2,036.2 barely covering 2 months import.

Energy Industry

From table 1 we see that the energy sector saw the production and distribution of energy grow by 7.5%. The country relies on two forms of electricity generation which are Hydro and Thermal. Hydroelectric generation went up by 11.1% while thermal electric production fell by 2.9%. High dependence on the hydroelectric generation which also relies on adequate rainfall throughout the year is not the best. Low rainfall results in shortage of distribution of electricity to all parts of the country. As a downside Wal-Mart may have to invest heavily in Generator plants.

Budget deficit/surplus

For the past 40 years Ghana has always had a budget deficit. Data on the 2009 budget, from the Bank of Ghana, indicated that Government fiscal operations resulted in a deficit, on a cash basis, of GH¢2.1 billion (9.9% of GDP) compared with GH¢2.6 billion (14.5 per cent of GDP) for the same period in 2008. The deficit was said to have been largely driven by a lack of prudence in public spending and misplaced priorities in investment projects.

This decrease in deficit was due to the success of the Fiscal austerity package imposed in Ghana in 2009.

Positive Outlook

As Ghana continues to become a preferred destination for tourist, this could further enrich Wal-Mart’s customer base since the tourist will be more familiar with Wal-Mart than the local retail supermarkets.

Access to the Ghanaian market will provide access to more export partners and increase profit margins.

As a result of good and prudent policy reforms, the economy of Ghana has shown a positive growth. Examples of these reforms are cautious fiscal policy management, well managed debt and international trade Regime, all coming together to create a good business environment attractive to investors. Effects of these reforms are seen in the low interest rates and economic growth.

Risk

Competition from similar retail stores trying to take advantage of the emerging economies such as Massmart of South-Africa. Tariff exempt and protection of small industries by the Government may mean certain imposition and restrictions in the setting up of Wal-Mart in the country. High opposition from trade unions are also anticipated to serve as barriers to entry into the market.

Conclusion/ Recommendation

Entering foreign markets is always a risky proposition for a company. Wal-Mart should closely study economic indicators such as GDP per Capita, and trade deficit, in order to customize its entry into the Ghanaian market. Wal-Mart’s failure in Germany was due to a high degree of ignorance of the target market, purchasing behaviour of consumers, and the underestimation of competitors. Understanding the Ghanaian economy would enable Wal-Mart make better decisions on the goods to carry in their retail stores, pricing of goods, identification of favourable supply, and the effective use of ready human capital in the country.

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