Analysis of Ghanas Economic Growth

Analysis of Ghanas Economic Growth An analytical review of the effect of conflict, politics and resources on the economic growth of the country. 1.0. Introduction 1.1. Ghana in 1957 Some fifty years ago, Dr Kwame Nkrumah stood before a throng of cheering fellow Ghanaians, proclaiming independence from the British Empire. â€Å"At long last, the battle is ended†, he bellowed triumphantly, â€Å"Ghana, your beloved country is free forever† (Nkrumah, 2007). Such were the words that signalled the end of British rule and the start of a new era for the former Gold Coast, which had succeeded in becoming the first independent nation in Africa. By doing so, she set a hopeful precedent to other former colonies which would shortly and eagerly follow in Ghana’s footsteps. For the â€Å"model colony† the future, at this point, looked bright. As a nation with â€Å"advantages of wealth and attainment unrivalled in topical Africa† (Meredith, 2005, 22), Ghana was expected to take the world by storm, swiftly join the ranks of the industrial nations, and proudly serve as a shining example to the post-colonial world (Dzorgbo, 2002, 2-3). There was nothing far-fetched about this optimism. She was, in 1957, one of the most economically advanced countries in sub-Saharan Africa. Income per head was double that of the Tanganikans, substantially more than the Zambians, and almost on a par with the Rhodesians (Alpine and Pickett, 1993, 64). Contributing to this private wealth was the lucrative trade in the export of cocoa whose production Ghana dominated by this time. Such a presence within the international commodity market helped shore up the already substantial amounts of foreign reserve her government held. Yet all of this failed to happen. Several years after independence, Ghana’s economy began to totter, her foreign reserves evaporated, and reckless public spending placed the country on a financial precipice – all this by the end of the 1960s (Konadu-Agyeman, 2000, 473). There was to be no let-up. The economic downturn continued into the 1970s where Gross Domestic Product (GDP) fell more than three percent each year. Price inflation averaged at around 50 to 100 percent. Worse was to follow. By the beginning of the 1980s, inflation reached more than 100 percent, GDP levels fell further into the abyss, and one of the worst famines hit the country (Sandbrook, 1982, 2). Nothing, it now seemed, could go right. She had little choice but to solicit help from abroad. 1.2. International intervention and neo-liberalism Following the implementation of economic restructuring programmes, created by the International Monetary Fund (IMF) and the World Bank, Ghana finally emerged out of her desperate trough in 1983. Inevitably questions were asked. Why had Ghana struggled for so long? How could she so comprehensively dash the hope and goodwill in the immediate years after independence? Many factors, in the view of the IMF, had contributed to her demise: mismanagement, over-regulation, failure to tackle inflation, and currency over-evaluations headed the depressingly long list (Konadu-Agyeman, 2000, 473). Correspondingly, strings were attached to how IMF funds were to be used: the devaluing of the currency, the Cedi; the withdrawal of subsidies; the retrenchment of labour; the reduction in public expenditure; and the liberalisation of trade and exchange controls. Such measures, which took their cue from a resurgent neo-liberalism, have proved to be a mixed blessing. Even though, on the one hand, the adoption of these policies helped rein in inflation, created steady currency fluctuations and boosted the production of cocoa, they also led, on the other hand, to increased unemployment, ushered in stiff and unfettered competition from abroad, and generated substantial social discontent. So much of the welfare state had been taken away, in fact, that the weak and the poor were falling through the net. But a final verdict on the effectiveness of these policies is still too early to call. Even so, it would be true to say that many of these neoliberal suggestions, which underpin the IMF’s Structural Adjustment Programmes (SAP), have not come from an appreciation of the peculiarities of the African predicament in general or the Ghanaian one in particular. Rather they draw from the successes of the East Asian Newly Industrialized Countries (NICs) which, it is argued, managed to free themselves from the shackles of perennial underdevelopment by creating growth through the export of value-added products. Such a way of proceeding, it has been reasoned, could be replicated within the African context. Much of the reason why Ghana failed in the years after independence from developing economically, this model suggests, was because she promoted a policy of protectionism. Rather than achieve industrial growth and economic development Nkrumah said it would, his policy of Import Substitution Industrialization (ISI), which erected tariffs so as to nurture domestic industry, did the opposite and halted diversification and competitiveness. All of which had now come home to roost, in the opinion of neo-liberalists, who now called on government to shrink. The new policy of SAP, based on exports, has at first glance much to recommend it, especially with regard to Ghana. Even a cursory look at Ghana’s colonial past yields firm illustration of why an export-based economy could make sense. During the days of the British Empire, Ghana had been forced to open up to the international market not least because she offered precious resources and material such as gold, sugar and cotton. Such a colonial emphasis on international trade, to be sure, substantially benefited the colonisers and not the colonised. Even though the British emphasis on exports had the effect of neglecting domestic industry, the legacy the Empire left behind was nonetheless one in which the economy thrived on her exports (Frimpong-Ansah, 1991, 67). Counterfactually-speaking, therefore, had Nkrumah implemented economic policies which aimed to promote exports rather than seek to curtail them, then Ghana may have been spared from the title question: what are you doing here? 1.3. Problems and solutions for the Ghanaian economy If only things were that simple. Even though one might forcibly argue that Ghana’s economy is orientated towards the international market, the kind of exports she has traditionally exported – and is currently exporting – would not have contributed much towards sustained growth. Nor do present circumstances hold hope that things would be any different either. Primarily, as the World Trade Organization has outlined, Ghana is still â€Å"heavily dependent on agriculture, especially cocoa, and on natural resources, notably minerals. Primary production accounts for almost half of GDP; agriculture at 40%, is the most important sector. Manufacturing contributes some 10% of GDP. Services are the second largest component† (WTO, 2001). Much of this primitiveness must be sought, once more, in British colonial policy, which saw little need to invest any substantial sums into creating a more sturdy and versatile infrastructure. Raw materials, such as Ghanaian cocoa, were kept just that – raw – to keep prices down, prevent competition to British firms by not having processing facilities, and turn Ghanaian subjects into obedient consumers of the finished product that would be shipped in from abroad. As Immanual Wallerstein put it with reference to Africa generally: â€Å"Whatever the motive for entering the world agricultural market and whatever the social organization of export production, each colonial administration, as the political arm of the metropole, sought to tie a segment of the African population into the larger imperial economy either as independent producers or as wage-workers, and in all cases as consumers† (Wallerstein, 1986, 18). He could have just as well been talking about Ghana. Such colonial legacies mean that even today Ghana’s raw materials continue to be dictated by external conditions. Since primary products are easily affected by the vagaries of the weather as well as by the fluctuating international market, export-led economic development would almost certainly prove to be a bumpy ride. More specifically, it means that: â€Å"When stocks are low and pries high farmers can increase their planting, but they cannot compress the time it takes crops to ripen to harvest When farmers eventually increase production, prices fall as supplies quickly outgrow demand in importing countries, given that demand does not grow significantly in response to lower prices. The result is a pattern of short-lived booms followed by lingering slumps† (Food and Agriculture Organization, 2004). Such descriptions invoke a viscous circle from which Ghana would find hard to escape. From this lesson follows the glaring need to diversify the country’s economic base, if it is to avoid the ‘booms’ and ‘slumps’ of an economy ensconced within agriculture. â€Å"While traditional exports, such as cocoa and gold, may remain an important source of growth and foreign exchange in the future,† the World Bank contends, â€Å"export diversification will be necessary to accelerate economic growth and poverty reduction and to decrease Ghana’s vulnerability to external price shocks† (World Bank, 2001,1). To be fair, it has not been from a lack of effort that Ghana has failed to diversity sufficiently, for political circumstances have repeatedly conspired to hold up any sustained drive. Liberal approaches to economic development, which Nkrumah’s successors aimed at, fell fowl of a coup, while two later regimes which tried to develop indigenous strategies of development were ousted in similar circumstances. Clearly political conflict and change have impacted hard on Ghana’s economic growth – arguably negatively on the whole – and, if the IMF anoraks are in any way right, stability in the present governmental set-up would finally lead the country to the elusive goal that had seemed possible during the few years after independence. 1.4. Objectives and organization Enmeshed within all these complicated factors, which this introduction has served to outline, the economic growth of Ghana must, at least for the moment, take place within the neo-liberal strictures imposed by the IMF, which has set great store by small government and export-led growth. Conflict, politics and resources will, in this investigation, be reviewed therefore need to take account of the domestic as well as international setting, so as arrive at a more rounded appreciation of how all these factors have affected economic growth in Ghana. Looking at past attempts to create economic growth as well as current trade policies designed to do the same, this study will offer both a historical as well as a contemporary analysis of the Ghanaian economy. Perhaps reaching beyond the remit of the brief, the study will also powerfully suggest that, as things stand as they do, Ghana’s economic future is set to remain a bleak one. More favourable rules of trade must be implemented, the thesis recommends, without which she will not be able to continue to diversify her economic base. To illustrate these points, the investigation is divided into the following chapters. Chapter two, below, will review some of the basic economic models which have found application in Ghana since her days as a colony of the British Empire. Chapter three will then focus on the implementation of these development theories from a historical perspective, analysing the various regimes as well as their ideological leanings which contributed to the kind of policies they came up with. Chapter four will then assume a more specific and contemporary focus, reviewing the extent to which international agreement on trade has impacted on economic growth in Africa in general and in Ghana in particular. Finally, chapter five will consider how tariff and non-tariff barriers, with reference to the EU, have influenced the shape of the Ghanaian economy. 2.0. Theories of Economic Development Before this investigation can examine in detail how various factors have influenced Ghana’s economic growth, one should stop to consider the kind of economic thinking that has undergirded the disparate policies she has resorted to in order to achieve prosperity down the years. Such a detour is necessary if we are to fully appreciate the broader economic and political climates in which policies have been conceived. 2.1. Free trade and nationalism During her time as a colony of the British Empire, Ghana had been forced to adopt a mercantilist system of trade which functioned as the principle form of economic thinking that dictated the way nations engaged with each other, economically-speaking, until the late eighteenth century. Much of modern economic thinking grew out of a backlash against this closed system, which put the nation before the individual and which saw wealth as finite. Inspired by the work of Adam Smith, who wrote his seminal The Wealth of Nations in 1776, liberals criticized how mercantilism elevated the position of the state out of all proportion to the role it should play in the functioning of the economy. By contrast, Smith felt that the state should limit itself to providing three basic duties to society: First, the duty of protecting the society from violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing inexact administration of justice; and thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, thought it may frequently do much more than repay it to a great society.(Smith, 1863, 286) From this basic framework, in which the individual would have access to basic rights and protection from violence, Smith recommended that the government retreat and allow the individual to develop on their own, especially with regard to economics. â€Å"Every man, as long as he does not violate the laws of justice†, he proclaimed, â€Å"is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.† Not only did he feel his thinking needed to apply to the domestic sphere but also the international one too, for â€Å"commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship† had broken down into a series of international conflicts because homos economicus operated from the assumption that they had to steal from one another rather than share the wealth available. More specifically liberal thinking envisaged a world based on three pillars: first was the belief that free trade promoted economic growth and consumption; second, that it improves societal values and ideals; and third, that free trade would promote a more peaceful international environment because greater interdependence would lead to a convergence of interests among societies (Harlen, 1999, 735). Most pioneering in the implementation of these ideals was Britain which threw down the gauntlet to her rivals by tearing down protectionist barriers, such as the Corn Laws, in the middle of the nineteenth century at a time when mercantilism dictated the opposite and discouraged trade between European powers. Soon European countries followed suite in gradually adopting policies that were more liberal in outlook. Nations such as France, Sweden, Belgium, Portugal and Spain all moved towards the liberalization of their tariff system. But such an open period proved to be short-lived as nationalistic concerns rowed the liberal boat back to shore. By the 1870s, for example, Austria-Hungary increased duties and Germany followed at the end of the decade; France also upped her tariffs in 1881, modestly initially, then sharply in 1892, while other countries returned the favour in kind (Krasner, 1975, 325). Much of the problem had been that, in following Britain, which had embarked upon industrialization much earlier than the European continent, the benefits which European countries could reap from liberalizing their markets would be far from worthwhile, not least because their own infant industries could not compete with those of Britain, which had far more established businesses that had the muscle to blow those of the continent out of the water. Bitter about the lessons that had been learnt at the hands of the British, nationalist economists, while seeing the benefits of free trade, came to point out that liberals â€Å"did not adequately address the problems of how economically and politically weak countries might ensure their national security in a world where free trade did not exist† (Harlen, 1999, 739). Such a dilemma was not only shared by European countries but also by the United States whose economic power was no match to Britain’s at this time. If the United States were to compete on Britain’ terms, economist Alexander Hamilton noted, â€Å"the want of reciprocity would render them [United States] the victim of a system which should induce them to confine their views of Agriculture, and refrain from Manufactures† (Hamilton, 1964, 138). Such a view implied that open competition would only result in the stronger country dictating terms and keeping the weaker one in almost perpetual underdevelopment. Consequently, in order to compete, diversification of the country’s manufacturing base had to be effected, an objective that could only be realized if government helped out and, to cite Hamilton once more, â€Å"encouraged the introduction of foreign technology, capital, and skilled labor †¦ and adopt protectionist trade policies, including tariffs, quotas and bounties, to bolster its fledgling industries†. Similar conclusions were reached by the German political economist Friedrich List, who laid down in his National System of Political Economy the need to dispense with the ideology of free trade in the short term in favour of empowering the state to protect and boost its infant industries and build up a skilled workforce. Only when this was done, List also argued, could countries move towards a policy of liberalization. 2.2. Theories of development Following the end of the Second World War, which signalled the end of colonialism, a similar yet different schools of thought emerged, which centred on the issue of how newly-independent former colonies could ‘catch up’ and attain economic prosperity. Such thinking took shape during the Cold War so that development theory, as it was called, took influences from both the right and the left – from capitalism to Marxism – to produce the following ways of thinking about development: modernization, structuralism, dependency theory and neo-liberalism. Typically, modernists believe development have to be achieved through linear progression, from a ‘traditional’ to a ‘modern’ society’ (Rostow, 1968). During the ‘traditional’ stage the country would be limited by weak government, poor technology and communications and overreliance on subsistence agriculture. Eventually however these societies would accumulate ‘preconditions of take-off’ in which foundations are laid, such as the creation of private business, banks, schools and hospitals; but such a society still lacks the productivity necessary to make the big jump. To achieve ‘take-off’ the economy would need to show signs of rising investment and savings as well as the rapid expansion of industry and agriculture. Even though the economy would have to experience some turbulence along the way towards maturity, it would do so by stripping itself of the very industries that had helped in the take-off. Finally, countries would, under this theory, enter the age of mass consumption when an affluent society would be born. Most importantly, in order to achieve the various stages of development and pass through them, the state had to be interventionist. Even though these thinkers insisted on the virtues of private enterprise, they also insisted that the Third World needed a plan or blueprint which governments could follow. A different take on modernization, which rejected the linear path of development, was Latin American structuralism. Ultimately, it sought the reason for underdevelopment in the unbalance of trade between raw commodity producers and manufacturers. More capital and technology would, it was argued, lead to a turnaround in fortunes. Crucially, developing countries had been apportioned the almost exclusive role of primary product producers within the international division of labour. As Raul Prebisch, a prominent proponent of this analysis, saw it, there were two problems associated with being predominately a primary goods exporter. First, he saw that technological advancement in the industrial core would lead to the creation of synthetics for natural products. Such a shift away from a dependence on raw materials, such as rubber, would have a detrimental impact on the economies of those who sought to profit. Second, he discerned the tendency that as per capita incomes increase, demand for primary products, such as food, would remain stable, while by contrast demand for manufactured goods would rise (Prebisch, 1964, 7). All of this meant that, without the prospect of the developed world consuming more primary products, developing countries had to face the prospect of â€Å"price volatility in the short term and declining terms of trade over the long run†. Such defects in the international system would be overturned through industrialization, which would decrease dependence on primary products and increase ability to export processed products. Importantly, however, structuralism shared with modernization theory the need for government to play a major role in supporting and protecting infant industries through tariffs and non-tariff barriers. Only by doing so, it insisted, could developing counties compete at all. Such was part of the reason why the policy of import-substitution industrialization (ISI) was created and propounded in the hope that an emphasis on industrialization would promote growth. Yet the problem with structuralism was that it took as a given the outer context of the capitalist international economy. Accept this, dependency theorists countered, then there was only the prospect for further dilemmas for developing countries. As a chief proponent of this idea, Andre Gunder Frank showed, in his book Capitalism and Underdevelopment in Latin America: Historical Studies of Chile and Brazil, that underdevelopment was caused by the very nature of global capitalism. Two divisional structures had emerged in which one camp would function as the metropolis centre and the other would serve as the peripheral and perennial satellites. Such a structure was largely exploitative in that â€Å"the metropolis expropriates economic surplus from its satellites and appropriates it for its own economic development. The satellites remain underdeveloped for lack of access to their own surplus and as a consequence of the sae polarization and exploitative contradictions which the metropolis introduces and maintains in the satellite’s domestic economic structure†. So he concludes pessimistically that â€Å"economic development and underdevelopment are opposite faces of the same coin† (Frank, 1969, 8). Such thinking formed the basis for the rejection of schemes such as ISI, since they only helped entrench even further a form of â€Å"dependent development† in which developing countries would become wholly reliant on the developed world for capital and investment. As long as this state of affairs continued, dependency theorists warned, developing nations could not share in the wealth of a capitalist world economy. Rather, it was argued, nations should move towards a socialist path of development, with the Soviet Union as a model of a country that had managed to industrialize without recourse to capitalism. Such an interpretation of development, it hardly needs to be mentioned, left room for any viability in the policies of ISI that had emerged under the structuralist banner. As it turned out, ISI failed to deliver on its promises of creating industrial competitiveness. In fact greater inequalities arose due to the way in which certain industries were protected so that they ended up with excess capacity, inefficiency and low quality. More worryingly, the fact that the state controlled licensing and foreign exchange meant that it encouraged â€Å"rent-seeking, corruption, smuggling, and black market as well as inefficiency in the allocation of resources† (Cohn, 2005, 378). Problems identified by dependency theorists proved to be prophetic. 2.3 The return of liberalism Even so, the inadequacies of ISI did not prevent the liberals, emerging out of the shadow of criticisms, from drawing different conclusions. For they sought the root cause of developing countries’ inability to move away from their state not in the unfair international system, which was inherently set up to keep them underdeveloped, but in incompetent government. What needed to be done, in other words, was to keep out the hand of government and allow market forces to operate. Evidence that the neoliberals were correct was provided by the promising growth of East Asian countries which based their economic development on exports. Examples such as Taiwan and Korea, which both witnessed strong rates of growth, conferred confidence on neoliberal analysts who sought the success of these countries to an â€Å"evolutionary process of industrially induced modernization and structural transformation †¦ locating an appropriate development niche within the global economy which may be exploited by implementing sound development policies based on conventional neoclassical economic principles† (Bruton, 1998, 107). From all these examples neoliberals re-built the edifice to their economic thinking. Clear guidelines this time were issued governments to, for example, â€Å"eliminate exchange–rate controls, restrictions on international trade, deregulation of the financial sector, privatization of state enterprises, creation of an unregulated labor market, specialization according to ‘comparative advantage’ and market driven resource allocations, and generally defining a ‘minimalist’ role for the state in development† (Brohman, 1996, 108). Most developed countries, responding to the debt crisis of the 1980s, gradually appropriated these new policies. Within the developing world, however, the legacy of ISI left a chronic balance of payment problem so that many countries had substantial debts they owed to international financial institutions. Responding to the crisis, in which many developing countries were expressing inability to return the debts, the IMF and World Bank issued guidelines in which it was spelt out that these nations should adhere to structural (or neoliberal) reforms so as to achieve growth and stability. There was, in fact, little choice. As Walden Bello and Shea Cunningham have acutely noted, â€Å"Faced with the threat of a cut-off of external funds needed to service the mounting debts they had incurred from the western private banks that had gone on a lending binge in the 1970s, these countries had no choice but to implement the painful measures demanded by the Bank and Fund† (Bello and Cunnigham, 1994). Such a move proved to be a watershed: it marked a shift away from an era of protection to a time of the free market, and it is within this climate that developing countries presently operate. In what follows one will review how these shifts and turns in economic developmental thinking impacted one particular country, Ghana. 3.0. Politics, ideology and economic policy Ever since her independence in 1957, Ghana has chopped and changed economic policy to the extent that she has tried pretty much all the development theories on which policy was forged. During the colonial period, she had been subjected to mercantile policies, which rendered Ghana an exporter of raw materials and an importer of finished consumer products. Tragically, this meant that wider socio-economic developments failed to take place, so that a diversification of her economic and industrial base away from the almost total reliance on a few basic resources could not be effected before British rule ended. 3.1. Nkruman and structural economics When Nkrumah assumed the mantle of power, he intended to push Ghana out of the underdeveloped into the developed world. Conceiving a Ten Year Development Programme, he established an Industrial Development Board (IDB), which was handed the task to develop the country’s manufacturing capabilities with the intent to pass them on to private enterprises when sufficiently grown (Dzorgbo, 2001, 148). But more substantive initiatives were carried out following the visit of Professor Arthur Lewis, a development economist, who argued strongly against any shock industrialization strategy in a country whose domestic market was limited; pursuit of large-scale industrialization would counterproductively remove resources away from the rural areas to the modern sector; and where shortage of labour would be aggravated by demand from industry. Far from adopting ambitious schemes, he put forward a series of modest proposals that were designed to prop up basic infrastructures so that a basis could be laid â€Å"for private foreign investment without the government having to bother offering special investment favours† (Dzorgbo, 2001, 149). Such a policy of â€Å"industrialization-by-invitation†, which was based on modernization theory, took a dim view of the ability of the government to access funds and take industries under its wing in a way Nkumah had initially intended. Even so, many of these recommendations were both enthusiastically and modestly accepted. Between 1950 and 1962, the Ten Year Plan adjusted to sing the tunes of a need above all for strong infrastructure. More specifically, it successfully constructed roadways and bridges to connect the various parts of the country, while it built the hydroelectric Akosombo Dam to secure the energy base needed for industrialization. Efforts were also invested in the setting up of transportation systems, while in the realm of social development, the government increased access its population had to water and education. Free primary education became available for all by 1960 and secondary education was expanded rapidly too. Enrolment in schools almost doubled across the board in the 1960s, with some 36,414 students registering in secondary schools, technical colleges, polytechnics and pre-university schools (Dzorgbo, 2001, 153). Such impressive improvements were capped off by improvements in health care services which saw new hospitals and clinics open. Despite the fact that Nkrumah government had followed and even bettered the recommendations of Lewis to improve the socio-economic infrastructure of the country, it grew impatient of the gradualist approach to economic development. More specifically, it became disillusioned by the â€Å"industrialization-by-invitation† policy because it had not led to the diversification of the economic base necessary for stability in the long run. Even though substantial amounts of FDI had been expected, following adoption of Lewis’ ideas, little of it had materialised. Those which had were taking the country for a ride. For example, during the construction of the Akosombo Dam, Nkrumah sought financial assistance from the United States. Eventually the firm Kaiser Aluminium Company came forward to underwrite some of the costs of the project. But conditions were attached that it as well as it