Ghana - Economy - History
Ghana's post-independence economic story has been a difficult one, but over the last 20 years, political stability and economic growth has been the long-term trend. Ghana is on track to meet several of the Millennium Development goals, including halving extreme poverty by 2015. Real GDP growth averaged 4% in the mid-1980s and has increased to about 6% over the past decade. Inflation declined after a rapid increase in 2009. The macroeconomy remained under pressure from large fiscal and trade deficits.
At independence, Ghana had a substantial physical and social infrastructure and $481 million in foreign reserves. The Nkrumah government further developed the infrastructure and made important public investments in the industrial sector. With assistance from the United States, the World Bank, and the United Kingdom, construction of the Akosombo Dam was completed on the Volta River in 1966. Two U.S. companies built Valco, Africa's largest aluminum smelter, to use power generated at the dam. Aluminum exports from Valco used to be a major source of foreign exchange for Ghana, but an investment dispute beginning in 2001, followed by sale back to the government, has led to sporadic operation in recent years, and it was closed again in March 2007 due to the country's energy crisis.
Nkrumah believed in a rapid transformation of the Ghanaian economy along socialist lines. He channeled investment into new industrial enterprises and agricultural projects, nationalized foreign-owned enterprises, and wherever possible "Ghanaianized" the public and private sectors. State-sponsored enterprises such as the Akosombo Dam and the Volta Aluminum Company were undertaken, roads were built, and schools and health services were expanded. The former Northern Territories, the northernmost third of the country which had been neglected by the British, received special attention in an attempt to address the imbalance in infrastructure and social services between North and South.
Ghana, however, lacked sufficient resources to finance the public-sector projects that Nkrumah envisioned. When foreign currency reserves were exhausted, the government resorted to deficit financing and foreign borrowing to pay for essential imports. Trained manpower to allocate resources and to operate old and new state enterprises was equally in short supply, and internal financial controls necessary to implement development led almost naturally to corruption.
Despite obvious gains from investment in roads, schools, health services, and import-substituting industries, by the mid-1960s Ghana was a nation ensnared in debt, rising inflation, and economic mismanagement, the result of Nkrumah's ill-conceived development policies. An overvalued currency discouraged exports, corruption was increasingly a fact of life, and the political system was intolerant of dissent and authoritarian in practice.
Many Nkrumah-era investments were monumental public works projects and poorly conceived, badly managed agricultural and industrial schemes. With cocoa prices falling and the country's foreign exchange reserves fast disappearing, the government resorted to supplier credits to finance many projects. By the mid-1960s, Ghana's reserves were gone, and the country could not meet repayment schedules. The National Liberation Council responded by abandoning unprofitable projects and selling some inefficient state-owned enterprises to private investors. On three occasions, Ghana's creditors agreed to reschedule repayments due on Nkrumah-era supplier credits. Led by the United States, foreign donors provided import loans to enable the foreign exchange-strapped government to import essential commodities.
Per capita incomes in Ghana declined by nearly a quarter over the decade of the 1970s, even as the countries chosen as its long-term comparators (Botswana, Ecuador, Korea, Malaysia, and Thailand) raised their own per capita incomes by 80 percent on average. Ghana‘s per capita growth remained slightly negative when averaged across the 1980s, though this average disguises a dramatic swing from steep decline in 1980-84 to positive growth thereafter. Nevertheless, the net result was that over the 1980s, Ghana continued to fall further behind all groups of comparator countries.
The payoff to economic reform began to emerge more clearly in the 1990s, when Ghana‘s per capita growth finally moved into positive territory, roughly equalling that of its low-income comparators (Bangladesh, Benin, Kenya, Senegal, and Tanzania). Ghana‘s growth further accelerated in the 2000s, exceeding that of the low-income comparators and roughly equalling that of its long-term comparators, while still falling short of the average rate of per capita growth among the near-term comparators (Cape Verde, Mongolia, Morocco, Sri Lanka, and Vietnam).
Prime Minister Busia's government (1969-72) liberalized controls to attract foreign investment and to encourage domestic entrepreneurship. Investors were cautious, however, and cocoa prices declined again while imports surged, precipitating a serious trade deficit. Despite considerable foreign assistance and some debt relief, the Busia regime also was unable to overcome the inherited restraints on growth posed by the debt burden, balance-of-payments imbalances, foreign exchange shortages, and mismanagement.
Although foreign aid helped prevent economic collapse and was responsible for subsequent improvements in many sectors, the economy stagnated in the 10-year period preceding the NRC takeover in 1972. Population growth offset the modest increase in gross domestic product, and real earnings declined for many Ghanaians.
To restructure the economy, the NRC, under General Acheampong (1972-78), undertook an austerity program that emphasized self-reliance, particularly in food production. These plans were not realized, however, primarily because of post-1973 oil price increases and a drought in 1975-77 that particularly affected northern Ghana. The NRC, which had inherited foreign debts of almost $1 billion, abrogated existing rescheduling arrangements for some debts and rejected other repayments. After creditors objected to this unilateral action, a 1974 agreement rescheduled the medium-term debt on liberal terms. The NRC also imposed the Investment Policy Decree of 1975--effective on January 1977--that required 51% Ghanaian equity participation in most foreign firms, but the government took 40% in specified industries. Many shares were sold directly to the public.
Continued mismanagement of the economy, record inflation (more than 100% in 1977), and increasing corruption, notably at the highest political levels, led to growing dissatisfaction. The post-July 1978 military regime led by General Akuffo attempted to deal with Ghana's economic problems by making small changes in the overvalued cedi and by restraining government spending and monetary growth. Under a 1-year standby agreement with the International Monetary Fund (IMF) in January 1979, the government promised to undertake economic reforms, including a reduction of the budget deficit, in return for a $68 million IMF support program and $27 million in IMF Trust Fund loans. The agreement became inoperative, however, after the June 4 coup that brought Flight Lieutenant Rawlings and the AFRC to power for 4 months.
In September 1979, the civilian government of Hilla Limann inherited declining per capita income, stagnant industrial and agricultural production due to inadequate imported supplies, shortages of imported and locally produced goods, a sizable budget deficit (almost 40% of expenditures in 1979), high inflation, "moderating" to 54% in 1979, an increasingly overvalued cedi, flourishing smuggling and other black-market activities, high unemployment, particularly among urban youth, deterioration in the transport network, and continued foreign exchange constraints.
Limann's PNP government announced yet another (2-year) reconstruction program, emphasizing increased food production, exports, and transport improvements. Import austerity was imposed and external payments arrears cut. However, cocoa production and prices fell, while oil prices soared. No effective measures were taken to reduce rampant corruption and black marketing.
When Rawlings again seized power at the end of 1981, cocoa output had fallen to half the 1970-71 level and its world price to one-third the 1975 level. By 1982, oil would constitute half of Ghana's imports, while overall trade contracted greatly. Internal transport had slowed to a crawl, and inflation remained high. During Rawlings' first year, the economy was stagnant. Industry ran at about 10% of capacity due to the chronic shortage of foreign exchange to cover the importation of required raw materials and replacement parts. Economic conditions deteriorated further in early 1983 when Nigeria expelled an estimated 1 million Ghanaians who had to be absorbed by Ghana.
In April 1983, in coordination with the IMF, the PNDC launched an economic recovery program, perhaps the most stringent and consistent of its day in Africa, aimed at reopening infrastructure bottlenecks and reviving moribund productive sectors--agriculture, mining, and timber. The largely distorted exchange rate and prices were realigned to encourage production and exports. The government imposed fiscal and monetary discipline to curb inflation. Through November 1987, the cedi was devalued by more than 6,300%, and widespread direct price controls were substantially reduced.
The economy's response to these reforms was initially hampered by the absorption of 1 million returnees from Nigeria, compounded by the decline of foreign aid and the onset of the worst drought since independence, which brought on widespread bushfires and forced closure of the aluminum smelter and severe power cuts for industry. In 1985, the country absorbed an additional 100,000 expellees from Nigeria. In 1987, cocoa prices declined again; however, infrastructure repairs, improved weather, and producer incentives and support revived output. During 1984-88 the economy experienced solid growth for the first time since 1978. Renewed exports, aid inflows, and a foreign exchange auction eased hard currency constraints.
While the reforms caused substantial shocks in some sectors, particularly agriculture and textiles, the overall effects were positive and helped bring about a measure of economic stabilization and recovery. However, a big drop in world cocoa and gold prices hurt growth and, in the face of pending elections, spurred government spending, leading to an increased deficit, falling currency and high inflation at the time a new government led by John Agyekum Kufuor took office in 2000.
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