Impact of Saps on Manufacturing in Ghana

CHAPTER ONE

INTRODUCTION

Ghana is a country with a land area of 228,000 square kilometers, located in the West African sub-region with a population of 21.7 million (2004) that grows at an annual rate of 2.4%. Ghana has a national per capital income of $298 as of 2002 while the annual GDP growth was 4.3% from 1990-2000, rising to 4.9 for the period 2000-2004.(world development indicators 2006). At independence in 1957, Ghana had one of the strongest economies in Africa with a high annual domestic growth rate of about 6% as well as substantial foreign exchange reserves.

Since the early 1960s, there has been debate over the appropriate trade policy for developing countries (Ishrat & Rashid, 1996). The contention has been between free market advocates and trade protectionists. While the free market proponents support an outward-looking, export-oriented trade regime, the trade protectionists settle for an inward-looking system. They both, nevertheless, agree that industrialization should be the main economic development strategy.

Advocates of free trade believe that it encourages the free movement of and allocation of factors of production. They surmise that individuals need to have the unrestricted access to and the power to dispose of the key factors of production (land, labor, entrepreneurship and capital). In arguing for free trade, David Ricardo (1815) formulated the idea of comparative costs, today called comparative advantage. Comparative advantage--a very subtle idea--is the main basis for most economists' belief in free trade today. The idea is this: a country that trades for products that it can get at lower cost from another country is better off than if it had made the products at home.

Say, for example, that Grace land can produce one pair of shoes with five hours of labor and one piece of cake with ten hours of labor. Promise land's workers, on the other hand, are more productive. They produce a pair of shoes with three hours of labor and a piece of cake with one hour of labor. One might think at first that because Promise land requires fewer labor hours to produce either good, it has nothing to gain from trade.

Ricardo argues that Grace land's cost of producing wine, although higher than Promise land's in terms of hours of labor, is lower in terms of cake. For every pair of shoes produced, Promise land gives up half of a piece of cake, while Grace land has to give up three pieces of cake to make a bottle of wine. Therefore, Promise land has a comparative advantage in producing shoes. Similarly, for every pair of shoes it produces, Promise land gives up two pair of shoes, but Grace land gives up only a third of its production capacity of shoes. Therefore, Grace land has a comparative advantage in producing cakes. These gains come, Ricardo observed, because each country specializes in producing the good for which its comparative cost is lower.

Free trade advocates also argue that substantial efficiency and growth benefits of free trade for both primary and manufactured goods can only be achieved in the presence of free trade. The success of the outward-looking East Asian economies (South Korea, Taiwan, Singapore and Hong Kong) seems to support the claims of the adherents of free trade.

The protectionists or inward-looking trade advocates on the other hand, stress the need for policies that encourage indigenous manufacturing that is relevant to a country's resource endowment. They believe that greater self-reliance can be achieved only if the movement of goods, people and information are restricted and multinational enterprises are kept out in order to allow domestic infant industry to grow (Streeten, P. 1973).

For Ghana and most African States, the 1970,s and 1980,s was characterized with persistent socio-economic crises. This situation has been attributed to two sets of factors, internal and external. The internal causes included inappropriate domestic policies, while the external involved natural disasters, the combined effect the external and internal factors resulted in the rapid decline of the productive sector of the economy. The early 70,s into the 80,s witnessed fluctuations in the prices of traditional commodity exports such as cocoa, timber and minerals, these export items then constituted the main source of Ghana's foreign exchange earnings. Coupled with these fluctuations was then, the rising price of crude oil, a main import, with an expanding population growth rate, the situation worsened. By the late 70's the culmination of these internal and external factors, plunged the economy into a persistence state of decline. Ghana's economic fortunes began to deteriorate from the 1970,s onwards (Kwodwo Ewusi, 1987, P 15). Gross domestic product (GDP) declined in real terms by a cumulative 15.6% between 1971 and 1983, while inflation grew from 0.9% in 1960 to 123% in 1983. Agricultural performance weakened dramatically with lower producer prices and the absence of an efficient system to deliver inputs and credit to farmers.

After Independence in 1957, Ghana adopted an import-substitution industrialization strategy (ISI), aimed at promoting large scale, capital-intensive manufacturing enterprises. ISI refers to a deliberate industrial policy adopted by governments to establish domestic industries to produce goods that were not produced domestically. ISI became widespread in the post 1945 world. During the 1950,s and 1960,s, most countries that were previously under colonial domination gain their independence. The popular morale of these newly independent states combined with nationalistic ideas of self assertion and self-reliance led to a drive for development. However the inherited structures of production and trade patterns from the colonial period posed some hurdles to development, notably the highly skewed income distributions and exports of primary commodities (raw materials and foodstuff) to the developed countries. Import substitution came to light at this point as a promising industrialization strategy advocated by most LDCs. This strategy was implemented in Ghana, behind high tariff protection and heavy reliance on short to medium term foreign borrowing. The economic policies pursued in support of the import substitution industrialization included the maintenance of an over valued exchange rate, an extended parasitical sector especially state monopolies.

The direct results of the implementation of ISI policies was that the effective exchange rate was allowed to grow by 816% in 1981 from 1973, interest rates were on the average negative. GDP declined on an annual basis of about .05% per annum from 1973 to 1981. Real per capital income fell by over 30% and real