Investments and Structural Reforms, including Privatization

Ghana embarked on an Economie Recovery Programme in April1983 to arrest the deterioration that had plagued the economy. The previous decade had been characterized by a plethora of instruments that restricted trade and adversely affected economie growth. These included the use of import licences and other non-tariff barriers to control imports and achieve balance of payments a~d import-substitution objectives. The launching of the ERP (which was predicated on an export-led strategy) changed the macroeconomie and incentive frameworks within which industry had to operate. There has been a substantial improvement in the trade regime with the reduction in the anti-export bias. The exchange rate policies pursued since 1984 have ensured substantial depreciation of the real exchange rate. The import control system has been completely liberalized and significant tariff cuts have been implemented. Since 1988 the export promotion programme has been made more attractive. FDI response was marginal, averaging US$4 million between 1983 and 1988.

Privatization in Ghana arose because of the poor financial performance and low productivity that characterized many of the state-owned enterprises (SOEs), culminating in huge financiallosses to the state. The total operating deficit of the public enterprises in 1982 amounted to 3 percent of GDP, which was not much less than total government spending on education, health, social security and welfare in that year (Tangri, 1991). Public enterprises had also become a significant drain on the government budget. Support for them ranged from 10 percent of government expenditure in 1982 to 8 percent in 1986. Between 1985 and 1989, the annual outflow from government to 14 core SOEs averaged 2 percent of GDP. The programme was started in 1988 after an intensive study conducted by the government revealed a disturbing array of problems plaguing the public sector, including the following:

• Constraints attributable to inadequacies, inconsistencies and lack of clarity of government policies on the SOE sector.

• Excessive political interference in the day-to-day operations of the enterprises.

• Inadequate capitalization and working capital.

• Lack of adequate incentives to stimulate higher performance and productivity.

• Lack of entrepreneurship direction and momentum

The divestiture programme got under way in terms ofresults in 1990/91. By 31 December 1997, the government had authorized 201 divestments of companies or divisions of comparues. The breakdown, on a yearly basis, highlighting the mode of divestiture, is shown in Table 2.5 below.

Table 2.5: Mode of Sale of Diversified Companies

Mode of sale 1991 1992 1993 1994 1995 1996 1997 Total

Outright Sale 16 4 3 30 19 18 15 105

Sale of shares 11 5 2 2 6 1 2 29

Joint V enture 6 3 1 4 0 4 1 19

Lease 3 1 0 1 0 0 1 6

Liquidation 24 2 5 5 6 0 0 42

Total 60 15 11 42 31 23 19 201

Source: World Bank (2001)

FDI seemed to have responded positively to the privatization, as inflows increased from US$5 million in 1988 to US$15 million in 1989 and were moderate compared with the initial period of the ERP. Privatization of Ashanti Goldfields Company (AGC) also took place in April 1994; the Government of Ghana sold 18.8 million of its 44 million shares for about US$350 million. In January 1996, the government sold an additional5.1 million shares for about US$112 million. In the same year (1996) Telecom Malaysia bought 30 percent of the shares of the then state-owned Ghana Telecom. Ghana has also been implementing reforms of the telecommunications subsector since 1996 aimed at expanding access to telephone faCilities. Even though Ghana Telecom remains the main player in the telecommunications subsector, it commenced sorne form of privatization in 1997. Between 1997 and 2001, Ghana Telecom succeeded in increasing the number of fixed telephone lines from 100,932 to 199,934 (an annual average increase of about 19 percent). In addition to Ghana Telecom, there are two other fixed network operators, Western Telesystems Limited (Westel) and Capital Telecom. Liberalization of the telecommunications subsector and increased competition has resulted in greater access to communications services since 1997. FDI responded positively to these privatizations by increasing to US$233 million in 1994 and US$120 million in 1996. From 1994 to 1998, agro-processed non-traditional exports (NTEs) grew by 26 percent per annum. To a large extent, this reflected the rapid takeoff of canned tuna exports, following a successful joint venture with Heinz (World Bank, 2001). In 1999, canned tuna alone contributed one-fifth of total NTEs (refer to Table 2.3.5). Between 1995 and 2000, tuna exports accounted for an average of over 90 percent of the exports of prepared foods and beverages. The cocoa butter subsector also gained new impetus following the privatization in 1993 of two state-owned factories to a German firm. As a result of investments by the privatized firm, processing capacity increased by 55,000 tons of cocoa beans, adding to the 25,000-ton capacity of another (state-owned) firm.

Table 2.6: FDI in Selected Non-Traditional Export Categories in 1999 (US$ million)

Product Amount

Canned Tuna 61.20

Cocoa Products 40.63

Agricultural Products including fish 7.20

Processed Agricultural Products 5.15

Wood Products 4.34

Total for ali NTEs 138.80

Source: World Bank (2001)

Even though NTEs constitute a small percentage of total exports the investments following these privatizations are partly responsible for the large values of FDI between 1993 and 1996. Key export-oriented projects that have taken off since the mid 1990s include Pioneer Food Cannery (a Heinz joint venture canning tuna with US$31 million investment), West A:frican Mills (US$57 million in coco a processing) and Carson Products (US$1 0 million). These investments accounted for the high level ofFDI in 1999. According to the World Bank (2001:14), "FDI has played a major role in the recent growth of NTEs. Exports by foreign firms accounted for 75 percent of the increase in earnings recorded over the 1993-1999 period and approximately 34 percent of the value ofNTEs in 1999."

CHAPTER THREE LITERATURE REVIEW

This section endeavours to explore and review the existing theories and empirical research studies that have been undertaken to ascertain the causal relationship as well as the impact of FDI on economie growth. The section highlights the arguments and findings that have been advanced by the different scholars. This section reviews the literature on FDI and growth by other authors who conducted their studies on developed and developing countries. I will be reviewing both the theoretical foundations and empirical findings.