The Early Years and Economic Crisis

Ghana began its long period of decline soon after independence when the government began to overspend. Between 1959 and 1961, the government surpassed its capital budget by 10 percent.^[3] This overspending was possible in the short run because the country was still rich in reserves inherited from the colonial regime; however, it set the pattern for fiscal mismanagement in years to come. At the rate with which government and foreign exchange reserves were being drained, by 1962–63 Ghana would have faced a crisis.

The modern economic history of Ghana began with the government's

[3] Andrzej Krassowski, Development and the Debt Trap: Economic Planning and External Borrowing in Ghana (London: Overseas Development Institute, 1974), 42.

response to the initial foreign exchange crisis in December 1961. To resolve the foreign exchange crisis, Prime Minister Kwame Nkrumah announced that nonrestrictive import licenses would not be renewed for 1962 and that from then on all importers would be required to possess specific licenses to gain access to foreign exchange. A large number of other steps that effectively transformed Ghana from an open to a closed economy were also taken: restrictions on the external operations of banks were imposed; Ghana delinked completely from sterling and began to issue its own currency (the cedi); the government took over sterling securities held by public and private institutions and replaced them with government securities; and it granted monopoly rights to the Ghana Trading Corporation to import a large number of basic commodities.^[4]

These steps were taken despite the fact that many recognized the dangers of the state's becoming too intimately involved with the economy. For instance, as early as July 1961, the minister of finance had said that import "controls are expensive in terms of man-power, and often lead to corrupt practices which we must avoid at all costs."^[5] The decision to control imports administratively and to adopt the other measures was made for the same reasons that caused African leaders across the continent to avoid adjusting the exchange rate when faced with balance of payments problems. Nkrumah, for instance, had become more and more committed to heavy state involvement to promote an early transition to socialism. Administrative control of imports also appealed to many African leaders who simply wanted to increase their political power and enhance their individual wealth and security.^[6]

It is also important to note that in the 1950s and 1960s the state was viewed by economists, aid donors, and multilateral organizations as a much more capable economic agent than it is perceived to be in the 1990s. During the colonial period, Ghana had extensive experience with price controls and import licensing, although not to the degree to which subsequent postcolonial governments adopted these types of regulations.^[7] More generally, in the 1960s countries across the world were

[4] Ibid., 59.

[5] Quoted in Tony Killick, Development Economics in Action: A Study of Economic Policies in Ghana (New York: St. Martin's Press, 1978), 264.

[6] See Henry L. Bretton, The Rise and Fall of Kwame Nkrumah (New York: Praeger, 1966), 65–71.

[7] A. H. O. Mensah, "Some Aspects of Economic Regimentation—Ghana's Experience with Price and Import Controls," Journal of African Studies 13, no. 2 (Summer 1986): 69–70.

increasing the state's role in the economy. The economic orthodoxy of the time therefore coincided with the political imperatives of African leaders.

The 1961 decision to increase the state's role in the economy set the stage for a dramatic increase in the public sector's involvement in the economy. The Seven-Year Plan, adopted in 1964, declared that the state should retain control of the strategic branches of the economy, including public utilities, raw materials, and heavy industry. The state was also to participate in light and consumer goods industries in which the rates of return on capital would be high.^[8] In particular, a large number of state-owned enterprises (SOEs) were established to promote socialism and enable the government to gain control of the commanding heights of the economy.^[9] Often, these state enterprises and other government operations were financed by external loans (when Ghana was still credit worthy) or simply by the government's printing more money.^[10] Although government investment between 1960 and 1965 was very high, it resulted in very little productive growth because so many projects (e.g., Ghana Airways, the new State House) were chosen for noneconomic reasons.^[11]

Another of Nkrumah's economic policies, which was widely followed by other African countries, was taxing cocoa, the country's major export. The Cocoa Marketing Board had been established to stabilize the price cocoa farmers received. When the world cocoa price fell in the early 1960s, however, the entire price decrease was passed on to farmers. The substantial reserves that the marketing agency had built up were not used to help farmers in bad times but instead were transferred to the central government and used for recurrent and capital expenditures.^[12] Cocoa farmers were also hurt because Ghana's overvalued currency kept the cedi price of cocoa artificially low. As the 1960s and 1970s progressed, these farmers turned to marketing their produce in neighboring

[8] Ghana, Seven-Year Plan for National Reconstruction and Development (Accra: Office of the Planning Commission, 1964), xiii.

[9] H. P. Nelson, "Report on the Administration and Operation of State Enterprises . . . ," reprinted in Eboe Hutchful, The IMF and Ghana (London: Zed Press, 1987), 146.

[10] Tetteh A. Kofi and Emmanuel Hansen, "Ghana—A History of Endless Recession," in Recession in Africa, ed. Jerker Carlsson (Uppsala: Scandinavian Institute of African Studies, 1983), 64–65.

[11] Naseem Ahmad calls this process "investment without growth." See his Deficit Financing, Inflation and Capital Formation: The Ghanaian Experience, 1960–1965 (Munich: Weltforum Verlag, 1970), 114.

[12] Robert H. Bates, Markets and States in Tropical Africa (Berkeley: University of California Press, 1981), 15–16.

Côte d'Ivoire, where the government paid more in hard currency for cocoa.

Continued overspending as well as increasingly obvious government improprieties caused the last two years of Nkrumah's rule to be disastrous. The overheated economy forced prices to increase by nearly 70 percent between 1963 and 1965. There were massive budget and balance of payments deficits.^[13] In 1965, the government announced that reserves could not be lowered any further without threatening the stability of the cedi.^[14] Therefore, it initiated a process that successive governments would repeat with numbing regularity: calling in the World Bank and the IMF. The World Bank, in an observation that would also be repeated many times, noted that the basic problem in Ghana was an overstraining of resources and that the government had to begin a period of consolidation. However, its actual recommendations were weak, especially compared to the kind of conditionality that would be a commonplace aspect of World Bank financing by the early 1980s. In particular, the bank trusted the government to enact the needed changes and simply called for financing to be available before programs were to be implemented and the necessary studies were done.^[15]

Before the Nkrumah government was able to implement any kind of reform program, however, it was overthrown by the National Liberation Council (NLC) headed by Lt. Gen. Joseph Ankrah. The NLC immediately declared that it would adopt a stabilization program to try to stop the hemorrhaging of Ghana's fiscal and foreign exchange accounts. It signed an agreement with the IMF that tied its policies to certain conditions in exchange for IMF resources. It is crucial to note, however, that the NLC did not envision significant departures from the system it had inherited from Nkrumah. For instance, while the NLC stated that it would like to liberalize import and licensing controls, after it took power it announced that it was only going to reform those regulatory mechanisms so that they would operate more efficiently.^[16]

The NLC succeeded in adopting a standard IMF disinflationary package of fiscal and monetary policies that went a considerable way toward reducing pressures on the economy. The projects inherited from Nkrumah that were viewed as economically sound were continued, but

[13] Krassowski, Development and the Debt Trap, 90.

[14] Parliamentary Statement by Minister of Finance, 10 September 1965, reprinted in Hutchful, The IMF and Ghana, 45.

[15] World Bank Preliminary Report, 24 September 1965, quoted in ibid., 48–49.

[16] "Proposed Letter of Intent, IMF Standby Agreement," 26 April 1966, reprinted in ibid., 64.

few new ones were adopted.^[17] As in the case of state regulation of imports, however, the NLC did not fundamentally alter the involvement of state-owned enterprises in the economy. The military officers had originally displayed outright hostility toward the state enterprises, but their attitude began to change rapidly. In the end, of the forty-six industrial and commercial state enterprises established by Nkrumah, only seven were offered for sale; private participation was sought for eleven others that would continue to be owned by the state. Of the seven put up for sale, only three were of significant size. In the end, only three state enterprises were sold, and private participation was increased in only four others.^[18]

Even this extremely limited sell-off of state enterprises created great controversy in Ghana and established an important legacy with which successive governments would have to cope. The NLC was attacked for even its limited efforts to sell state enterprises because many believed the government was receiving too little for its assets. At a more general level, the sale of the state enterprises, which Nkrumah had portrayed as an important way of gaining the commanding heights of the economy, struck many Ghanaians not only as an improper political step but also as a retreat from the pursuit of economic independence. The NLC came under attack because it could not provide an alternative vision to Nkrumah's on how the state could participate in the economy. The military officers had been able to overthrow Nkrumah, but they could only slow the momentum of his policies; they could not displace his ideology.

True to its word, the NLC did sponsor competitive elections, and Dr. Kofi Busia was elected prime minister in September 1969. Under Busia, much of the NLC-initiated rhetoric of turning away from the Nkrumah regime continued. There is, in fact, some evidence that economic management of programs was better. However, the government reverted to the expansionist economic policies of the Nkrumah regime. It was possible to carry out high spending policies for a short time because world cocoa prices were exceptionally high. In addition, in the early years of the Busia regime the civilians, despite their rhetoric, showed no more desire to change the fundamental relationship between the state and the market than the NLC did. Wage, price, and, of special importance, import controls were all retained. After the controversy that the NLC

[17] Killick, Development Economics, 55.

[18] Krassowski, Development and the Debt Trap, 118.

faced in trying to privatize a few state enterprises, there was very little energy devoted to changing the status of other parastatals.^[19]

In mid-1971, after cocoa had returned to its historic price levels, the Busia regime was faced with another in Ghana's continuing series of balance of payments crises. In a fundamental break with the past, the Busia regime finally decided to address the foreign exchange shortage by a massive devaluation. This decision was a benchmark in Ghanaian economic history because it marked a fundamental departure from using state instruments as the major means of dealing with an economic crisis and instead relied on market mechanisms to balance the external account. A few days after the devaluation announcement, however, the Busia regime was overthrown by Lt. Col. I. K. Acheampong. As explained in chapter 3, the coup, coming so closely after the devaluation, had an enormous impact on later governments when they contemplated resorting to market mechanisms to address their foreign exchange shortages.

The National Redemption Council (NRC), led by Acheampong, immediately revalued the cedi, thus eliminating most of the devaluation implemented by the previous regime. Indeed, M. M. Huq is correct in noting that the Acheampong coup initiated a period of "complete mismanagement."^[20] As noted in chapter 3, the decision to revalue the cedi and then to use administrative measures to control foreign exchange ad hoc led to a massive overvaluation of the cedi, crippling the economy.^[21]

The NRC also kept all the other administrative controls on the economy—and added more. In addition, there was a compulsory acquisition of 55 percent shareholding in the timber, mining, and oil industries.^[22] Finally, in a startling indication of just how far the regime would flaunt economic conventions, the Acheampong regime simply repudiated a substantial portion of the foreign debt it had inherited from previous regimes.

The Acheampong regime also continued the previous governments' patterns of using government largesse to build political support. As Jeffrey Haynes has noted, "Most political leaders, whether civilian or

[19] Killick, Development Economics, 307–9, is especially persuasive on this point.

[20] M. M. Huq, The Economy of Ghana: The First 25 Years since Independence (London: Macmillan, 1989), 16.

[21] World Bank, Sub-Saharan Africa: Progress Report on Development Prospects and Programs (Washington, D.C.: World Bank, 1983), 8. Although unusual in degree, the overvaluation of the exchange rate that the Acheampong regime caused was similar to what many other African countries were experiencing. Between 1973 and 1981, African countries' real effective exchange rates appreciated by 44 percent.

[22] Killick, Development Economics, 317.

military, believed that economic growth and their own political survival required the state to develop jobs, industries, and public welfare services."^[23] Corruption, already endemic in the Nkrumah regime, reached almost unbelievable heights as government decisions on fundamental issues such as import permits were made largely on the basis of personal connections. While the regime did put substantial emphasis on agriculture, it was unable to meet its own goals because of the sharp deterioration in the Ghanaian economy and because of mismanagement.^[24] Figure 2 documents one important indicator of the growing lack of confidence in the Ghanaian economy—the decline in the percentage of the economy devoted to investment.

Cocoa perhaps best demonstrates the dramatic decline of the Ghanaian economy. The 1970s were a time of generally high cocoa prices. Ghana's policies of overvalued exchange rates and low prices for cocoa farmers, however, caused a decline in the country's share of the international market from 29 percent in 1970 to 17 percent in 1980 (figure 3).^[25] There are probably few better examples of how a nation's leaders can propel a country into bankruptcy. In July 1978, Acheampong was overthrown in a military coup; but the new leaders, many of whom had been deeply involved in the Acheampong government, continued most of his disastrous policies and did not make fundamental reforms.

On June 4, 1979, Flt. Lt. Jerry John Rawlings seized power. Rawlings said he was disturbed that the military men who had ruled Ghana for the previous decade would escape unpunished after they held long-planned civilian elections. In an extraordinary action for Ghana, a country that had largely escaped political violence, Rawlings executed Acheampong and several other military leaders for corruption. Rawlings said that he was not interested in ruling and, true to his word, in September 1979 he handed power to Hilla Limann, the democratically elected president.

It is important to briefly examine the first Rawlings government's economic policies given that his second government would embark on fundamental changes in the economy. Rawlings's diagnosis of the economy's problems in 1979, if he really had a coherent one, did not seem to

[23] Jeffrey Haynes, "Ghana: Indebtedness, Recovery, and the IMF, 1977–1987," in The African Debt Crisis, ed. Trevor W. Parfitt and Stephen P. Riley (London: Routledge, 1989), 99.

[24] Donald Rothchild, "Military Regime Performance: An Appraisal of the Ghanaian Experience, 1972–1978," Comparative Politics 12, no. 4 (July 1980): 470–71.

[25] K. Ewusi, Statistical Tables on the Economy of Ghana (Legon: Institute for Statistical, Social, and Economic Research, 1986); Commodity Research Bureau, CRB Commodity Yearbook, 1991 (New York: CRB, 1991).

Fig. 2.
Investment as a Percentage of GDP, 1957–1983
Source: R. Summers and A. Heston, "The Penn World Table (Mark 5)," 
computer disk provided by authors.

Fig. 3.
Cocoa Production, 1957–1983
Sources: K. Ewusi,  Statistical Tables on the Economy of Ghana  (Legon: Institute of
Statistical, Social, and Economic Research, 1986); and Commodity Research Bureau,  CRB
Commodity Yearbook, 1991  (New York: CRB, 1991).

differ substantially from the statements of previous leaders. He attributed "the greater part of the country's present economic and social woes" to "some businessmen who hide through the curtain to dupe the country through trade malpractices and other anti-social activities."^[26] The Rawlings government's response to these perceived malpractices was to continue previous attempts to regulate the economy while adding a level of brutality to enforcement that even the Acheampong government had managed to avoid. In the most spectacular example of its determination that the state would control the market at any price, the Rawlings regime destroyed Makola Number 1 Market, which had been the center of commercial activity in Accra for fifty years.^[27] The Rawlings government also declared it would conduct unannounced searches of traders and stated that if any were found with hoarded goods they would be "taken away to be shot by firing squad."^[28] It proclaimed the same fate for those caught smuggling cocoa.^[29]

The Limann government that took power in September 1979 may have recognized the fundamental problems of the economy, but it had neither the political will nor the analytic ability to cope with the quickly deteriorating economy. In particular, no fundamental changes were made in the relationship of the state to the economy. As inflation continued at a high rate and the exchange rate became increasingly overvalued, cocoa farmers diverted an ever larger share of their production to Côte d'Ivoire. State enterprises also continued to generate significant losses. Most businessmen found it impossible to conduct commercial operations legally and either closed down their operations or began to operate on the now ubiquitous black market. As Naomi Chazan has noted, "The Limann regime's proposals [to address economic decline] offered paliatives where more surgical structural moves were required."^[30] International donors, already gravely suspicious of Ghana following Acheampong's disavowal of external debts, essentially walked away from Ghana. By 1981, Ghana was receiving only $13.3 dollars per capita in net official development assistance compared to an average of $26.3 dollars for all sub-Saharan countries excluding Nigeria.^[31]

[26] Ghanaian Times, 7 July 1979.

[27] Daily Graphic, 20 August 1979.

[28] Ghanaian Times, 12 June 1979.

[29] Ernesto May, Exchange Controls and Parallel Market Economies in Sub-Saharan Africa: Focus on Ghana, World Bank Staff Working Paper no. 711 (Washington, D.C.: World Bank, 1985), 68.

[30] Naomi Chaza, An Anatomy of Ghanaian Politics: Managing Political Recession, 1969–1982 (Boulder: Westview, 1983), 313.

[31] World Bank, African Economic and Financial Data (Washington, D.C.: World Bank, 1989), 196.

Indeed, looking at Ghana's macroeconomic indicators, there was little reason to question the proposition that Ghana had become a hopeless case. Per capita income, which had been approximately 640 cedis in 1971, had declined by the end of 1981 to approximately 460 cedis in constant (1975) terms.^[32] Every organization in the country, ranging from the government to the private sector to voluntary organizations in the rural areas such as the churches, had essentially ground to a halt because of a lack of resources. It was estimated that two million Ghanaians had simply left the country because of a lack of economic opportunity.^[33] Ghana had completed the transition from a prospering middle-income developing country with great hopes at independence to a nation suffering from Fourth World poverty.