Chapter 3—
Exchange Rate Reform: Strategy and Tactics

Devaluation is like a war. You have to have a strategy.
—Bank of Ghana official

Among the changes demanded by programs of comprehensive economic reform, perhaps none are more politically difficult than devaluation and altering the way the exchange rate is determined.^[1] Since African economies are so open—exports plus imports routinely account for approximately 40 percent of gross national product in many countries—changes in the exchange rate will have a very broad effect.^[2] Control of the exchange rate also plays an important role in providing goods to political clients in many countries, making it extremely difficult for some African leaders to enact reform. Finally, control of the exchange rate is seen by many in Africa as a crucial aspect of economic sovereignty. Thus, demands for reform of the exchange from the IMF, a common aspect of many conditionality programs, are always controversial.^[3] As a result, exchange rate reform often fails in Africa. For instance, in approximately half the African countries attempting to float their currencies in the 1980s, the reform was eventually abandoned, often with a real appreciation of the currency.^[4] Successful reform of the exchange rate in Ghana, therefore, is particularly interesting.

[1] Interview, Accra, 21 July 1989, with Bank of Ghana official quoted above.

[2] Calculated from World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth (Washington, D.C.: World Bank, 1989), 221, 240.

[3] In one study, liberalization and reform of exchange rate regimes was a feature in more than half the programs supported by the IMF between 1980 and 1984. A similar percentage held for the African countries sampled. Fiscal Affairs Department, Fund-Supported Programs, Fiscal Policy and Income Distribution, IMF Occasional Paper no. 46 (Washington, D.C.: IMF, 1986), 12, 42–53.

[4] S. Kimaro, Floating Exchange Rates in Africa, IMF Working Paper no. WP/88/47 (Washington, D.C.: IMF, 1988), 26.

In addition, the case of exchange rate reform in Ghana is especially important because the leadership self-consciously adopted a strategy designed to overcome the specific local factors impeding fundamental change. In the main, this strategy was successful. Of course, the government's correct analysis of local political factors and its subsequent design of an appropriate strategy are not the only reasons it has been able to implement economic reforms long thought to be impossible. Other factors—luck, political repression, weariness from a decade of decline—contributed to the Rawlings regime's success. However, Ghana is a good case to examine political strategy, the neglected aspect of economic reform.

The Dilemmas of Exchange Rate Reform

As noted in chapter 1, in the face of balance of payment problems, African countries have consistently chosen to control imports administratively. Unfortunately, reliance on an administrative system to control imports often leads, in practice, to an overvalued exchange rate. If leaders depend on administrative controls rather than the exchange rate to ration imports, they often do not feel compelled to adjust the value of the currency to reflect differences between domestic inflation and the inflation rates of their trading partners. Indeed, in a perverse manner, use of administrative import regimes actually encourages ever-increasing overvaluation of exchange rates because the more the exchange rate becomes overvalued, the greater the benefit a government can bestow on those few who are granted access to foreign goods.

Ghana is an excellent example of how exchange rates can become distorted and how difficult it is to reform them. Ghana's history of exchange rate problems began with economic crises in the early 1970s. In response to a declining economic position, the government of Prime Minister Busia announced in December 1971 a surprise devaluation of 78 percent, thereby reducing the value of the cedi from 1.02 to the dollar to 1.82 to the dollar. The devaluation was quickly followed by the Acheampong coup, and the military government that followed revalued the cedi back up to 1.28 to the dollar in February 1972.^[5]

In the ensuing years, the exchange rate was largely held steady while Ghana experienced considerable inflation, resulting in the rapid over-valuation of the cedi. In 1972, the black-market rate for the cedi was 28

[5] J. Clark Leith, Foreign Trade Regimes and Economic Development: Ghana (New York: National Bureau of Economic Research, 1974), 152–55.

percent greater than the nominal rate. By 1976, when the cedi was nominally valued at 1.15 to the dollar, the black-market rate was at 2.9 cedis to the dollar (60 percent over the official rate). By 1982, the cedi had only fallen to 2.75 to the dollar, but the black market was at an incredible 61.6 cedis to the dollar (an overvaluation of 2,242 percent).^[6]

The great overvaluation of the cedi spawned a huge and thriving black market as goods became unavailable at the quoted price. The government implicitly admitted that it had lost control of the situation by creating, in 1980, a system of special unnumbered licenses that allowed Ghanaians to import goods but did not allocate any foreign exchange for this purpose. Potential importers therefore were encouraged to bid for funds on the black market.^[7]

The overvalued exchange rate also had an important effect on exporters. Prices for the country's major export, cocoa, were artificially low, and Ghana's export farmers either stopped producing or smuggled their produce across the border to Côte d'Ivoire, which was offering much higher prices, due in good part to a more realistic exchange rate. As noted in chapter 2, the overvaluation of the currency was central to Ghana's loss of market share in the 1970s. Other exporters were also hurt, with the result that the value of total exports in constant cedis in 1980 was only 52 percent of the 1970 level, while exports in 1981 were only 32 percent of what they had been eleven years before.^[8]

There were several reasons why successive Ghanaian governments were unable to reform the exchange rate even though there was widespread agreement among senior civil servants and many government officials that the severe overvaluation of the cedi was seriously hurting the country. First, the system of administrative allocation of foreign exchange was extremely useful in rewarding clients because in a climate of ever greater scarcity, the allocation of an import license was a powerful means of developing and retaining constituencies.^[9] Flt. Lt. Jerry Rawlings correctly noted the economic and political effect of the continued overvaluation:

Foreign exchange is a scarce resource in Ghana and if the official banking system fails to recognize its scarcity premium, an avenue is provided for racketeers to extract rents. Providing foreign exchange at rates well below the

[6] Adrian Wood, Global Trends in Real Exchange Rates, 1960 to 1984, World Bank Discussion Paper no. 35 (Washington, D.C.: World Bank, 1988), 122.

[7] M. M. Huq, The Economy of Ghana (London: Macmillan, 1989), 327.

[8] World Bank, Ghana: Policies and Program for Adjustment (Washington, D.C.: World Bank, 1984), 85.

[9] See Report of the Commission of Enquiry into Alleged Irregularities and Malpractices in Connection with the Issue of Import Licenses (Akainyah Commission) (Accra:Government Printer, 1964), 12; and Report of the Commission of Enquiry into Trade Malpractices in Ghana (Abraham Commission) (Accra: Government Printer, 1965).

actual transaction prices really means that the government is subsidising such racketeering.^[10]

Many of these racketeers were either in government or had become the primary supporters of successive governments.

Second, there was a widespread belief among the urban population, the chief consumers of imported goods, that they benefited from an overvalued exchange rate and would be hurt by any kind of devaluation. One contribution to the Ghanaian debate concerning devaluation in 1982 (tellingly titled "The Revolution or the IMF") argued, "It is also important to point out that whenever there is a devaluation of the currency the ordinary people are those who suffer most from the resultant price increases, unemployment, and cuts in social services."^[11]

Third, in Ghana, the concept of a "strong" currency came to appeal to many elements of the polity. In part, the need to have a "strong" cedi was tied to the desire of many Ghanaians, who had seen their once proud country decline into bankruptcy, to recapture some of the nationalistic spirit of the past by confronting international financial institutions. David Anafglatey spoke for many Ghanaians when he said,

It is as if the IMF is some sadistic monster which becomes angry at seeing people happy. . . . One also recalls with pride how Ghana's own Osegyefo [Kwame Nkrumah] rejected the Fund's pressures to devalue the cedi in the early 1960's. . . . Unfortunately many of the leaders Ghana has had after Nkrumah have not had the courage of the Osegyefo . They spinelessly yield to the IMF pressure.^[12]

For the leadership, the attachment to a "strong" cedi manifested itself in an association that developed between devaluations and coups after Acheampong overthrew Busia.^[13] Dr. Joseph Abbey outlined previous governments' fears concerning the exchange rate:

[10] Quoted in People's Daily Graphic, 8 January 1987.

[11] Napoleon Abdullai, "The Revolution or the IMF," Daily Graphic , 7 September 1982. The Daily Graphic added the appellation "People's" on 31 December 1982.

[12] Accra Domestic Service in English, "Commentary Rejects any Devaluation of Cedi," 2 March 1982, reprinted in Joint Publications Research Service, Sub-Saharan Africa (JPRS, SSA ), 17 March 1982, 36.

[13] There is, in fact, substantial evidence that the Acheampong coup was planned well beforehand and would have happened even without the devaluation. However, the political mythology that developed afterward was that the devaluation was directly responsible for the toppling of the Busia regime. See Thomas M. Callaghy, "Lost Between State and Market: The Politics of Economic Adjustment in Ghana, Zambia, and Nigeria," in Economic Crisis and Policy Choice: The Politics of Adjustment in the Third World, ed. Joan M. Nelson (Princeton: Princeton University Press, 1990), 272.

Procrastination of successive governments over a prolonged period in refusing to adopt appropriate stabilisation policies destroyed the country's economy, given the widespread belief that a stabilisation policy, especially devaluation of the exchange rate inevitably conjured up threats of a coup in Ghana. Consequently a succession of governments had held out until the bitter end before attempting any sort of stabilisation policy, so that economic conditions were particularly bad when they finally did make policy changes.^[14]

There is perhaps no better example of how a disastrous economic policy can become politically essential in the official mind of an African government.

Finally, devaluation requires a leap of faith by the national leadership. While the deleterious effects (e.g., higher prices for imports) are guaranteed to be immediate, the beneficial effects (e.g., increased production by exporters who receive better prices for their goods) will take some time and are always viewed as somewhat tenuous by African leaders well aware of the weaknesses in their country's infrastructure and private sectors.^[15] The belief of Dr. Obed Asamoah, foreign affairs secretary at the time, that there is "realization that some adjustment has to be made in the exchange rate of the cedi, but at the same time there is some feeling in the country that success stories based on IMF devaluation prescriptions are hard to come by" was also a common one in Ghana.^[16]

None of these factors is unique to Ghana, although that all were so strong may have caused the country to have had an unusually poor exchange rate policy. For instance, in many other countries, exchange rates have long been used to benefit a segment of the population.^[17] Similarly, the fear of "IMF riots" due to devaluations or other aspects of economic reform is a common one in Africa and elsewhere in the Third World.^[18] Finally, in Africa, general opposition to the IMF and World Bank usually centers on the exchange rate—a widely followed indicator in most countries—and in many African countries the exchange has become, for better or worse, an important nationalistic symbol.^[19] For

[14] Dr. Joseph Abbey, "Ghana's Experience with Structural Adjustment," Accra, mimeo, 1987(?), 4.

[15] See, for instance, J. S. Addo (governor of the Central Bank), "The Justification for Devaluation under the Economic Recovery Programme, 1983–6," speech, reprinted in The State of the Economy, no. 2 (Accra: Information Services Department, 1986), 22.

[16] Daily Graphic, 6 October 1982.

[17] See, for instance, World Bank, Accelerated Development in Sub-Saharan Africa (Washington, D.C.: World Bank, 1981), 28.

[18] See Henry S. Bienen and Mark Gersovitz, "Consumer Subsidy Cuts, Violence, and Political Stability," Comparative Politics 19 (1986): 25–43.

[19] I discuss this development at greater length in "The International System and the Weak State: The Politics of the Currency in West Africa, 1900–1990," mimeo.

instance, both Nigeria and Tanzania in the early 1980s resisted devaluation in good part because of the psychological and nationalistic investment that had been made in a particular rate of exchange. This aspect of African politics may seem peculiar to Westerners, who are inclined to see the exchange rate as just another aspect of economic policy, but the psychological importance in the exchange rate should not be underestimated. In a country like Ghana, where the psychology of the exchange rate becomes intertwined with leadership fears of a coup, the emotions surrounding devaluation may become a formidable barrier to reform.

The Politics of Radical Exchange Rate Reform

The drastic reforms in the exchange rate regime that the Rawlings government have implemented are therefore particularly important. However, it was not immediately obvious that the new government was going to make radical changes in the exchange rate regime. In 1982, the PNDC repeatedly noted that it would not devalue the cedi.^[20] Instead, it simply devoted itself to making the inherited system of import licenses work better.^[21] And given the PNDC's constituency—primarily workers and students—it was also unlikely to embark on radical economic reform, particularly devaluation. Here it is crucial to note that the early supporters of the PNDC were likely to be net importers, who would undoubtedly oppose any effort at exchange rate reform.

Changing the Psychology of Devaluation

Yet, as noted in chapter 2, by the end of 1982, a consensus was developing within at least part of the PNDC that the bitter medicine of the IMF, especially devaluation, would have to be taken. But both for the continuing welfare of a large part of the urban population and for government survival, government leaders and civil servants needed to break the psychology of the country that accorded such an important place to a "strong" cedi. In late 1982 the government took the first step to break the mass psychology, raising the price of imported food—until then artificially cheap because of the exchange rate—so that it was equal to the price of locally produced food. Government officials explain that this

[20] See, for instance, Accra Domestic Service in English, "PNDC Member Says Cedi Will Not Be Devalued," 15 October 1982, quoted in JPRS,SSA, 18 October 1982, T3.

[21] Ghanaian Times, 31 December 1982.

was done to break at least some of the psychological dependence on imported goods and to try to demonstrate to the population how the overvalued exchange rate was hurting peasant growers.^[22]

The new government then moved dramatically to address the overvalued exchange rate and a host of other problems in the 1983 budget announced in April. It imposed a system of bonuses for exporters and surcharges for importers that lowered the effective value of the cedi from 2.75 to the dollar to 25 to the dollar. Petrol was initially assigned a lower surcharge, so there was effectively a different exchange rate for fuel imports.^[23] Given the collapse of the statistical system in Ghana, policy-makers and IMF officials had difficulty in estimating the extent of the needed devaluation. It was hoped that this initial devaluation would at least return the economy to the competitive level it had achieved in 1978, after the last exchange rate adjustment.^[24]

In general, the IMF and the World Bank oppose surcharge and bonus systems, which amount to multiple exchange rates, because they can be extremely difficult to manage and may delay the adoption of a correctly valued exchange rate. However, Ghanaian officials argued that given the political realities of the country, they could not announce an outright devaluation. The multiple exchange rate, they contended, enabled them to begin to address the exchange rate problem while suggesting to the population that they had not just simply capitulated to the IMF and adopted a devaluation. Thus, Mrs. Aanaa Enin, a PNDC member, could assure Ghanaians that "the government has not devalued the cedi but had rather readjusted it to meet the economic conditions of the times."^[25]

Many civil servants argue that the multiple-tier exchange rate was also important because a substantial portion of the political leadership was against devaluation and they therefore needed to adopt a strategy that would not be called "devaluation" outright.^[26] Indeed, the PNDC spent two meetings searching for the right terminology to avoid using the word "devaluation."^[27] This attempt to forge common ground was a

[22] Tsatsu Tsikata, "The Human Dimension of Africa's Economic Recovery and Development: Ghana's Country Experience," paper presented at the International Conference on the Human Dimension of Africa's Economic Recovery, Khartoum, 5–8 March 1988, 9.

[23] Information Services Department, Ghana: Two Years of Transformation (London: Impads, 1983), 25–26.

[24] G. G. Johnson et al., Formulation of Exchange Rate Policies in Adjustment Programs, IMF Occasional Paper no. 36 (Washington, D.C.: IMF, 1985), 28.

[25] People's Daily Graphic, 20 May 1983.

[26] Interview, Accra, 21 July 1989.

[27] See the article by former government official Zaya Yeebo, "How the IMF Tamed a 'Leftist' Apostle," Africa Events, January 1985, 19.

particularly important consideration because the PNDC—a group of military and civilian officials who ranged in ideology from "Nkrumah's children" to firm believers in the IMF's basic analysis—was by no means united around reform. The multiple exchange rate system therefore gave the different factions of the PNDC a common place to meet without any group having to admit defeat.

Once the multiple-tier system had been established and it was shown that a Ghanaian government could actually implement exchange rate reform, it was easier for those who favored devaluation to make their case within the PNDC. In addition, the reform program that Ghana announced immediately drew a significant amount of support from international donors. Since 1983, aid flows have averaged US$ 530 million a year.^[28] Supporters of exchange rate reform were able to demonstrate to their cabinet colleagues that the stabilization program could immediately attract resources from the outside. The World Bank and the IMF also played an important role, providing a framework for the analysis of Ghana's problems more persuasive than anything opponents of economic reform could develop.

Of course, most Ghanaians realized immediately that imports would be more expensive; and the 1983 budget, which also raised prices on a host of consumer goods, was widely denounced by the government's erstwhile constituencies. For instance, the General Transport and Chemical Workers called the budget "anti-people, a killer, callous and inhuman."^[29] The Trades Union Congress (TUC) later protested Ghana's

submission to the dictates of the IMF and the World Bank and urged it to wrestle the country's economy from the grip of these financial institutions. As a result of these IMF conditions, working people in Ghana now face unbearable living conditions which manifest themselves in poor nutrition . . . [and] high prices of goods and services.^[30]

There were also widespread protests by students and other urban dwellers who were severely affected by the government's policies.

Despite the protests, the government was able to implement the system of bonuses and surcharges—in part, of course, because people knew that Rawlings was willing to use force to get his program through. As one government official said, "This government was prepared to take action. It also had a strong constituency among those who hold the gun. The population knows that if you complain, you will be silenced. If you

[28] Tony Hawkins, "Star Pupil Comes of Age," Financial Times, 11 July 1989, 35.

[29] People's Daily Graphic, 30 April 1983.

[30] Ibid., 10 November 1984.

did misbehave you would be taken care of."^[31] Or as Professor A. Adu Boahen noted in his courageous Danquah lectures, "We have not protested or staged riots not because we trust the PNDC but because we fear the PNDC! We are afraid of being detained, liquidated or dragged before the CVC [Citizens' Vetting Committees] or NIC [National Investigations Committee] or being subjected to all sorts of molestation."^[32]

The willingness to use force was combined with the legitimacy Rawlings had achieved from his "housecleaning" in 1979 and the support he had gained personally. One government official explained in Accra,

The PNDC regime had a comparative advantage in making reforms just like Nixon had a comparative advantage in going to China. It is a populist regime. People believe that Rawlings is for them. He convinced them that nothing else is possible and they believed that it must be true. A professor from Legon or a rich businessman would not have been able to get away with devaluation.^[33]

Therefore, in Ghana it was not simply a question of a government prepared to use force to implement a policy; after all, other governments in Ghana had no hesitation about locking up people. Rather, the Rawlings government succeeded in part because it was able to use a particularly effective combination of coercion and legitimacy to deter outright opposition.

Further, there is some evidence that the multiple exchange rate system did work to alleviate some of the psychological disposition against devaluation. Thus, the TUC in 1988 argued that a system of bonuses and surcharges "is better than the traditional devaluation which does not discriminate in its scope and level."^[34] Actually, there were very few exemptions in the system of bonuses and surcharges that the government announced in 1983, but the fact that it left the government with some opportunity to intervene in the economy seems to have been important.

The Ghanaian government may also have faced less popular opposition than it expected because, given the gross overvaluation of the cedi, few goods on the shelves of stores (and nothing in the markets) were priced according to the official rate. In retrospect, government officials are confident that more worker protest against the budget announcement and subsequent reforms did not emerge because most of the society was already paying shadow prices for the goods.^[35] This point is usually

[31] Interview, Accra, 26 September 1989.

[32] A. Adu Boahen, The Ghanaian Sphinx (Accra: Ghana Academy of Arts and Sciences, 1989), 51–52.

[33] Interview, Accra, 14 July 1989.

[34] Trades Union Congress, "Views of the Trades Union Congress on the Economic Recovery Programme Policy Framework, 1986–1988," Accra, mimeo, 1988, 2.

[35] See also Ajay Chhibber and Nemat Shafik, Exchange Reform, Parallel Markets,and Inflation in Africa: The Case of Ghana, Policy Research and External Affairs Working Paper no. 427 (Washington, D.C.: World Bank, 1990), 54.

Fig. 4.
Real Value of the Cedi over Time
Sources: Inflation and trade figures from Statistical Service,  Quarterly Bulletin of
Statistics,  various issues; and Statistical Service,  Statistical News Letter,  various issues.
Nominal cedi rates derived from World Bank (unpublished data);  West Africa  (various
issues); and Kodwo Ewusi,  Structural Adjustment and Stabilization Policies in Developing
Countries  (Tema: Ghana Publishing Company, 1987). Inflation figures for Ghana's trading
partners from Organization for Economic Cooperation and Development,  Main Eco-
nomic Indicators,  various issues.
Note: Ghanaian inflation estimates are especially prone to error. 1985 trade weights
are used for subsequent years.

ignored when government officials and multilateral organizations attempt to estimate the effects of a devaluation on the public.

The PNDC quickly moved to consolidate its exchange rate reforms by unifying the import and export rates at 30 cedis to the dollar in October 1983. Thus, in five months the cedi had undergone a nominal devaluation of 1,090 percent. The government then linked the exchange rate to an index of the difference of the inflation rate between Ghana and its major partners. Between October 1983 and January 1986, the government announced periodic devaluations of the currency, sometimes by considerably more than was called for by its own formula, so that by the beginning of 1986 one U.S. dollar was equivalent to 90 cedis.^[36] According to government officials, the PNDC repeatedly "tested the waters" to see how large a devaluation it could get away with at any given time. As figure 4 demonstrates, these administrative announcements resulted in a dramatic real devaluation of the cedi.

[36] Kodwo Ewusi, Structural Adjustment and Stabilization Policies in Developing Countries (Tema: Ghana Publishing Corporation, 1987), 77–78.

Deflecting Political Pressure

The government carried out these devaluations at considerable political cost. The workers had become largely alienated, in good part because each newspaper that carried news of the latest devaluation also reported that petrol and other commodities were increasing in price because of the new exchange rate.^[37] In a remarkable statement for a country that still suffers from what Rawlings calls "the culture of silence," A. K. Yankey, head of the TUC, said in late 1985 that "workers out of frustration would be forced by their human instinct of survival to rise up against the Government since it cannot ensure them their survival."^[38] Students, too, were largely alienated from the PNDC, and the universities had to be shut for a considerable time because of student protests.

Perhaps most important, by early 1986, senior government officials were beginning to voice, in public, serious concerns about the political implications of continued exchange rate reform. In a bold challenge to government policy, Lt. Col. (ret.) J. Y. Assasie, who was at that time political counsellor for the Economic Development of the Committees for the Defence of the Revolution (as the WDCs and PDCs had been renamed), said,

We are of the view that the burdens that tend to flow from currency adjustments fall disproportionately heavily on the deprived and poorer sections of [the] community without adequate and corresponding compensatory benefits. This sector of our society is the constituency of the Revolution which must not be unnecessarily burdened in the pursuit of growth.^[39]

Similarly, one Finance Ministry official said, "Exchange rate announcements became more and more difficult with each successive announcement of devaluation. The government began to look bad. Revolutionaries asked if the government was for the workers. Every devaluation brought an increase in prices."^[40] By this time, government officials admitted that they faced too much popular pressure to simply continue the practice of administrative announcements of devaluations. Government officials also expressed some unhappiness that the process of setting rates administratively, which involved the Ministry of Finance, the Bank of Ghana, and the PNDC, was too cumbersome to continue indefinitely.

[37] For instance, on 5 December 1984 the People's Daily Graphic reported a devaluation; the accompanying story on the page concerns an announcement from the Ministry of Fuel and Power that fuel prices were increasing because of the new exchange rate.

[38] Pioneer, 25 November 1985.

[39] J. Y. Assasie, "CDRs and the National Economy," The CDR Eagle Flies 1, no. 1 (December 1986): 16.

[40] Interview, Accra, 25 July 1989.

In addition, while the devaluation had hurt a large number of people, explicit supporters of the government's economic policy were still relatively scarce. Although farmers' incomes were increasing, cocoa production was at only 215,000 tons in 1985, an increase from 1983's level of 158,000 tons but still well below the 258,000 tons achieved in 1980.^[41] Of course, the slow response by cocoa farmers was hardly surprising given that it takes five to seven years for a tree to begin to yield cocoa beans. Thus, there was no obvious manifestation of rural support for the government and, as will be discussed in chapter 5, the PNDC was still grappling with the fact that its institutional ties with the countryside were tenuous.

Faced with these problems, the government decided to institute a foreign exchange auction, which constituted a "second window" for foreign exchange allocation. As Dr. Botchwey noted, the auction tended to "depoliticise" currency adjustments because the government could plausibly deny its responsibility for further devaluations, blaming them on the market.^[42] Similarly, an editorial in a local newspaper noted how the auction deflected blame from the government:

Each and every Ghanaian, therefore, must be aware that the way he or she goes about the tasks and responsibilities of daily life will be reflected in the weekly auction results. We can no longer hide from the truth or blame it on international financial institutions or economists who talk a language which we don't understand. . . . It is our efforts which will determine the weekly economic temperature.^[43]

In the first week, the value of the cedi decreased by almost 42 percent to 128 cedis to the dollar. The government soon confirmed its commitment to the auction by closing the first foreign exchange window so that the auction became the sole means of foreign exchange allocation in the country. The auction continued the gradual devaluation of the cedi: by September 1991 the exchange rate had reached 400 cedis to the dollar. Figure 4 indicates that the auction brought about a further real depreciation of the cedi even though there was substantial slippage after the auction was instituted. The same groups that had been disaffected before by the devaluation continued to be unhappy, but there is little evidence that they posed any threat to the regime.

Once the auction began, the PNDC did not comment as the cedi fell

[41] Commodity Research Bureau, CRB Commodity Yearbook, 1991 (New York: CRB, 1991), 35.

[42] Quoted in Baffour Agyeman-Duah, "Ghana, 1982–6: The Politics of the P.N.D.C.," Journal of Modern African Studies 25, no. 4 (December 1987): 635.

[43] People's Daily Graphic, 15 September 1986.

and did not intervene too overtly in the auction. The government could reasonably claim, therefore, that it was not directly responsible for the devaluation or the ensuing hardships. Indeed, Ghanaian authorities repeatedly noted the benefits of the cheaper cedi.^[44] In contrast, the Zambian government began to worry about the value of the kwacha and intervened overtly in its auction,^[45] thereby directly assuming responsibility for the devaluation and the accompanying political blame. As a result, in contrast to Ghana, the Kaunda government was forced to terminate its auction.

In February 1988, the government embarked on further liberalization of the exchange rate by allowing the establishment of foreign exchange bureaus. These bureaus, which are privately owned, are allowed to trade openly in foreign exchange with no questions asked of either Ghanaians or foreigners who want to buy or sell foreign exchange. As Figure 4 indicates, the establishment of the bureaus led to a further real depreciation of the currency from the auction rate. This further decline occurred because the auction is partially managed and because some Ghanaians are reluctant to indicate to the government how many cedis they possess. The establishment of the bureaus was an extraordinary step because it marked the abandonment of the old system, in which the government had allocated all foreign exchange, in favor of one in which the foreign exchange rate was either determined by auction, for a limited number of goods, or by a competitive free market.

According to government officials, they took this radical step because they recognized there was a flourishing market for foreign exchange outside official channels and decided they would be better off legalizing illegal trade and trying to understand the market rather than continuing to ignore a substantial part of the economy. As one official quipped in an interview, "If you can't beat them, join them."^[46]

The bureaus also may serve as a lucrative new form of business for those who previously made their living exchanging money on the black market or through privileged access to government-allocated foreign exchange. Several government officials stated that at least some of the dealers who previously occupied the infamous Cow Lane (Accra's once thriving black market for foreign exchange) have now opened foreign exchange bureaus, but it is impossible to investigate this assertion. It

[44] For instance, see PNDC, The P.N.D.C. Budget Statement and Economic Policy for 1991 (Accra: PNDC, 1991), 39.

[45] Roger Young and John Loxley, Zambia: An Assessment of Zambia's Structural Adjustment Experience (Ottawa: North-South Institute, 1990), 33.

[46] Interview, Accra, 10 July 1989.

can be said that the incentive system the government has now established promotes legitimate trading activity (for which the government receives a licensing fee) and that the once vibrant black market has largely dried up.

Ghana's Real Devaluation

Ghana's devaluation is significant for several reasons. First, it was, as Figure 4 demonstrates, a massive, sustained, real devaluation of the currency. This point is important because in some countries, especially those that have adopted expansionary fiscal policies, the tendency is to let the currency appreciate so that after a few years the real value of the currency is not significantly different from what it was before the devaluation.^[47] Figure 4 suggests that after large devaluations the currency tended to begin to appreciate. However, when the authorities were determining the value of the currency administratively, they were able to make large enough discrete jumps so that the slippage afterward was not significant. Each time Ghana went to a new form of foreign exchange allocation (either the auction or the foreign exchange bureaus), there was also a significant depreciation, which counteracted the tendency for the currency to appreciate.

However, Ghana's devaluation is more than just a simple change of prices. By fundamentally changing the way foreign exchange is allocated, the government has made a more radical economic change than most other countries in Africa, which attempt to reform simply by changing relative prices. The inability of the PNDC to influence the exchange rate assures exporters that they can make realistic assumptions about the exchange rate in future business plans. Had the PNDC simply devalued without changing the institutions affecting the exchange rate, it would have much less credibility; and businesses would have no assurance, especially given Ghana's past, that the exchange rate would continue. Thus, in fundamentally changing the country's economic institutions, the PNDC implemented real structural adjustment, rather than simply an adjustment in relative prices.

The Rawlings government was able to enact comprehensive exchange rate reform for several reasons. First, and perhaps most important, the economy began to grow again. Since 1983, it is generally estimated that

[47] Sebastian Edwards, Exchange Rate Misalignment in Developing Countries, World Bank Occasional Paper no. 2, n.s. (Baltimore: Johns Hopkins University Press, 1988), 38–39.

the economy has grown at 5–6 percent a year, a spectacular performance given that most of Africa has suffered from depression for most of the 1980s.^[48] Part of this increase is due to the reforms instituted under the economic recovery program, but part is also due to improvement in the weather since 1983. As Dr. Abbey noted, "We literally took advantage of the drought of 1982–83 to launch our program. It was clear to us that if we waited until after the harvest improved, it would be a lot more difficult to launch an austerity program, which we knew the country needed."^[49] Also, as noted above, Ghana found that the supply of international aid was extremely elastic once the country began to institute reform. The injection of aid produced immediate, visible signs that the economy was starting to grow even when most of the Ghanaian private sector was moribund. There is no firm evidence that the lot of the average Ghanaian has actually improved dramatically, but certainly it has become evident to everyone that the economy is picking up and therefore better days may be ahead.

However, the importance of the strategy that the Rawlings regime adopted should not be underestimated. Even though the soft state had imploded, the psychology of the soft state, epitomized by the belief that devaluation would cause burdens on the urban population and prompt a coup, remained. The strategy that the Ghanaian government adopted was therefore especially important in successfully implementing the devaluation. Ghanaian officials argue that their adoption in certain periods of multiple exchange rates was crucial in demonstrating to the country that the exchange rate could be reformed. This strategy also allowed the PNDC to proceed with economic reform despite the leadership's being divided concerning the nature and pace of economic change. It seems that a sophisticated strategy on the part of the top leadership may supplant the need for the unified government that much of the economic reform literature declares is necessary. Keen political tactics are especially important in Africa because the formulation of a viable political strategy does not require particularly well developed administrative and institutional capabilities. The strategy used to implement the exchange

[48] Ghana, Towards a New Dynamism: Report Prepared by the Government of Ghana for the Fifth Meeting of the Consultative Group for Ghana (Accra: Government of Ghana, 1989), 1; and Ghana, Enhancing the Human Impact of the Adjustment Programme (Accra: Government of Ghana, 1991).

[49] J. L. S. Abbey, On Promoting Successful Adjustment: Some Lessons from Ghana (Washington, D.C.: Per Jacobsson Foundation, 1989), 33.

rate reform in Ghana took no more than a few high-ranking officials and civil servants to develop.

The PNDC also made a strong effort to try to educate people to the dangers of the previous economic policies and to demonstrate how the new program of economic reform would eventually help them. For instance, in his 1983 budget speech, Dr. Botchwey criticized the previous governments' policies of overvaluing the cedi: "The real losers in this exchange rate policy are of course the working people, the underprivileged who have no access to foreign exchange."^[50]

The government further stressed its commitment to help those who had been hurt by the economic reform program by adopting the most ambitious program on the continent to alleviate the social costs of adjustment. The Programme of Actions to Mitigate the Social Costs of Adjustment (PAMSCAD) will not reverse the significant changes that devaluation has brought about, but the food-for-work and redeployment efforts are a signal to the population that the government understands the deprivations people have been forced to undergo. In its justification of PAMSCAD, the PNDC specifically noted that the program would contribute to the sustainability of the economic reform program by showing that the government cared about the harmful aspects of economic reform.^[51]

There are few signs that these efforts to educate the public about the dangers of overvaluation and to show that the government cared about the population were successful in generating support for the devaluation program, but they may have dampened outright efforts to oppose the economic reform program. A Bank of Ghana official claimed, for instance, that the intensive education efforts produced a "resigned acceptance" of the devaluation program.^[52]

The Rawlings devaluation was in sharp contrast to Busia's attempted devaluation, which was done without warning and without adequate planning by the government.^[53] It was also dramatically different from the approach of such countries as Zambia, where the government was not fully committed to the economic reform program, little effort was

[50] People's Daily Graphic, 25 April 1983.

[51] Ghana, Programme of Action to Mitigate the Social Costs of Adjustment (Ghana: Government Printer, 1987), 21.

[52] Interview, Accra, 26 July 1989.

[53] David B. H. Denoon, Devaluation under Pressure: India, Indonesia, and Ghana (Cambridge: MIT Press, 1986), 166–67.

made to develop an indigenous political strategy, and few resources were devoted to educating the public on the benefits of the reform program.^[54]

Failure to Develop Supportive Constituencies

Given the magnitudes of the devaluation and the extent to which the PNDC went to institutionalize the changes in the value of the currency, it is striking that more outright support has not developed for the exchange rate regime. Agriculture has improved, but for many reasons there is still little obvious political support from the countryside. First, the peasants (especially the cocoa growers) who benefited from the new exchange rates are not particularly well organized. Second, as will be noted in chapter 5, many of the peasants who benefited most from the pricing changes are Ashanti, and the Ewe-dominated government may have been unable or unwilling to become politically dependent on this group.

The business community is also ambivalent about the exchange rate reforms even though the Economic Recovery Programme (ERP) is designed to promote the private sector. However, many businesses are doing poorly because they responded to the price signals transmitted by successive Ghanaian governments and established inefficient industries behind high tariff walls. As the cedi was devalued and these tariffs were reduced, some Ghanaian businesses suddenly faced strong competition from imports. Companies in the garment, leather-processing, cosmetic, and plastic sectors have been gravely threatened by new competition from imports. The depreciation of the cedi also caused severe liquidity problems for many industries, especially those that had borrowed foreign funds under the old rate of 2.75 cedis to the dollar.^[55]

Whatever the speed of liberalization, however, structural adjustment is not only about helping the private sector; it is also vitally concerned with destroying many of the old, corrupt businesses that prospered from government-induced distortions. Thus it is hardly surprising that the existing business community should be ambivalent about structural changes.

Further, the PNDC government has made little effort to develop ties with business to replace some of the constituencies lost when it embarked on radical economic change. For instance, Ghanaian business-

[54] Ravi Gulhati, Impasse in Zambia: The Economics and Politics of Reform, EDI Development Policy Case Series no. 2 (Washington, D.C.: World Bank, 1989), 50.

[55] See J. K. Richardson, "Speech by the President of the Association of Ghana Industries," Accra, mimeo, 23 February 1989, 8, 11.

men report that the government has made almost no effort to consult with them during the years of economic change. One businessman called the actual exchange rate "the business of the government," although that rate will directly affect the viability of many businesses in Ghana.^[56] Similarly, members of the Chamber of Commerce complained,

We have suggested what the actions should be, at what rate the exchange rate should be changed, but it is difficult to find an official. . . . Business is not influential. There is no consultation with government. We have government by decree. Our contribution is after measures have been taken.^[57]

It may be that government leaders, aware of the weaknesses of Ghana's industry, decided that there was not enough "profit" to be earned in cultivating businessmen as a constituency. First, even after five years of recovery, industry (excluding mining and quarrying) still accounts for only 14.2 percent of total economic activity.^[58] Also, business organizations suffered from the same financial and organizational problems of every other group in Ghana during the long years of decline. The Chamber of Commerce and the other sectoral organizations do not have the ability to make a persuasive case to government or the means to publicize their claims. Business therefore was hardly in a position to offer strong support to the government.

Another potential constituency for the government is new businesses that might emerge because of changes in the exchange rate. Because of the bottlenecks in the Ghanaian economy, however, relatively few exporters will be able to benefit from the new exchange rate over the short to medium term. The road, banking, and communications systems were in such disrepair that even drastic changes in the exchange rate could not prompt a quick boom of new exporters owing their prosperity to the PNDC government. According to figures supplied by the Bank of Ghana, there was no noticeable increase in the amount of foreign exchange allocated to nontraditional exporters during the first three years of the auction's operation.^[59]

The remnants of the populism of 1982 and early 1983 may have deterred government leaders, even after they had adopted the ERP, from developing too close a public or private relationship with the private

[56] Interview, Accra, 20 July 1989.

[57] Interview, Accra, 11 July 1989.

[58] Statistical Service, Quarterly Digest of Statistics, June 1989 (Accra: Statistical Service, 1989), 86.

[59] Unpublished Bank of Ghana statistics indicate that only .18 percent of the funds allocated in the first 143 auctions went to nontraditional exports.

sector. Roger Tangri quotes a senior Ghanaian official as saying, "Government still sees wealth as something undesirable especially in a society where the mass of people are very poor."^[60] For instance, the timber industry, which might be expected to be a key government constituency given its export orientation, has been under almost constant attack from the PNDC since the early 1980s because of alleged business malpractices and because it is perceived as being run by non-Ghanaians.

More generally, the PNDC did not even attempt to develop an ideological perspective based on its economic reforms. The government has not even used the rhetoric (e.g., "export or die") commonly associated with countries that have radically reformed their economies to promote exports. Rather, the PNDC tried to retain its old radicalism while implementing economic orthodoxy. While such a position may have helped the government avoid political challenges when it first introduced the reforms, it was a hindrance when the agenda changed to developing actual political support for the recovery program.

Finally, in dramatic contrast to the attention devoted to deflecting political opposition, the PNDC did not have either the interest or, apparently, the ability to design a strategy to actually cultivate support. For instance, Tangri notes that "business representation on the advisory councils and boards of government ministries and state-owned enterprises has also been virtually non-existent. Indeed, institutional mechanisms for promoting communication between domestic capital and government have either been largely absent or remained moribund."^[61] The Rawlings government, not dependent on the electorate for gaining or retaining power, was uncomfortable with the prospect of actually developing real political support for the changes it had wrought. Also, even though the ERP is dedicated to helping the private sector, the government had alienated many businessmen by its heavy-handedness during the early years of the program. The tactics the PNDC used, while successful in suppressing opposition to the new reforms, may also have effectively thwarted any possibility of its developing politically helpful constituencies.

Lessons for Future Reform

The primary lesson for future reformers to be gained from the Ghanaian experience in terms of strategy is that the World Bank and the IMF have

[60] Roger Tangri, "The Politics of Government-Business Relations in Ghana," paper, 11.

[61] Ibid., 8.

to allow countries more leeway to formulate politically viable economic reform programs. The World Bank and the IMF have developed a powerful analysis of what has gone wrong economically with African countries, but this economic analysis does not have a corresponding political logic. Instead, the bank and the fund have simply advocated adopting programs as quickly as possible. In the case of the exchange rate, they have argued for shock devaluations and moving as rapidly as possible toward a floating rate because this strategy limits speculation.

This kind of shock devaluation, however, would probably have fallen victim to the psychosis of devaluation that had such a grip on the Ghanaian polity. To make devaluation politically viable, it was important that the Ghanaians embark on the transition step of multiple exchange rates, even though the World Bank and the IMF correctly argue that this is a less than optimal strategy to promote economic growth. Thus, Ghana was a success in good part because, while the World Bank and the IMF provided the economic rationale and a substantial amount of the resources for reform, the Ghanaians themselves developed the political logic to bring about radical changes in the exchange rate. If other reform programs are to be successful, African governments must contribute a political framework.

A well-developed political strategy for economic reform does not guarantee successful adjustment. In Ghana and other African countries, too many other factors are at work to make such a simplistic association. An appreciation of the local circumstances inhibiting reform and development of an appropriate strategy, however, will allow a government to take advantage of favorable circumstances (e.g., inflows of aid, previous economic decline) to implement politically contentious reforms. At the same time, governments armed with a political strategy may be able to cope with hostile external developments and difficult local circumstances when implementing an economic reform program. The policy changes that structural adjustment demands are so difficult for African governments that the advantages a locally produced political strategy provides cannot be ignored. Even the politically adept PNDC, however, appears to have been unable to develop a strategy to cultivate long-term support. Ironically, the very tactics that the regime used to institute exchange rate reform may have made it much more difficult to garner public backing.