Chapter 7—
Ghana, the Multilaterals Organizations, and the International Economy

The actions of the IMF and the World Bank will always be central to the politics of structural adjustment in Africa. Indeed, the involvement of the multilaterals in what had previously been considered the sovereign domestic policy decisions of African countries was one of the most important and most controversial developments in the Third World during the 1980s. Given that the World Bank and the IMF will probably continue to expand their role during the 1990s, it is particularly important to understand the interaction between international aid organizations and African governments. Since the PNDC government has had one of the longest sustained relationships with the multilaterals in Africa, the Ghanaian case is especially important in this regard.

After reviewing the history of Ghana's relationship with the World Bank and the IMF in the 1980s, this chapter will analyze the political dynamics of conditionality and the timing of reforms. These exceptionally important issues have often been debated only by assertion in the economic literature because the political relationships between the multilaterals and African governments have been underanalyzed. The chapter will then analyze how reforms recommended by the World Bank and the IMF will affect Ghana's relationship with the international economy and, eventually, with the multilaterals themselves. Thus this chapter, which examines the interaction between Ghana and the international economy, is the analogue to chapter 6, which examined the domestic economic frontiers of the state.

Ghana and the Mutilaterals

The Economic Recovery Programme that the Ghanaians finally aunched in 1983 was technically a home-grown plan. However, the constant interaction among the IMF, the World Bank, and Ghanaian civil servants over the years inevitably meant that the PNDC's program had been heavily influenced by the thinking of the multilaterals. In addition, the immediate problems that Ghana faced in 1983 were so stark and so obvious that there was no way that any serious reform effort could avoid the problems of devaluation, pricing, and deficit reduction, issues of central concern to the World Bank and IMF.

In the early years of the ERP, especially between 1983 and 1986, the IMF took the lead in providing external finance for the ERP.^[1] Of the $1 billion in additional external assistance provided to the PNDC up to 1986, 60 percent came from the IMF. In contrast, the World Bank provided only 14 percent of the additional inflows. The IMF took such a prominent position because the early goals of the ERP centered on increasing exports, eliminating or reducing the extraordinary macroeconomic imbalances that had developed, and reestablishing Ghana's international creditworthiness. The IMF, as the provider of the international "Good Housekeeping seal of approval," was the obvious agency to help Ghana.

After 1986, the comparative advantage of the IMF in helping Ghana diminished while that of the World Bank increased. Three years into the recovery program the government had made substantial progress on some of the major macroeconomic imbalances and was increasingly turning its attention to rehabilitation of infrastructure, pricing decisions, and sectoral rehabilitation. Naturally, the World Bank would take the lead in all these areas. Also, the high interest rates on the money the IMF loaned to Ghana was beginning to create a debt-servicing problem. As table 3 indicates, while Ghana did receive large new inflows of aid, much of that money immediately left the country again to service old debts or to repay the IMF. The World Bank's terms were much easier, and increasing reliance on the bank has been one of the reasons for the jump in net inflows of aid to Ghana as the ERP progressed.

By the late 1980s and continuing into the early 1990s, the World Bank

[1] I rely here on John Toye, "Ghana," in Aid and Power, vol. 2, ed. Paul Mosley, Jane Harrigan, and John Toye (New York: Routledge, 1991), 159–63.

had come to take the dominant position, not only vis-à-vis-the IMF, but also in regard to all other donors in Ghana. The bank's sectoral loans in particular came to be extremely prominent. The IMF's role was accordingly reduced to monitoring the exchange rate and other macroeconomic variables. The IMF did allow Ghana access to progressively cheaper money through the Extended Fund Facility and the Structural Adjustment Facility. In 1988, these relatively generous facilities were replaced by an Extended Structural Adjustment Facility, an even less restrictive IMF loan to which only a few countries in Africa enjoyed access.

Ghana's relationship with the multilaterals appears to be a success. Indeed, the study by Mosley, Harrigan, and Toye notes that Ghana actually implemented most of the agreed-upon conditions in the order they were proposed, a rare event in the study's sample of countries.^[2] Martin also notes the "astonishing degree of compliance" that Ghana

[2] Paul Mosley, Jane Harrigan, and John Toye, Aid and Power, vol. 1: The World Bank and Policy-Based Lending (New York: Routledge, 1991), 114.

had with World Bank and IMF conditions during the 1983–1989 period.^[3] Ghana authorities, although they have had their disagreements with the multilaterals, some of which are detailed below, seem generally pleased with the relationship with the World Bank and the IMF.

Still, the actions taken in Ghana by the IMF and the World Bank are controversial: many have criticized the approaches of the multilaterals. These criticisms may not be completely fair to the Ghanaian experience because they are based on what we have learned since the imposition of the Economic Recovery Programme and therefore enjoy the benefit of hindsight. Still, examining these criticisms is important because they may suggest important lessons for other countries that want to implement elements of Ghana's ERP program. Also, examining these criticisms is necessary given the lack of any persuasive alternative to current reform proposals and because the World Bank's analytical framework still needs to be developed.^[4]

Strictness of Conditionality

A major criticism of orthodox reform programs has been that the International Monetary Fund in particular has been too demanding in its conditionality. As former president of Tanzania Julius Nyerere said, "When did the IMF become an International Ministry of Finance? When did nations agree to surrender to it their power of decision making?"^[5] Similarly, a major review of adjustment by a group of experts argued that the IMF's conditionality has become too tight and that too many conditions are imposed on countries. For instance, it noted that nearly 80 percent of the IMF arrangements between 1983 and 1985 contained, on average, eight performance criteria.^[6] This issue is particularly difficult because, given the political logic of poor economic policies, without strict conditionality politicians may not have enough incentive to make the difficult reforms that structural adjustment demands.

However, countries may differ from the IMF on legitimate issues

[3] Matthew Martin, "Negotiating Adjustment and External Finance: Ghana and the International Community, 1982–1989," In Ghana: The Political Economy of Reform, ed. Donald Rothchild (Boulder: Lynne Rienner, 1991), 240.

[4] See Fahrettin Yagci, Steven Kamin, and Vicki Rosenbaum, Structural Adjustment Lending: An Evaluation of Program Design, World Bank Staff Working Paper no. 735 (Washington, D.C.: World Bank, 1985), 1–2.

[5] Quoted in John Loxley, "Alternative Approaches to Stabilization in Africa," in Africa and the International Monetary Fund, ed. Gerald K. Helleiner (Washington, D.C.: IMF, 1986), 119.

[6] The Group of 24 report is reprinted in IMF Survey, 10 August 1987, 8.

including political calculations, desired income distribution, and the eventual design of their economy, and such differences might make strict IMF conditionality difficult to justify or implement.^[7] Indeed, strict conditionality is not inherent in IMF programs. The IMF had looser requirements in the 1970s, and its legislative history suggests that when the organization was founded there was considerable sentiment that it not interfere in the sovereign decisions of nations.^[8] The IMF admits that much of its current operating procedure is based on little more than the "oral tradition" passed down by generations of officials.^[9] An analytic perspective on the strictness of conditionality is therefore desperately needed.

The question of strict IMF conditionality became a central issue in Ghana between 1983 and 1986. Despite the fact that after 1983 Ghana fulfilled every IMF target, the fund continued to insist on extremely strict measures regarding the budget deficit, money supply, and exchange rate. Indeed, when the ERP began to slip in 1986, the IMF suspended its standby program, and the World Bank delayed its disbursement of program loans for ninety days.^[10] This hurt the credibility of proadjustment PNDC officials and made the program that much more difficult to implement. Ghanaian officials expressed considerable bitterness that the IMF did not trust them more after three years of implementing extremely difficult programs. Strict conditionality can help proadjustment officials argue their case by making it clear that the IMF will not negotiate. However, conditionality in Ghana's case seems to have gone beyond the point where it was politically beneficial to proadjustment officials.

The Ghanaian experience and similar complaints from almost every other country that has had dealings with the IMF and the World Bank have caused many to suggest that the nature of conditionality should be changed. For instance, John Loxley has argued that standby programs should be front-loaded so that countries receive most of the funds from the IMF before they introduce their reform program or soon after. This would have the effect of reducing IMF leverage and increasing the political maneuverability of African governments.^[11] Similarly, Martin

[7] Some of these points are stressed by Loxley, "Alternative Approaches," 127.

[8] Sidney Dell, On Being Grandmotherly: The Evolution of IMF Conditionality, Essays in International Finance no. 144 (Princeton: International Finance Section, 1981), 1–10.

[9] International Monetary Fund, Theoretical Aspects of the Design of Fund-Supported Adjustment Programs, IMF Occasional Paper no. 55 (Washington, D.C.: IMF, 1987), 1.

[10] Martin, "Negotiating Adjustment," 249.

[11] Loxley, "Alternative Approaches," 134.

argues that the IMF and the World Bank must show more flexibility than they have done if other countries are going to successfully implement the reforms.^[12]

However, there are still strong arguments for strict conditionality. Most important, in the early years it was uncertain if the IMF and World Bank could trust the PNDC to implement the reforms, given the notable failures of previous governments and the Rawlings government's own early history. As Deepak Lal notes, the lack of credibility inevitably affects the degree of conditionality:

If in the past a government has reversed preannounced plans because the costs of reversal (say, increased inflation) seemed to be lower than the benefits (say, financing a public sector deficit), then an announced adjustment program which is reversible may be unsustainable. Even if the "new" government has in fact changed its character, before outside creditors are willing to provide capital for smoothing intertemporal consumption, the government may have to demonstrate its newfound resolution by undertaking more Draconian disabsorption measures than would have been required if its announcements were credible.^[13]

In hindsight, as Martin suggests, it is clear that the PNDC was serious in its reforms, and therefore strict conditionality should have been loosened. However, this argument does not suggest how the IMF and the World Bank could have known when conducting negotiations, especially early in the recovery program, that the Rawlings government was committed to implementing reforms as opposed to trying simply to muddle through another foreign exchange crisis with the IMF's help. The issue becomes particularly difficult because African countries are well aware of how each other does with the IMF and the World Bank. Therefore, loose IMF conditionality with one country may affect negotiations with a country that may not deserve such a concession.

Focusing on Institutional Change

The question then becomes how uncertainty about government intentions can be reduced so that the IMF can loosen its strict conditionality policy in certain cases without yielding the leverage needed to counteract the political advantages of inadequate policies or setting an unfortunate precedent. The most persuasive response to this challenge would be to

[12] Martin, "Negotiating Adjustment," 259.

[13] Deepak Lal, "The Political Economy of Economic Liberalization," World Bank Economic Review 1 (January 1987): 275.

judge government intentions by reforms in economic institutions rather than by such economic measures as the size of the fiscal deficit, which, after all, can indicate only temporary changes and can be altered. For instance, more than a few countries have met their IMF target for the fiscal deficit simply by not issuing certain checks for a few days.

Changes in real economic institutions, especially the shedding of decision-making power by the state to the market, indicate a degree of commitment to economic reform that should be rewarded by a loosening of conditionality. Reforming economic institutions in this way is particularly important because it makes reversal of policy much more difficult in the future. Governments could, of course, take back authority they had given to the market to set prices on goods or foreign exchange, but this would be a much more difficult and obvious step than, say, letting the fiscal deficit slip beyond the parameters agreed to with the IMF.

A focus on changes in economic institutions is also useful because often it is a good gauge of the factional politics within the leadership revolving around economic reform. Governments can make many policy changes and still be mired in factional disputes that will eventually derail an economic reform program. For instance, a one-time devaluation does not indicate that a government is irrevocably committed to a reform program. Antireform politicians may have simply suffered a temporary setback; as long as the government retains control over the exchange rate it has not lost the ability to return to past exchange rate policies. Thus, in 1986, Lieutenant Colonel Assasie realized that as long as Ghana continued to devalue administratively, there was a chance to derail the recovery program. However, once the auction was adopted and the government lost the ability to determine the exchange rate, it became much more difficult to reverse reforms in this area. Substantively and symbolically, changes in economic institutions are a clear indication that proadjustment forces have consolidated their power and have won outright victories that cannot be rescinded.

Therefore, in operational terms, the importance of institutional change in reducing the uncertainty of a regime's intentions suggests that strict conditionality should prevail through the stabilization phase of economic reform. Given that stabilization mainly involves changing prices, there is no way to judge a government's long-term commitment to reform. However, once countries have embarked on true structural adjustment, changing economic institutions, the multilaterals should be looser with conditionality.

For Ghana, this perspective suggests that criticisms of IMF conditionality up to 1986 are probably overemphasized. There was no way for the multilaterals to know how serious the Rawlings government was about reform, and there were serious dangers to loosening conditionality prematurely. Indeed, even the initial institutional reforms that the Ghanaians did make—eliminating price controls on some goods—could not be viewed as a true gauge of their seriousness because these controls had become largely irrelevant to the population at large. It was not until 1986 that Ghanaian officials introduced the first truly significant change in economic institutions: the foreign exchange auction. Commitment to the auction dramatically reduced uncertainty about the PNDC's determination to reform the economy and made it more difficult to backtrack on those reforms. Until that point, however, strict conditionality was justified.

Arguing that strict conditionality is justified until uncertainty is reduced does not mean that the IMF and World Bank cannot improve their economic and public diplomacy—regardless of the good reasons, dealing not only with the individual country involved but also the multilaterals' entire lending program, for retaining strict conditionality. By tying the degree of conditionality to the certainty of commitment to reform, I am proposing an operationally realistic way that the multilateral organizations and African governments can foster reform. Unfortunately, those who simply suggest that the multilateral organizations loosen their conditionality do not suggest how or by how much. Clearly, ad hoc loosening of conditionalities not tied to a benchmark such as institutional reform could be damaging to the multilateral organizations as well as to proadjustment officials within individual African countries who use conditionality requirements to promote reform within their governments.

Timing of Reforms

Orthodox economic reform programs attempt to address a significant number of problems with a variety of instruments. Timing of those instruments has naturally been a controversial issue. Killick, Bird, Sharpley, and Sutton make the traditional case for a gradual implementation of reforms:

There must also be a general presumption in favor of gradual programs rather than shock treatment approaches [because of gestation lags]. . . . It also seems likely that the loss to "psychic welfare" is less when people have time to adjust

their lives to altered circumstances and policies than if traumatic changes are suddenly thrust upon them.^[14]

Similarly, a U.S. congressional investigation of economic reform in Ghana and Senegal called for slower alleviation of external and internal deficits to minimize deflationary effects and pressures for rapid export growth.^[15] Many governments in Africa have adopted this approach. For instance, to avoid unemployment and the resulting political pressures, Zimbabwe has implemented a program of gradual trade liberalization.^[16]

In contrast, Lal argues that allowing people time to adjust may subvert the program:

The government may find that gradualism allows time for those hurt by the cuts to combine and exert irresistible pressure for their reversal. Politically, a long drawn out cut in real expenditures may thus be more difficult for a government to implement than a single, quick one.^[17]

Between these two positions, there is a fundamental disagreement concerning whether it is politically desirable to implement a shock program and thereby prevent an opposing coalition from developing or to reform gradually and thereby forestall future protest by allowing people and firms time to adjust.

There is good reason to believe that stabilization measures should be "shock therapy." First, at least the initial economics of devaluation may require a shock program. Prolonged discussion and debate about devaluation measures in particular may cause speculation (because importers attempt to bring in more goods and exporters hold back goods) that significantly worsens the balance of payments problem.^[18] As noted

[14] Tony Killick et al., "The IMF: Case for a Change in Emphasis," in Adjustment Crisis in the Third World, ed. Richard E. Feinberg and Valeriana Kallab (New Brunswick: Transaction Books, 1984), 66. See also Frances Stewart, "Should Conditionality Change?" in The IMF and the World Bank in Africa, ed. Kjell J. Havnevik (Uppsala: Scandinavian Institute of African Studies, 1987), 41.

[15] U.S. House Committee on Foreign Affairs, Structural Adjustment in Africa: Insights from the Experience of Ghana and Senegal, March 1989, 17.

[16] "Zimbabwe Survey," African Business, June 1990, 21.

[17] Lal, "Economic Liberalization," 275–76. Much the same position is adopted by Anne O. Krueger, "Interactions between Inflation and Trade Regime Objectives in Stabilization Programs," in Economic Stabilization in Developing Countries, ed. William R. Cline and Sidney Weintraub (Washington, D.C.: Brookings Institution, 1981), 112; and Martin Wolf, "Timing and Sequencing of Trade Liberalization in Developing Countries," Asian Development Review 4, no. 2 (1986): 13.

[18] On speculative attacks and foreign exchange crises, see Sebastian Edwards, The International Monetary Fund and the Developing Countries: A Critical Evaluation, NBER Working Paper no. 2909 (Cambridge, Mass.: National Bureau of Economic Research, 1989), 16.

above, once a devaluation is implemented, a host of other policies have to be adopted at the same time if the change in the exchange rate is to have any effect.

Second, the shocks imposed by sudden stabilization programs may not be quite as great as the nominal magnitudes suggest because, as in the case of Ghana, a reforming government may, to some degree, simply be catching up with the shadow prices already being paid by most of the population. Also, as noted in chapters 3 and 4, there is substantial evidence indicating that analysts and African governments have overestimated the initial threat to political stability that may be caused by imposition of shock stabilization programs.

As governments move into the structural adjustment phase, the question of the timing of reform becomes more complicated. The Ghanaian experience indicates that it is important for a government to implement some reforms gradually so that it has time to survey the political situation and review its economic strategy. Also, reforms in the structural adjustment phase have to be more gradual because, as this examination of the Ghanaian case has stressed, changing long-standing economic institutions is an extremely difficult technical task that African governments are poorly equipped to do.

Even within the step-by-step process of exchange rate reform, however, as chapter 3 made clear, the Ghanaian government required a real strategy to deflect political pressure. A gradual adoption of reforms is no guarantee that opposition will not develop. Only if the government is able to intelligently use the time provided by a gradual approach will it be able to gain greater political acceptance. A strategy is especially important since even step-by-step reforms in the structural adjustment phase will inevitably produce shocks that the population will have difficulty absorbing. For instance, the Rawlings government instituted non-incremental devaluations at each new phase of the reform process.

The requirements for strategy are especially important because the Ghanaian experience suggests that in the long term it is difficult for governments to gain political support for structural adjustment. The logic of the gradualists depends on a government's being able to cultivate support for the reforms, which it could not do if there were shock reforms. However, as chapter 5 noted, it does not appear that this support will be gained easily, if for no other reason than that the institutional requirements needed to actually transmit support to the leadership are so great. Thus, gradual adoption of some reforms is not enough. A strategy must still be devised.

In addition, cultivating support for structural adjustment over time may be particularly difficult in Africa because, as a result of all the bottlenecks in the economies, it will not soon be evident who benefits from structural adjustment. In economies with relatively few distortions and in which factors of production (e.g., capital, labor) move relatively freely, it is immediately clear to most people who will benefit from drastic changes in government economic policy. However, because of the many distortions in African economies, even the winners (e.g., future owners of export industries) will not realize nearly as soon that they will benefit; therefore they may not initially support the government's reform program. Certainly in Ghana, even after the reform program had been in place for eight years, many entrepreneurs were not certain if they would benefit. A shock program would perhaps draw more adherents than a process of gradual reform because the former gives evidence sooner of who the winners are. Thus, the gradualist perspective may be less appropriate for African-type economies than it would be for, say, the more developed economies in Asia.

In their study of reform, Mosley, Harrigan, and Toye present a slightly different gradualist argument. They argue that losers and their representatives should be compensated by "non-distortive" payments.^[19] They do not develop this idea, so it is unclear how they propose weak governments such as Ghana could adopt what appears to be an extremely complex program. Moreover, the analysis in this book suggests that such an approach would be unnecessary in Ghana and many other African countries. The potential losers in Ghana were not, after all, significant obstacles to reform. The analysis in previous chapters has suggested that because the economic decline had been so great and because so much of the real economy had already adjusted, there were far fewer who opposed the adjustment program than was originally thought. Indeed, compensating the losers might inadvertently provide a pole around which they could coalesce and oppose the adjustment program. Also, as indicated throughout this book, the administrative weaknesses of African countries are one of the chief obstacles to reform. Developing complex compensation schemes for losers who do not pose real political threats to the reform effort would therefore seem to be counterproductive.

The debate between those who would implement gradual reforms and those who advocate shock treatments therefore misses the point. In the

[19] Ibid., 129.

beginning of an economic reform program, it is absolutely necessary, especially in the exchange rate area, to implement some shock reforms. However, during the long-term process of structural adjustment, administrative difficulties and the necessity to survey the population will force governments to choose a more gradual sequence of reforms. Obviously, this position corresponds closely with the argument made above on conditionality. Strict conditionality is most useful when shock treatments are needed; as a country proceeds through the reform program, the multilaterals' requirements can gradually be reduced. Indeed, during the initial stabilization phase, strict conditionality can be usefully implemented because numeric goals can be established for the money supply, exchange rate, and other prices the government sets. However, as will be argued below, once the difficult process of structural reform begins, reform goals cannot be quantified nearly as easily, so strict conditionality around unambiguous targets becomes less possible.

African Economic Reform and the International Economy

Many critics of stabilization and structural adjustment cite the continuing influence of the international economy as a major constraint facing countries such as Ghana that are trying to reform. For instance, Jacques Pegatienan Hiey, in his study of Côte d'Ivoire, noted,

The experience of the Ivory Coast illustrates a fundamental problem with IMF-type stabilization programmes. This is that the instruments recommended . . . have little impact on the principal constraints under which the economy functions, e.g., the level of import and export prices, the degree of dependence on foreign factors of production and interest rate structures in world financial markets.^[20]

Hiey goes on to argue that the export emphasis of structural adjustment will cause African economies to become even more distorted.^[21]

There are several immediate problems with this argument. First, it is little more than a truism that the international economy poses constraints on poor countries. Any reform program would face the same problems. If Ghana and other poor African countries are unusually vulnerable to the international economy, such vulnerability is in good part a result of government policies that kept them poor. Indeed, the

[20] Jacques Pegatienan Hiey, Ivory Coast (Helsinki: WIDER, 1987), 36.

[21] Ibid.

continual decline that African countries experienced may have made them more dependent on a few raw material exports. As exchange rates become overvalued, marginal exporting enterprises inevitably are less viable, leaving only the major raw material enterprises to increasingly dominate the declining export sector. For instance, in 1960, exports of all Ghanaian cocoa products (beans, paste, and butter) accounted for 59.7 percent of exports. Over the next two decades, there was a slow but significant increase in the share of cocoa products so that by 1978 cocoa comprised 69.9 percent of all exports.^[22]

In contrast, structural adjustment programs have the potential to diversify African countries' export portfolio because devaluation may make exporting viable again. For instance, since the adoption of the ERP in Ghana, there has been a significant increase in mining investment, especially in gold, and some other export-oriented industries. Indeed, if cocoa prices do not increase from the levels they fell to in the late 1980s and gold prices are robust, there is a chance that gold could become Ghana's most important export by the mid-1990s. Given the economic role of cocoa in Ghana's history, such a diversification would have to be termed revolutionary. Decline, not structural adjustment, causes African countries to become ever more dependent on a few raw materials.

Perhaps even more important, critics such as Hiey ignore the fact that comprehensive economic reform of the type Ghana is attempting may also change government institutions and policies so that the dangers of being a raw material producer are mitigated. African countries face problems not because of their being monocrop or monomineral exporters per se but because of flawed government policies and the social conflicts that flow from dependence on relatively few goods. If Ghana and other African countries can change how they respond to the international economy, then the mere fact that they are raw material producers will become much less significant.

In fact, there are indications that Ghana is changing basic institutions and policies so that some of the disadvantages of being a primary commodity producer can be ameliorated. Ghana should be able to respond to international shocks—a continual danger to raw material exporters—much better than in the past because of the new policies it has adopted. In the late 1970s and early 1980s, African countries such as Ghana did not lower their exchange rare in response to exogenous

[22] Kodwo Ewusi, Statistical Tables on the Economy of Ghana, 1950–1985 (Accra: Institute of Statistical, Social and Economic Research, 1985), table 154.

shocks, thereby causing a real appreciation of the exchange rate and an eventual loss of market share in developed economies. Ghana was the extreme example of how disastrous this strategy was because its loss of share in the cocoa market propelled it into a downward spiral. In contrast, East Asian countries did markedly better by lowering their exchange rate and thereby gaining market share in the international economy.^[23]

Another indication of the much healthier interaction between the Ghanaian economy and the international economy is the evolution of government finance. In the past, decreases in the price of cocoa inexorably led to government fiscal problems. Ghana's fiscal problems were severe in the early 1980s. However, in what could almost be called a revolutionary development given its chronic deficits in the early 1980s, in the late 1980s Ghana began to experience a surplus despite the decrease in the price of cocoa. The following list shows the government's deficits and surpluses as a percentage of total expenditures during that period.

In contrast, African countries' deficits averaged approximately 20 percent of total expenditures.^[25] The surpluses run by the Ghanaian government suggest that the deepening of the tax base, in addition to fiscal controls and new emphasis on proper government policies, has had a dramatic effect on government finance. While Ghana will continue to be hurt by decreases in the prices of its exports, as any other country would be, it is unlikely that Ghana will experience the kind of chronic deficits

[23] Moshin S. Khan, "Developing Country Exchange Rate Policy Responses to Exogenous Shocks," American Economic Review 76, no. 2. (May 1986): 86.

[24] International Monetary Fund, Government Finance Yearbook, 1990 (Washington, D.C.: IMF, 1990), 44, and ibid., 1991, 32.

[25] It should be noted that this average is calculated on the basis of a small number of countries. International Monetary Fund, Government Finance Statistics Yearbook, 1990 (Washington, D.C.: IMF, 1990), 96.

caused in part by the kind of commodity price decreases that occurred before 1983. In addition, there is now at least some hope that the country will be able to handle commodity booms better.

Dependence on Aid

Finally, some have argued that the aid requirements of structural adjustment are so great that even reforming countries will remain dependent on the international economy. Also, a significant criticism of the Ghanaian experience has been that it has been driven mainly by World Bank and other donor aid at a level other countries could not expect to receive.

External aid has been an important part of the ERP since 1983, and foreign savings as a share of gross domestic product (GDP) are expected to rise from 4.4 percent in 1988 to 7.7 percent between 1989 and 1991 (see table 3).^[26] There is no doubt that the World Bank's funding in particular has been critical to many specific projects and to lubricating the economic machinery at a time when many facets of the Ghanaian economy had all but stopped.

However, the aid Ghana has received is not that impressive when compared with that received by other African countries. Ghana's aid per capita doubled from approximately $13.3 per person in 1981 to $27.5 per person in 1987. It is this doubling to which so many attribute the success of the ERP. Still, $27.5 of aid per person is substantially below the $35.0 that African countries other than Nigeria averaged.^[27]

Also, noting Ghana's dependence on aid is not a damning criticism of the ERP because the World Bank has made it clear from the beginning that economic reform in Africa would be dependent on a large inflow of resources from external donors at highly concessional rates.^[28] Given the disrepair in which Ghana and other African countries have found themselves, there is no way they could have raised themselves by their own bootstraps. Aid can also be seen as a bridge to be used by African countries until governments can increase the amount of revenue they are able to raise from domestic sources.

A more serious question is whether or not the World Bank and other

[26] Ghana, Towards a New Dynamism: Report Prepared by the Government of Ghana for the Fifth Meeting of the Consultative Group for Ghana (Accra: Ghana, 1989), 6.

[27] All statistics in this and the following paragraph from World Bank, African Economic and Financial Data (Washington, D.C.: World Bank, 1989), 196–98.

[28] World Bank, Accelerated Development in Sub-Saharan Africa (Washington, D.C.: World Bank, 1981), 121.

donors can provide the same level of resources to other African countries interested in following the Ghanaian model. Certainly (as noted in chapter 2), aid donors have committed a large amount of money to Africa over the last decade. There is probably more than enough money in the World Bank for five or six more Ghanas (as long as one of them is not Nigeria) because the money provided to Ghana, while large in African terms, was not that significant to the World Bank. Whether there will be funds for more countries than that is unclear. The lesson for African countries is that it is important to be the second or third fastest reformer rather than the twentieth. In a world where countries increasingly compete on the basis of economic reform, those African countries that act quickest will naturally be better off.

Future Relations with the Multilateral Institutions

As noted throughout this book, the multilateral institutions have been central to the formulation, implementation, and financing of the ERP since it was adopted in 1983. Given the importance of multilateral funding, Ghana's relationship with the World Bank and the IMF may have been the single most salient aspect of its relationship with the world economy in the 1980s. Ghana's relationship with the multilaterals in the 1990s must be understood.

It is likely that Ghana will develop a much more normal relationship with the multilaterals in the 1990s. By "normal" I mean that, while the multilaterals will still be very important to Ghana, especially in financing, it is likely that they will become a less visible part of the policy process. The multilaterals will recede in prominence for several reasons. First, as noted above, Ghana is now well beyond the initial stabilization crisis where the IMF in particular has such an important role to play. In the early 1990s, the IMF apparently wanted Ghana to "graduate" back to the regular facilities used by most countries but was convinced that the country could still benefit from special terms. However, Ghana is clearly becoming more and more like most countries in the world in the IMF's view; consequently, the IMF's presence will certainly recede in the years to come.

Second, as the economy strengthens, the Ghanaians have also been able to significantly enhance their own economic decision-making structures. Thus, while the expertise provided by the World Bank and the IMF will be important, it will not be as crucial as it was in the early 1980s. For

instance, during the first eight years of structural adjustment, the Bank of Ghana was able to enhance its administrative apparatus and is now taking on many of the true functions of a central bank, especially in supervising the banking system. Given how weak the central bank was before the ERP began, it could not have taken on this role before.

Third, as Ghana confronts the problems of structural adjustment, the IMF and the World Bank have fewer answers to the country's problems. The multilaterals could play an important role early in the stabilization crisis because of the power of their dogma. "Get prices right" is profound in its advice, persuasive to those who understand anything about the past distortions of the economy, and simple to convey. However, now that all of Ghana's prices are more or less correct (in the early 1990s, only the real interest rate, still negative, was noticeably off), the traditional type of advice that the IMF and the World Bank can offer will become much less important.

One example of the decreasing relevance of the multilaterals to Ghana's problems is the banking sector. The banking sector in Ghana presents a formidable obstacle to further growth. In particular, problems in the credit market have made it difficult for firms to raise capital to expand in response to the new productive economic environment the PNDC has established. At a more general level, the banking sector is interesting because it exemplifies the extremely difficult reforms that governments face once they go beyond stabilization and begin to try to reform fundamental economic structures.

The financial sector of the Ghanaian economy is extremely shallow. There is no capital market, and the stock exchange just began in late 1990. Banks must supply almost all the capital for companies wishing to expand. There are two private banks (Barclays and Standard Chartered) and six state-owned banks. Because of the dramatic changes in the economy since 1983, all the banks have a significant number of nonperforming loans. Businessmen who took out foreign-denominated loans when the cedi was 90 to the dollar, for instance, are facing a difficult repayment schedule with devaluation, especially if they are not exporters; by 1991, the cedi had reached 400 to the dollar. Further, the state-owned banks were until recently saddled with a large number of loans to SOEs that could not service their debts. Because the SOEs could not pay, the banks could not recycle loans, and there was a shortage of credit. This is an extremely common problem in many African countries. As Peter Nicholas noted, "The most difficult aspect of financial market and

banking sector reforms has been ensuring an orderly transition for banking systems saddled with many nonperforming loans, sometimes of public enterprises, and liberalizing previously controlled lending and deposit rates."^[29]

The problems of the banking sector are important to highlight because many in Ghana have argued that tight credit is a major barrier to expansion. For instance, the Ghana National Chamber of Commerce complained in a memo to the government,

As we have stated often times recently, the greatest problem facing the Ghanaian businessman is low liquidity or the lack of it. . . . it has become increasingly difficult to obtain overdraft and credit facilities from the country's commercial banks as these banks have resorted to collecting previous loans more than granting new credit. . . . A lot of businesses are now faced with acute shortage of working capital and we are of the view that if the wheels of the economy are to be kept moving, businesses including industry and commerce should not be strangled to death.^[30]

Similarly, John Richardson, president of the Association of Ghanaian Industries, has argued,

Perhaps the most serious problem facing Ghanaian industry today is the problem of liquidity. It has been with us since the early days of the ERP. It has hardened in character over the past 6 years. . . . Our experience has been that as a result of several years of decline in productive activity, industrial establishments have been singularly ill-equipped to generate enough capital to meet their day to day operational requirements.^[31]

Indeed, almost all businessmen will state that tight credit is the most formidable obstacle to their expansion or, in many cases, continued existence.^[32]

It is important to note that the banks, especially the private ones, have a very different perspective on the credit problems of companies. Bankers fervently deny that there is any real credit problem for those who have going concerns. Rather, they argue that most of the Ghanaian

[29] Peter Nicholas, The World Bank's Lending for Adjustment, World Bank Discussion Paper no. 34 (Washington, D.C.: World Bank, 1988), 20.

[30] Ghana National Chamber of Commerce, "Memorandum on the Budget—1989," Accra, mimeo, 1989, 4.

[31] John Richardson, "Speech at the 29th Annual General Meeting of the Association of Ghana Industries," Accra, mimeo, 1989, 8.

[32] See also the study by William F. Steel and Leila M. Webster, Small Enterprises in Ghana: Responses to Adjustment, Industry and Energy Working Paper no. 33 (September 1990), 29.

private sector is essentially bankrupt and is made up of poor credit risks.^[33] It is true that much of the private sector is corrupt and built upon the distortions of the 1960s and 1970s. Clearly, many of these companies will simply have to go out of business if the Ghanaian economy is to adjust to the new incentives the government has established.

The Ghanaian government has taken certain steps to begin reform of the banking sector. Most important, it has essentially written off the nonperforming debts of the SOEs by giving the banks government bonds in exchange for their paper. The government also hopes that the new stock market will grow rapidly from its narrow base in the years to come. Of course, in the early years the Ghanaian stock market will not be a very important institution but, as noted in chapter 6, over the next few decades, it could become absolutely crucial to the economy. The stock market will play a particularly important role in deepening the capital market because firms will no longer have to look only to the banks for capital.

However, far more remains to be done if the financial sector is to be liberalized so the economy can continue to grow. Private sector access to capital markets is a particularly important issue. Government officials such as Dr. Joseph Abbey speak of some type of "corporate PAMSCAD," but they admit they are unsure of what to do.^[34] Indeed, although everyone agrees that reform of the financial sector is probably the major problem facing the Ghanaian economy through the 1990s, there is great uncertainty about how the reforms should proceed.

The World Bank and the International Monetary Fund do not seem to have been particularly helpful to the government so far, and it is unclear if the multilaterals can provide more assistance in the future. The basic problem is that the multilaterals do not have a firm view of how African economies should operate once they are forced to go beyond "getting prices right." Therefore, in the area of financial sector reform, the multilaterals will play a much less prominent role. Indeed, their loss of prominence, especially compared to the role they played during the initial exchange rate, when IMF officials were critical in determining the magnitude of the first devaluation, is striking. The much lower profile of the multilaterals on banking reform will undoubtedly parallel experiences elsewhere in the economy as the Ghanaians confront issues of institutional change that require a great deal of local knowledge and analysis, exactly those areas in which the IMF and the World Bank are weakest.

[33] Interviews, Accra, 15 August 1990.

[34] Interview, London, 20 August 1990.

Conclusion

No reform program could quickly alter Ghana's or most other African countries' relationship with the world economy. The decline has been too great and the remaining institutions too weak to accomplish such a task. What is important is that the reform policies being adopted in Ghana and elsewhere will help African countries to cope much better with the constraints and opportunities posed by the international economy. The only real hope for African countries wishing to fundamentally change their relationship with the world economy is to reform and grow so that they will no longer have to continually plead for aid from the international community.