1996 (3) July
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The material that follows has been provided by Overseas Development
Institute
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                  ADJUSTMENT IN AFRICA: LESSONS FROM GHANA

Structural adjustment in Africa has generated controversy and some
pessimism. As one of Africa's first and most consistently pursued,
Ghana's structural adjustment programme (SAP) has attracted particular
attention, for several reasons. The programme was initiated with
considerable local involvement and implemented by a socialist-inclined
military government professing a non-party 'grassroots' form of
democracy: following parliamentary elections in 1992 the country has
now become a democracy with competing political parties. Adjustment
policies have run for more than a decade, with considerable initial
success. Ghana's SAP was the first in Africa to formally integrate a
'Programme of Actions to Mitigate the Social Costs of Adjustment' 
PAMSCAD). Recently, however, the strategy has shown signs of faltering
and imbalances are re-emerging. This paper attempts to identify and
explain the weaknesses in the country's recovery effort, and the lessons
they offer for other countries in Africa.

Economic decline, 1957-83

Under Kwame Nkrumah, its first President, Ghana was once considered to be
the 'black star' of Africa. As the first country in sub-Saharan Africa to
gain political independence, in 1957, it was seen as one of the stronger
economies in the developing world. Per capita income was high by African
standards (its average income was then about the same as that of Mexico or
South Korea) and the country enjoyed a 'medium income' international
classification. As world leader in the production of cocoa, the economy
appeared buoyant, with growing output, inflation of under 1%, and large
accumulated external reserves.

By the mid-1960s, however, the economy was stagnant and living standards
were falling. By the time Nkrumah was overthrown by a coup in 1966, public
investment in import-substituting industries and in infrastructure was
yielding poor returns. The National Liberation Council, which took over,
adopted an IMF- backed stabilisation programme in 1967, but growth rates
did not increase notably and per capita income ended the decade lower than
at the beginning. When, in 1969, Dr K. A. Busia became President in the
Second Republic, his free-market approach, together with high world prices
cocoa, produced some recovery. This was short-lived, however, and by 1971,
economic strains caused Busia to devalue the cedi. This precipitated his
overthrow by the military led by Colonel Acheampong, whose increasingly
corrupt administration pursued policies that caused a severe degradation of
the economy. This resulted in a further coup, in June 1979, led by Flight
Lieutenant Jerry Rawlings who after relinquishing power to civilian rule
for a brief period, headed a second coup in December 1981.

Throughout this period the economy deteriorated (see Table 1 for indicators
of economic performance). In the troubled 1970s, per capita income declined
further and by the end of the decade the 'black star' had lost its lustre,
with falling output, three-digit inflation, widespread import shortages and
high unemployment. A scarcity of foreign exchange resulted in shortages of
imports of producer goods. The 1970s also saw a decline in exports. The
country lost its place as the largest producer of cocoa, with its recorded
share of world cocoa exports declining from 35% in 1961 5 to only 15% by
1981. The important mining sector also suffered from shortages of imported
inputs and lack of new investment. In 1982/3, the situation was made worse
by a severe drought and by the expulsion of about a million Ghanaians from
Nigeria. By this time Ghana was facing a grave economic crisis.

Economic recovery, 1983-9

In April 1983, Rawlings' Provisional National Defence Council (PNDC)
despite its initial populist stance, embarked on a programme for economic
austerity and structural adjustment supported by the International Monetary
Fund and the World Bank. This aimed to remove market distortions which were
preventing the price mechanism from allocating resources efficiently, and
to revitalise the country's productive structure through improved price
incentives. Decisive macroeconomic action was taken. On the fiscal side,
there were budgetary cut-backs, removal of subsidies, introduction of
cost-saving and cost-recovery measures, improved control over capital
expenditures through the institution of three-year public investment
programmes, and enhanced tax-collection. Monetary policy became very tight,
involving large interest-rate rises to control domestic credit expansion.
An incomes policy was introduced to limit the public wage bill.
Balance-of-payments measures included a series of devaluations which
culminated in the flotation of the currency and unification of the exchange
rate. Import restrictions were reduced to allow the import of much needed
inputs, spare parts, etc.

There were also institutional reforms: the public sector was reorganised
through retrenchment and redeployment of labour and, more recently, through
divestiture of some state-owned enterprises. Moreover, there were financial
sector reforms, involving the take-over by the state of commercial banks'
bad loans through a donor-supported Non-Performing Assets Recovery Trust,
and new laws to strengthen bank supervision. These initial years of
adjustment mainly involved macroeconomic stabilisation to reduce inflation
and strengthen the balance of payments. Output began to increase again,
with an annual growth rate of about 5% between 1984 and 1989 (Table 1).
From 1986 the budget started showing surpluses, although these were
misleading since they included increased foreign aid (Table 2). Inflation
was brought down from three-digits to an annual average rate of about 25%
with the help of favourable harvests. (Since the share of food in the
consumer price index is about 50%, good harvests can have a considerable
impact on inflation.) Although the trade balance did not improve
significantly, the severe foreign-exchange constraints were eased by
largescale foreign aid, permitting increased imports.

External support for the balance of payments and the budget, combined with
improved expenditure controls, made rationalisation of the exchange rate a
success. From a heavily overvalued fixed rate, Ghana moved to a liberalised
system in which the rate of exchange was determined by supply and demand.
By 1989, the authorities had achieved a full unification of the parallel
and official markets, and year-on-year depreciations were within 'normal'
limits. But while there is little doubt that the restoration of a realistic
exchange rate, in combination with greater budgetary and monetary
restraint, contributed substantially to the stabilisation, it is difficult
in this period to separate the effects of improved policies from those of
the increased aid inflows.

An important ingredient in the success of the early years of the SAP was
the commitment of the government to the programme, with officials involved
in extensive discussions with the IMF and World Bank about the actions that
should be taken. Agreed policies were diligently implemented and this
commitment, together with the initial successes, restored external
credibility to the extent that the government regularly received higher
donor commitments than the aid it requested at donor meetings.

Budgetary cut-backs involved some severe hardships (see Box 2) particularly
for ordinary Ghanaians, the PNDC's main constituency. Despite this,
adjustment policies did not meet with much organised opposition. In the
initial years, radicals opposed the programme but they became discredited
through association with unsuccessful coup attempts. The PNDC had already
silenced the beneficiaries of the 'control economy' the former government's
inner elite, big businessmen and civil servants. Furthermore, because by
1981 the economy had sunk to such a low level, most Ghanaians were willing
to try anything which might reverse this situation.

Just as drought exacerbated Ghana's economic crisis in the early 1980s, so
the recovery was aided by a reversal of fortunes. Favourable rains and a
good harvest in 1984 accounted for much of the reduction in the inflation
rate from 123% to 40% in 1984 and 10% in 1985. Low inflation in 1992 see
Table 2 was again partly the result of good harvests in 1991, although
tight fiscal and monetary policies were also important contributory
factors.

Improved macroeconomic management that commanded wide external support and
good fortune had contributed to success in overcoming the worst imbalances
between demand and supply. By 1989, the economy appeared poised for a
period of sustained growth. The contrast between Ghana's rapid economic
recovery and the alternative path of economic decline and political
corruption which eventually lead to anarchy in regional neighbours such as
Liberia and Sierra Leone could not be more evident.

Re-emerging weaknesses since 1990

The Rawlings government deserved the considerable credit it was given for
the economic stabilisation of the 1980s, especially through its moves to
reduce budgetary deficits. But a deterioration since then can be
attributed to weaknesses in macro-economic policy, exacerbated by the
slow response of the private sector to the earlier improvements.
Faltering economic performance is related to the slackening of fiscal
control which started in 1990. Unbudgeted outlays for a Ministerial
Conference of the Non-Aligned Movement; peace-keeping operations in
Liberia in 1990; and later the direct and indirect costs of local
government elections, placed a great a strain on a still fragile
economy (see Table 2). The fiscal pressures of these unanticipated
expenditures were aggravated by a decline in aid inflows.
In 1991 the government added to its fiscal problems by insisting on a
national referendum on a new Constitution, even though there was no
serious opposition to its proposals. This was followed in 1992 by
presidential and parliamentary elections. The associated increase in
public spending contributed to a large budget deficit financed by
borrowing from the banking system, and as a result money supply
expanded by over 50%. In 1994, the proceeds of a sale of part of the
government's holding in Ashanti Goldfields obscured the budgetary
problem, but the underlying economic tensions remained: a reported
surplus on the budget was only achieved through unexplained 'special
receipts' of around 189 billion cedis. The budgetary weaknesses and the
credit demands of the rest of the public sector led again to a large
increase in money supply. After some time, this inevitably sent
inflation back to high levels over 70% per annum by December 1995.

An important achievement of the stabilisation process of the 1980s had been
the rationalisation of the country's exchange rates. However, since 1992
the authorities have intervened in the market to limit the rate of
depreciation. Such interventions have resulted in a rise in the real
exchange-rate, reducing the profitability of exports, without preventing a
large nominal depreciation of the cedi. This policy has protected urban and
middle class consumers at the expense of (mainly rural) exporters.

These actions contributed to a derailing of the adjustment programme. But
some of the difficulty may have been due to a preoccupation with
macroeconomic management to the neglect of complementary measures to
stimulate production. Table 1 shows that the overall growth in GDP declined
by half a percentage point in 1990 5 from the preceding five-year period,
and in only two years since 1990 has growth exceeded the nearly 5% average
of 1984 9. Figure 1 illustrates the variable performance of the main
sectors since 1988. Agriculture appears to have been left to the vagaries
of the weather, and the cyclical decline in world cocoa prices, so that in
the absence of market and non-market incentives to increase productivity,
it has performed poorly. Industry, having responded to the initial impetus
generated by the improved availability of imported inputs, is now hampered
by the tight credit squeeze, restricting finance for working and
replacement capital. Moreover, trade liberalisation has exposed it to
increased competition from abroad. The service sector has consistently
outstripped the other main sectors, but cannot alone provide sufficient
impetus to sustain economic growth.

Structural adjustment policies appear to have been implemented without
sufficient attention to ensuring that the private sector was responding to
the programme. Thus whenindustrial capacity utilisation increased in the
initial years of the programme, it was on the basis of an old and obsolete
capital stock. Domestic saving (about 12% of GDP in 1995) still too low to
generate substantial local investment has remained. While private saving
has improved over the years, government saving has become negative,
reflecting the poor fiscal position.

At about 16% of GDP in 1995, investment has increased dramatically from its
low of less than 3% at the beginning of the adjustment period. However,
much of this recovery has been concentrated in the extractive sector,
particularly gold mining, which has performed well under adjustment. Helped
by considerable foreign investment, gold has now overtaken cocoa as the
largest single export earner.

There have been revisions of the Investment Code to provide tax and other
incentives but these have not generated the expected growth in capital
formation. Factors contributing to this failure have been the inadequate
infrastructure reflecting decades of under investment and inadequate
maintenance; the unstable macroeconomic environment; and continuing doubts
about the attitude of the government towards private investors.

Supply responses to adjustment policies have been particularly weak in
agriculture. In the initial years of the programme, exchange rate reforms
and increases in the producer price helped to improve earnings from cocoa.
Latterly, however, the performance of the cocoa sector seems to have
confirmed the widely held view that much of its initial recovery was due to
a cessation, perhaps reversal, of the smuggling of cocoa to neighbouring
Côte d'Ivoire, rather than to increases in production. After rising from
159,000 tonnes in 1983 to 247,000 in 1990, cocoa export volumes have
stagnated and Ghana's current world market share is even smaller than it
was in 1981. Also government policies, disease problems and climate change
in the old cocoa growing areas (now the transitional forest zone) have
caused the cocoa frontier to move to less optimal conditions in the Western
Region. At the same time, the food sector has been weakened by the switch
to price incentives for cash crops and by the increased cost of inputs,
particularly fertiliser and labour.

Politics and adjustment

There is continued debate about the impact on adjustment programmes of the
introduction of democratic political institutions. On the one hand, it is
suggested that a strong authoritarian government would be in a better
position to push through unpopular measures and to suppress opposition to
them. Against this, it is held that in a pluralistic system the programme
may have greater legitimacy and support from the general public.

In 1992, the PNDC regime gave in to domestic and international pressures,
and converted from military rule to a constitutional parliamentary system
of government. The resulting elections confirmed Rawlings as President. The
opposition parties boycotted the parliamentary elections, arguing that the
prior presidential election had been rigged. Notably, economic policy was
not a major issue in the political campaign, with the main opposition party
supporting the thrust of the SAP.

Since the advent of the Fourth Republic in 1992, the poorer performance of
the economy has given the impression that there is an incompatibility
between the successful implementation of structural adjustment and
democratic government. However, it can be argued that recent economic
performance has had less to do with the current political situation and
more to do with a declining commitment to fiscal control in the last years
of military rule. Political factors already present, but which find more
open expression under the new democratic constitution, have now adversely
affected economic performance.

A major goal of the SAP was to reduce the size of the public sector and to
promote private sector activity. President Rawlings' government appears to
have done little to encourage private sector involvement, however, and
there is limited trust between them. Most big businessmen suffered as a
result of the PNDC revolution and may still resent Rawlings and his
colleagues. At the same time, because of its avowed fears of exploitation
of consumers and workers, the government has appeared ambivalent in its
attitude towards the private sector. This was illustrated when President
Rawlings cautioned his party supporters not to buy the products of certain
businessmen associated with the political opposition.

The government has also been slow to implement the privatisation
programme. Only a few of the several state-owned enterprises selected
for divestiture have been sold, and opposition parties have claimed that
some of the sales that have occurred have lacked transparency.

A further example of the government's commitment to the SAP weakening in
a more democratic environment came during budget hearings for 1996,
concerning 'petrol politics'. Under pressure from a parliament dominated
by the ruling party's own members, the government announced a price
increase of 19%, which was insufficient even to compensate for
exchange-rate depreciation. This has weakened the state petroleum
company's financial position and will put pressure on the 1996 budget
through lost revenue and the implicit subsidy which is being provided.

In short, the aura of success surrounding Ghana's adjustment efforts has
been fading. Economic growth has slowed down; inflation has become a
major concern; the cedi has been depreciating, further fuelling inflation
but without maintaining incentives to export; unemployment is increasing;
and there appears to have been little reduction in poverty. Thus the
claims for major successes in reversing economic decline and establishing
a more democratic goverment, especially in relation to development
elsewhere in the region, now have be tempered by the continuing
difficulties facing the economy.

Conclusion: lessons for Africa

Bearing in mind the dangers of generalising from a single case, this
analysis suggests some important, if familiar, lessons for other African
countries.

   * Macroeconomic stabilisation, through improved control of government
     spending and of credit creation, is essential but insufficient.
     Strengthening the supply capacity of the productive system is also
     essential, including measures to induce private sector participation
     and to stimulate investment.

   * There are important and fairly quick output gains to be had from
     relieving supply bottlenecks through greater imports. Aid can play
     a crucial role in facilitating this. But sustained growth cannot be
     based only on a strategy of raising capacity utilisation.

   * Persistence and consistency are important but politically difficult.
     Adjustment is a long-term process when economies are inflexible,
     as is the case in most African countries. This is particularly so
     with major institutional changes, such as privatisation and the
     strengthening of markets.

   * Adjustment measures put low-income groups at risk, particularly
     public sector workers and resource- poor subsistence-oriented
     farmers. It requires a substantial effort and planning from the
     outset if these groups are to be cushioned.

   * With shrinking aid budgets and growing debt burdens, the generation
     of domestic saving is essential. This reinforces the necessity for
     measures to reduce budget deficits.

   * The limited domestic savings capacity implies measures to attract
     substantial net foreign direct investment.

   * Moves to political pluralism are apt to complicate the political
     management of necessary economic changes; there may be economic
     costs to set against the benefits of democratisation.

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Dr Nii K. Sowa, Fellow, Centre for Policy Analysis, Accra, Ghana, worked
with ODI staff to compile this Briefing Paper; ODI is responsible for the
final text.

Research for this Briefing Paper was supported with a grant from the
ODA's Economic and Social Committee for Overseas Research, although ODA
is not responsible for any views contained in the text.

Briefing Papers present objective information on important development
issues. Readers are encouraged to quote or reproduce material from them
for their own publications, but as copyright holder, ODI requests due
acknowledgement and a copy of the publication.

©Copyright: Overseas Development Institute 1996 ISSN 0140-8682

Briefing Papers present objective information on important development
issues. Readers are encouraged to quote or reproduce material from them
for  their own publications, but as copyright holder, ODI requests due
acknowledgement and a copy of the publication.

Overseas Development Institute, Portland House, Stag Place,
London SW1E 5DP
Telephone: +44 (0)171 393 1600 Fax: +44 (0)171 393 1699 Email:
publications@odi.org.uk
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RRojas Research Unit/1996