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O C C A S I O N A L   P A P E R     
Ghana: Economic Development in a Democratic Environment

Sérgio Pereira Leite, Anthony Pellechio, Luisa Zanforlin, Girma Begashaw, Stefania Fabrizio, and Joachim Harnack

Abbreviations Used
I   Overview

Economic Development and Democracy
The Revolutionary Phase: 1981–91
The Democratic Phase: 1992 to the Present
The Paper in Brief
II   Poverty Reduction Strategy

Institutional Structure for Reducing Poverty
Programs to Reduce Poverty
Poverty Monitoring and Indicators
Lessons and the Challenge Ahead
III   Patterns of Growth

Sources of Output
Sources of Growth
IV   Cocoa Reforms: An Experiment in Participatory Decision Making

Cocoa Trends in the Last Decade
Marketing Arrangements and Early Reform
A Participatory Approach to Cocoa Reforms
Next Steps and Conclusions
V   Fiscal Performance and Reforms

Fiscal Impact of the 1992 Election
Developments After the 1992 Election
Fiscal Impact of the 1996 Election
Developments After the 1996 Election
External Shock Ahead of the 2000 Elections
VI   Coping with Painful Choices: Public Sector Reforms

Early Reform Efforts
Recent Reform Efforts
Lessons Learned and the Future of Public Sector Reform
VII   Divestiture: Obstacles and Achievements

The Divestiture Implementation Committee and the Early Efforts
Recent Divestiture Experience: 1993–99
Summary and Conclusions
VIII   Financial Sector Issues

The Banking System and Its Evolution
Structure of the Banking System
How Far Have the Reforms Gone?
Lessons Learned and Next Steps
IX   External Competitiveness

Evolution of the Exchange Rate System
Traditional Competitiveness Indicators
Competitiveness Indicators for Ghana
X   The Road to 2020

Main Elements of Ghana--Vision 2020
Results of the First Phase
Reformulation of Ghana--Vision 2020
Lessons Learned
  2.1.   Program of Action to Mitigate the Social Costs of Adjustment (PAMSCAD)
  3.1.   Growth of Nontraditional Exports, 1986–98
  4.1.   The Medium-Term Cocoa Development Strategy
  4.2.   Cocoa Export and Tax Revenue
  5.1.   The Medium-Term Expenditure Framework
  6.1.   Decentralization Efforts
  6.2.   The Public Sector Reinvention and Modernization Strategy
  7.1.   Divestiture Procedures
  7.2.   The Ghana National Petroleum Corporation
  7.3.   Divestiture of Strategic Companies
  8.1.   The A-life Fraud
  8.2.   Rural Finance in Ghana
  8.3.   The Social Security and National Insurance Trust
  9.1.   Exchange Rate Arrangements, 1983–97
  2.1.   Incidence of Poverty by Region
  3.1.   Gross Domestic Product by Sector
  3.2.   Comparison of Ghana with Other Leading Agricultural
Countries in Sub-Saharan Africa
  3.3.   Comparison of Ghana with Other Leading Manufacturing
Countries in Sub-Saharan Africa
  3.4.   Gross Domestic Product by Expenditure Category
  3.5.   Comparison of Ghana with Leading Countries in Sub-Saharan
Africa by Investment-GDP Ratio
  3.6.   Comparison of Ghana with Leading Countries in Sub-Saharan
Africa by Productivity of Capital
  4.1.   Distribution of Proceeds of Cocoa Exports in Selected
Cocoa-Producing Countries
  5.1.   Central Government Revenue and Grants
  5.2.   Central Government Expenditure
  5.3.   Economic Classification of Central Government Expenditure
and Net Lending
  5.4.   Central Government Budgetary Operations and Financing
  7.1.   Divestiture of State Enterprises
  7.2.   Selected Divestitures Outside the DIC Framework
  8.1.   Chronology of the Banking System
  8.2.   Indicators of the Size and Concentration of the Banking Sector
  8.3.   Selected Banking System Indicators as of December 1998
  8.4.   Selected Banking System Indicators as of December 1999
  2.1.   Poverty Gap by Region
  2.2.   Incidence of Poverty by Main Economic Activity of Household
  3.1.   Real GDP per Capita and Inflation Across Political Regimes
  3.2.   Saving, Investment, and the Current Account
  3.3.   GDP Per Capita and Exports Per Capita
  3.4.   Agricultural Sector and Real GDP
  4.1.   World Cocoa Production and Yields
  4.2.   World Market Shares in Cocoa Production
  4.3.   Cocoa Prices Received by Ghana and Côte d'Ivoire
  4.4.   Distribution of Cocoa Export Revenue in Ghana and
Côte d'Ivoire
  5.1.   Central Government Finances
  7.1.   State Enterprise Divestitures
  7.2.   Divestiture Proceeds
  8.1.   Financial Deepening Ratios
  9.1.   Real Effective Exchange Rates
  9.2.   Real Effective Exchange Rates Based on Unit Labor
Cost Indices
  9.3.   External Competitiveness of Ghana and Four Neighboring

I.  Overview

In 1992 Ghana held its first elections in over a decade, taking a decisive step in the return to democratic rule. Although many countries in Africa moved to democracy in the 1990s, Ghana had reached that point only after a virtual meltdown in the early 1980s. What has been all the more laudable in Ghana's case is therefore the steady progress since the return to democratic rule in enhancing a democratic environment.

A democratic environment is characterized primarily by free elections, an effective legislature, and an independent judiciary. This is not all, however. True democracy also involves regular consultation with civil society and the prominence of the rule of law, as well as transparency and accountability in government. All these ingredients have been present in Ghana since 1992, although much still needs to be accomplished before one can claim that democracy has matured.

Ghana's economic strategy since 1992 has focused on macroeconomic stabilization and structural reform in a democratic environment. Within Ghana, a rich economic and political debate informs and influences government policies. Newspapers and magazines keep the public aware of current economic affairs. In-depth television interviews on economic themes are common, providing an opportunity for different views to be aired. Independent economic institutes, such as the Center for Policy Analysis, the Institute of Economic Affairs, and the Institute of Statistical, Social, and Economic Research provide analysis of economic trends and policies. Consultation with stakeholders is the norm in many areas of policymaking. Transparency and accountability are increasing, and institutions such as the Commission on Human Rights and Administrative Justice and the Serious Fraud Office help ensure that the rule of law is respected. Although critics find much to fault in the government's efforts to involve civil society in decision making, the government has taken some steps in the right direction, and there seems to be genuine support within civil society for the basic tenets of the participatory approach.

This paper focuses on economic policies in Ghana since the return to multiparty democracy in 1992. This introductory section explores the key relationships between participatory democracy and successful economic development and reviews the early steps of participatory decision making in Ghana. More generally, it sets the stage for a discussion of Ghana's main achievements and failures since 1992 in raising the standard of living of its population and reducing poverty.

Economic Development and Democracy

In recent years the IMF has emphasized the importance of a participatory approach to decision making (Ouattara, 1999). The participatory approach to economic development promotes the application of key elements of a democratic environment--consultation, the rule of law, and transparency and accountability--to economic policymaking. Because a participatory approach aims at broad consultation and consensus building, it fosters strong ownership of the economic program by civil society, a crucial element in making the program a success. It also increases the chances that government policies will be well conceived and fair.

Yet a democratic environment and a participatory approach to economic policies are no panacea. Consultation and consensus building can (and do) delay policy implementation. The strategies chosen sometimes involve too many compromises or are too timid. Protection of minority rights and interests can be overlooked under the guise of majority rule. Consultations with stakeholders can become perfunctory and fail to really take their views into consideration. Deadlocks may halt reforms, and elections may encourage politicians to spend unwisely in an attempt to impress voters.

Nevertheless, with all its temporary setbacks and potential delays, a democratic environment supported by a participatory approach to decision making remains a key ingredient in any successful strategy for sustainable development. The assessment of Ghana's economic policies and structural reforms in this paper underscores how a democratic environment and a participatory approach can contribute to the realistic consideration of available alternatives, the credibility of the decision process, the generation of program "ownership" by society at large, and the prevention of backtracking, while broadening popular support for the economic program.

The Revolutionary Phase: 1981–91

Although it would be years before Ghana would seriously put into practice the concepts of participatory decision making, Jerry J. Rawlings, the leader of the December 1981 military coup, described to the country in a broadcast on January 2, 1982, the kind of democracy he hoped would emerge in Ghana:

To many of us, if not all of us, democracy does not just mean paper guarantees of abstract liberties. It involves, above all, food, clothing, and shelter, in the absence of which life is not worth living. . . . [T]he time has now come for us to restructure society in a real and meaningful democratic manner so as to ensure the involvement and active participation of the people in the decision making process. (quoted in Shillington, 1992, p. 82)

Later that year the first step toward implementing this concept was taken with the establishment of the National Commission for Democracy (NCD). The commission's principal functions were to engage in political education, advise the government on how to develop a participatory democracy, and monitor the government's performance in fostering a democratic environment. However, it was not until 1986 that the NCD began to fulfill its functions. During 1986 and early 1987, the NCD held a number of political seminars in the various regional capitals to help define the key characteristics of a Ghanaian approach to the democratic process. Early on, the NDC decided that any participatory system of democracy in Ghana would have to be strongly grounded in the localities. Therefore, in its so-called Blue Book report, published in July 1987, the commission proposed a system of elected local assemblies aimed at involving the largest possible number of people in policymaking decisions. This report was further discussed in another round of seminars in every region of Ghana. The process culminated in October 1988 in PNDC Law 207, which set out a new system of elected government at the district level. Voting for the 110 district assemblies began in some districts in November 1988 and was completed by the end of February 1989.

In January 1989 the Program of Action to Mitigate the Social Costs of Adjustment (PAMSCAD) was introduced as a safety net for population groups vulnerable to the effects of economic reform (see section II). PAMSCAD represents an early example of the application of a participatory approach to decision making on economic policy. The program was originally conceived as a series of small-scale projects originating at the local level. People in the villages were asked to identify their local needs, such as repair and rehabilitation of primary schools or the building of new health clinics, and about 1,000 of these projects were selected for financing by international aid agencies that had pledged funds to PAMSCAD.

In 1990 the NCD turned its attention to the national level; between July and November of that year it conducted 10 regional seminars on a democratic structure for central government. The NCD's report, issued in March 1991, recommended the adoption of a multiparty system. This took critics by surprise as they had expected that some system of grassroots democracy, without parties, would be recommended. The government accepted these recommendations in April, and a special committee of constitutional experts was quickly set up to formulate specific constitutional proposals by July. On August 26, 1991, the 260-member Consultative Assembly began its proceedings.

Also in 1990, the government set up the National Development Planning Commission (NDPC), charged with formulating and implementing an enhanced economic strategy to consolidate the gains achieved by the Economic Reform Program (ERP) and to lay the foundations for accelerated economic growth and poverty reduction into the 21st century. Throughout its deliberations, the NDPC was to critically evaluate economic policies and continually adapt them to the overall goals of raising living standards and reducing poverty. During the first half of the 1990s, the NDPC established working groups made up of academicians, consultants, nongovernmental organizations (NGOs), and researchers from the public and the private sectors, in an attempt to make the development effort as broad-based as possible. It was from these early efforts that the Ghana--Vision 2020 strategy would emerge in the mid-1990s.

In this context it was felt that the private sector had to play a dominant role in generating substantial increases in saving, investment, and exports. Therefore the Private Sector Advisory Group was set up in 1991 and charged with responsibility for making recommendations on how to improve the environment for private sector investment.

The Democratic Phase: 1992 to the Present

Nineteen ninety-two was a watershed in Ghana's history: a new constitution reintroducing democratic rule was adopted in April. Presidential and parliamentary elections followed in November and December, respectively. The process of participatory decision making has continued and strengthened, leading to economic reforms that have produced mostly satisfactory results.

The Participatory Process
The 1992 constitution is clearly based on principles of participatory democracy. Article 35 provides that "the state shall make democracy a reality by decentralizing the administration and financial machinery of government to regions and districts and by providing all possible opportunities to the people to participate in decision making at every level of national life and in government." The constitution also calls for the creation of four independent commissions that were to become the guarantors of the system of participatory democracy embodied in the constitution: the Commission on Human Rights and Administrative Justice, the National Commission on Civic Education, the National Electoral Commission, and the National Media Commission. It directs the president, within two years after assuming office, to "present to Parliament a coordinated program of economic and social development policies" (Article 36, clause 5).

The NDPC remained in charge of the development program, which had to be endorsed by parliament, thus ensuring the latter's direct and continuous involvement in the economic debate. This long-term program of economic and social policies, developed in a participatory fashion, became known as Ghana--Vision 2020 and remains the foundation of Ghana's strategy for raising living standards and reducing poverty.

The first version of the Ghana--Vision 2020 strategy was prepared in early 1994, presented to a three-day national workshop in April, and published in May. It was further elaborated and presented to parliament in January 1995. A private sector roundtable consisting of a broad spectrum of Ghanaian entrepreneurs was also convened in 1995 to deepen the work begun by the Private Sector Advisory Group. In true participatory fashion, a number of important workshops took place in 1996–97 and were influential in refining the strategy.1

These consensus-building efforts led to the National Economic Forum in September 1997, which brought together some 500 participants, representing parliament, the executive, trade unions, employers' associations, and NGOs, as well as bilateral and multilateral development partners. As described by its organizers, the National Economic Forum was aimed at consolidating a "national consensus on pragmatic policy measures for accelerated economic growth within the framework of Ghana Vision 2020" (NDPC, 1997, p. 4). The main topics of the National Economic Forum were macroeconomic stability, economic growth, employment generation, and human development. Participants were keen on defining concrete actions to be taken in each of these areas, which were then included in a program of action published in June 1998 (Government of Ghana, 1998).

Financing for the new economic development strategy was put together by the World Bank, together with other bilateral and multilateral donors, in connection with the November 1997 Consultative Group meeting in Paris. The government, through both the NDPC and sectoral roundtables, also stepped up the coordination of its development needs with the international community in an effort to use external resources more efficiently and to avoid overlap among donors. In particular, sectoral investment programs were drawn up for health services, education, and infrastructure.

Despite this extensive consultation, critics of the government often claimed that the participatory process had so far been more rhetorical than real. To respond to this criticism, the Structural Adjustment Participatory Review Initiative (SAPRI), a participatory review of the Ghanaian experience with structural adjustment programs, was launched in November 1997.2 SAPRI was managed by a tripartite National Steering Committee composed of seven representatives from Civisoc (an umbrella organization for various civil society groups), four from government, three from the World Bank, and an independent chairman, Akilagpa Sawyerr.3 Since SAPRI's launch, the participatory process has been gradually deepened and expanded--for example, in the context of the Country Assistance Strategy of the World Bank. There is, however, still room to deepen grassroots involvement in macroeconomic decision making, and the government is expected to formalize the consultation process in the context of the Poverty Reduction Strategy Papers that will serve as a basis for new lending from the World Bank and from the Poverty Reduction and Growth Facility of the Fund.

Economic Highlights
From an economic perspective as well, 1992 was a crucial year. In March, private traders were allowed for the first time to purchase the cocoa crop in competition with the state-owned Produce Buying Company; domestic and export trade in coffee, shea nuts, and cocoa products had been privatized in early 1991 (the export levy on coffee had also been eliminated in 1991). Significant changes also took place in monetary and exchange rate policies. In early 1992 the Bank of Ghana, the country's central bank, began using indirect instruments as the primary instruments of monetary policy, replacing a system of credit ceilings on commercial banks with weekly auctions of government and central bank securities. A floating exchange rate system based on an interbank market was introduced in March to replace the weekly exchange rate auctions. A new pay and grade structure for the civil service was introduced in July. A new social security system had also been introduced in 1991. The completion of the banking sector reforms was felt to be at hand, and initiatives to improve the investment climate for the private sector, such as the Private Sector Advisory Group, were on course. In summary, the economy was poised for significant, sustained growth.

Unfortunately, the period since 1992 is not one of clear-cut successes and economic development. The same elections that restored representative democracy to Ghana also encouraged the government to spend excessively, in part because the government faced a series of strikes. Doctors went on strike in May, nurses in June, workers of the Cocoa Board in July, and railway employees and civil servants in September. Pressed for time and concerned about the elections, the government granted large salary increases, which worsened macroeconomic imbalances and rekindled inflation. The fiscal balance turned from a surplus of 1.8 percent of GDP in 1991 to a deficit of 4.9 percent in 1992, financed by the banking system.

The government implemented policies in 1993–94 with the object of regaining control over the budget deficit but had only limited success. Instead of taking structural measures that would address the weaknesses in the public sector, the government used large receipts from the divestiture of state enterprises to finance the fiscal deficit in 1994. Growth in the money supply accelerated that year, however, mainly because of an increase in borrowing by the national petroleum corporation from the central bank, and this further intensified inflationary pressures. Similar events in 1996, when new elections were held, highlight the difficulties that Ghana has confronted in carrying out economic adjustment and structural reforms in a democratic environment.

Since mid-1997 the government has strengthened its economic policies and made considerable progress in restoring macroeconomic stability (see section III for details). Despite some difficult external shocks--an energy crisis in 1998 and a terms-of-trade shock in 1999--the economy has continued to show reasonably good results, with real GDP growing by 4.7 percent in 1998 and 4.5 percent in 1999. The average inflation rate has also continued its downward trend from 27.9 percent in 1997 to 19.3 percent in 1998 and 12.4 percent in 1999, in response to a marked tightening of fiscal and monetary policy. The primary domestic surplus was, on average, 2.7 percent of GDP in the three-year period 1997–99. The external current account deficit declined sharply in 1998 to 4.7 percent of GDP, from 14.4 percent in 1997, but it increased again in 1999 to 11 percent as a result of sharp declines in gold and cocoa prices and an increase in oil prices. Because of these external price shocks, 2000 has been a difficult year. Nevertheless, the macroeconomic and structural reforms have progressed to such a point that, if the government stays the course of adjustment, Ghana will be well on the road to achieving the objectives of the Ghana--Vision 2020 strategy.

The Paper in Brief

This paper describes the main economic developments and policies pursued in Ghana during 1992–99, when the authorities gradually developed a participatory approach to decision making. Clearly, not all economic decisions during this period reflected a truly participatory process. However, Ghana can be recognized as one of the first African countries to seek more widespread participation of civil society in development planning. The purpose of this paper is to tell the story of this effort, both its successes and its shortcomings, so as to learn from it.

An important aspect of Ghana's economic strategy since 1992 has been the identification of poverty reduction as an overarching objective of macroeconomic policy. The IMF fully recognizes this as crucial to ensuring that development efforts will be sustained. Therefore, section II focuses on how poverty reduction became central to the Ghanaian development strategy. It describes that strategy, its implementation and monitoring, and the lessons learned. It concludes that significant progress has been made in poverty reduction since 1992, but that still more remains to be achieved.

Section III analyzes the obstacles to growth in the pre-1992 period and how economic policies adopted since then have helped mitigate these constraints. It points to the potential for further growth and identifies the policies that are crucial to fully realizing this potential. In particular, it stresses the need for continued agricultural growth, private sector development, export-oriented diversification, and investment in basic infrastructure and in human capital as key elements of a growth strategy that will be effective, just, and sustainable. It also identifies the main threats to Ghana's economic development: resumption of macroeconomic instability, high levels of public indebtedness and high domestic interest rates, and continued external vulnerability.

Section IV deals in more detail with one important aspect of Ghana's development strategy, namely, increasing the performance and productivity of the cocoa industry, which traditionally has been the backbone of the Ghanaian economy. Reform in this industry is also important for its contribution to reducing poverty, as most of Ghana's poor live in rural areas. This reform, which is still far from completed, is also interesting because it exemplifies well the participatory approach to decision making adopted by the Ghanaian authorities since 1992.

Section V describes the ups and downs of fiscal performance during 1992–99. The achievements and failures of fiscal policy explain most of the pattern of economic performance during the period. A crucial aspect was the stop-and-go nature of fiscal adjustment. Adjustment was interrupted in 1992 and 1996 by excessive spending and lax tax administration, which were directed at achieving election victories but imposed a high cost on the economy. Also discussed are the tax and tariff reforms undertaken during the period and their rationale. The efforts to link government expenditure patterns more closely to the needs of the population are dealt with through a description of efforts at public expenditure review and the recent development of the medium-term expenditure framework. High interest costs, which resulted from policy mistakes of the past, continue to pose an obstacle to economic development in general, and in particular to redirecting expenditure for maximum effectiveness in accelerating economic growth and reducing poverty. The section concludes that, without a sustained effort to generate primary fiscal surpluses and reduce domestic debt, it will be difficult to put in place a consistent strategy of poverty reduction.

Section VI discusses the public sector reforms undertaken in Ghana since 1983, with emphasis on the 1992–99 period. These reforms, which include measures to refocus government activities toward its core tasks, present a difficult challenge for the government. They have resulted in a gradual decline in employment in the public sector--a painful choice for any government, but particularly so in a participatory democracy. Another important aspect of these reforms is decentralization. This, too, is needed to involve the population more closely in the public decision-making process. However, experience around the world shows that decentralization also has serious pitfalls in terms of ensuring the accountability and transparency of government activities. These need to be addressed in a satisfactory manner to allow decentralization to make a true contribution in bringing decision making to the grass roots. The section concludes by identifying some of the lessons learned in the process of making these painful, costly, and protracted public policy choices.

Section VII deals with public sector reform in the context of divestiture. It argues that, although one might think it would be easier and faster to show beneficial results from divestiture than from the more subtle and often slower process typical of other types of public sector reform, in practice this is seldom the case. In Ghana the divestiture process has suffered from a stop-and-go approach, which is symptomatic of deep divisions within civil society about its benefits, the procedures used, and their transparency. The section shows that, in the medium term, divestiture is highly beneficial to employers, employees, and consumers, and any negative effects tend to be temporary, modest, and manageable.

Section VIII discusses the status of financial sector reforms and what remains to be done to ensure that the financial sector does not become a bottleneck to Ghana's development. By 1992 Ghana had already made good progress in rehabilitating its financial sector. In the period 1992–99 many problems reappeared, but they were not allowed to reach the serious proportions of the pre-1992 period. The section discusses the achievements of the financial sector reforms and identifies the steps still remaining to make the Ghanaian financial sector an active partner in the development of the country.

Section IX draws attention to the importance of realistic exchange rates that provide sufficient incentives for domestic production and export, if the proposed development strategy is to succeed. It brings to the fore the problem of trade-offs, such as that between inflation and competitiveness, which sometimes develop as a result of external events, and which need to be addressed in a timely manner. Governments often have difficulties dealing with these trade-offs and events, which critics see as proof that the strategy was inappropriate. The solution is to explain events to the public as frankly as possible, while defending the most appropriate course of action by explaining what would be the consequences of the alternatives.

Section X summarizes the objectives and approach of Ghana--Vision 2020 and draws the main lessons from the period 1992–99. It concludes by identifying what needs to be done in the near future to keep Ghana moving speedily toward the objectives set by its participatory approach to economic development.

1These workshops included the Inflation Management Workshop and the National Forum on the State of the Economy in May 1996; the employment seminar of the influential Tripartite Committee (composed of government, the trade unions, and the employers' association) in August 1996; the Forum for Policy Dialogue: Toward a Re-energized Partnership for Rapid Economic Growth in March 1997; and Ghana Reaching the Next Level Through Global Competitiveness: A Public-Private Sector Partnership in June 1997.
2This exercise was part of an international initiative carried out in Ghana and seven other developing and transition countries--Bangladesh, Ecuador, El Salvador, Hungary, Mali, Uganda, and Zimbabwe--under World Bank sponsorship.
3The Civil Society Coordinating Council (Civisoc) was formed to represent civil society interests in the SAPRI exercise. It has a membership of 25, drawn from the labor movement and associations of business, agriculture, students and youth, women, and Christian and Muslim groupings, as well as sector development NGOs. Kwesi Adu-Amankwah, the Deputy-Secretary-General (Operations) of the Trades Union Congress, chairs the council.