Reference no: EM131552179

Case Study: Ghana: An African Dynamo

The West African nation of Ghana has emerged as one of the fastest-growing countries in sub-Saharan Africa during the last decade. Between 2000 and 2013, Ghana's average annual growth rate in GDP was over 7.5 percent, making it the fastest-growing economy in Africa. In 2011, this country of 25 million people became Africa's newest middle-income nation. Driving this growth has been strong demand for two of Ghana's major exports-gold and cocoa-as well as the start of oil production in 2010. Indeed, due to recent oil discoveries, Ghana is set to become one of the biggest oil producers in sub-Saharan Africa, a fact that could fuel strong economic expansion for years to come.

It wasn't always this way. Originally a British colony, Ghana gained independence in 1957. For the next three decades, the country suffered from a long series of military coups that killed any hope for stable democratic government. Successive governments adopted a socialist ideology, often as a reaction to their colonial past. As a result, large portions of the Ghana economy were dominated by state-owned enterprises. Corruption was rampant and inflation often a problem, while the country's dependence on cash crops for foreign currency earnings made it vulnerable to swings in commodity prices. It seemed like yet another failed state.

In 1981, an air force officer, Jerry Rawlings, led a military coup that deposed the president and put Rawlings in power. Rawlings started a vigorous anticorruption drive that made him very popular among ordinary Ghanaians. Rawlings initially pursued socialist policies and banned political parties, but in the early 1990s, he changed his views. He may well have been influenced by the wave of democratic change and economic liberalization that was then sweeping the formally communist states of eastern Europe. In addition, he was pressured by Western governments and the International Monetary Fund to embrace democratic reforms and economic liberalization policies (the IMF was lending money to Ghana).

Presidential elections were held in 1992. Prior to the elections, the ban on political parties was lifted, restrictions on the press were removed, and all parties were given equal access to the media. Rawlings won the election, which foreign observers declared to be "free and fair." Ghana has had a functioning democratic system since then. Rawlings won again in 1996 and retired in 2001. Beginning in 1992, Rawlings started to liberalize the economy, privatizing state-owned enterprises, instituting market-based reforms, and opening Ghana up to foreign investors. Over the next decade, more than 300 state-owned enterprises were privatized, and the new, largely privately held economy was booming.

Following the discovery of oil in 2007, Ghana's politicians studied oil revenue laws from other countries, including Norway and Trinidad. They put in place laws designed to limit the ability of corrupt officials to siphon off oil revenues from royalties to enrich themselves; something that has been a big problem in oil-rich Nigeria. Some oil revenues are slated to go directly into the national budget, while the rest will be split between a "stabilization fund" to support the budget should oil prices drop and a "heritage fund" to be spent only when the oil starts to run out.

Despite all of its progress over the last two decades, Ghana still has many issues to deal with. Although Ghana ranks better than most African nations, there is still a perception that corruption is a problem, particularly in the police force and the allocation of government contracts. Inflation rose to greater than 13 percent in 2013, and the budget deficit widened to 12 percent of GDP as the ruling political party stepped up public spending in advance of presidential and general elections, which it narrowly won. Despite economic progress, as many as a third of Ghanaians still live on less than $2 a day, and Ghana still needs to upgrade its power, water, and road infrastructure. On the other hand, oil revenue is starting to flow, and will increase over time, which-if used wisely-will give Ghana a chance to fix some of its problems and solidify its gains

Questions

1) After gaining independence from Britain, Ghana's economy languished for three decades. What factors contributed to this weak economic growth? What does the Ghana experience teach you about the connection between economic and political systems and economic growth?

2) What were the main changes that Jerry Rawlings made in the Ghanaian political and economic systems? What were the consequences of these changes? What are the lessons here?

3) What external forces helped to persuade Rawlings to change political and economic practices in Ghana? Do you think he would have made the changes he did without these external forces?

4) If Ghana had discovered large oil reserves in the 1980s instead of the 2000s, do you think things might have played out differently? Why or why not?

5) What is the difference between the approach of Nigeria toward oil revenues and that of Ghana(the Nigeria experience is documented in the country focus feature in this chapter)? Which approach is in the best long-run interests of the country?

6) What dies Ghana need to do to remain on its current track of sustained economic growth?