Part II Regional review

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I. Developing country regions

Recent economic and agricultural performances in the four developing country regions are examined and the main policy developments affecting their agricultural sectors during 1993 to mid-1994 are highlighted in this section. The review then focuses more specifically on the experience of selected countries in each region: Ghana in Africa; China in Asia; Brazil in Latin America and the Caribbean; and Turkey in the Near East and North Africa.

Sub-Saharan Africa

Regional overview

Five major factors have affected, and will continue to affect, overall economic and agricultural performance in the region: i) the world economic environment; ii) political events, including intracountry, civil and ethnic confrontations; iii) international and intraregional economic cooperation; iv) individual country policies; v) agroclimatic conditions and natural disasters. Another factor with significant economic and agricultural consequences for several countries in the region has been the devaluation of the CFA franc.

Changes in the international economic environment

The world economic environment in the last few years had been dominated by slow growth in developed countries which, through trade and capital flows as well as other financial links, created a negative, environment for growth in developing countries.

The implications for developing countries of the slowdown in industrial countries was not uniform across regions. While many Asian and Latin American and Caribbean economies expanded significantly in recent years, sub-Saharan Africa's per caput GDP declined again in 1992 and 1993, continuing a long-term negative trend. One factor behind such poor growth performance was the fact that a big proportion (at least 80 percent) of the region's exports went to developed (mostly West European) countries which were themselves experiencing economic downturns. An additional but partly interrelated factor was the continuing fall in the region's terms of trade which declined by 6.3 percent in 1992 and by 7.6 percent in 1993. Although most developing country regions (with the exception of East and South Asia and the Pacific) experienced falls in their terms of trade, the decline was by far the steepest in sub-Saharan Africa.

Figure 5: SUB-SAHARAN AFRICA; Source: FAO

This drastic terms of trade deterioration for the region occurred against a background of mixed directions in real overall commodity prices. While petroleum prices fell by 12.1 percent, the overall index of non-petroleum commodity prices increased by 1 percent, reflecting the balance of increases in food, beverage and raw material prices (0.2, 5.7 and 22.5 percent, respectively) and decreases in prices of metals and minerals (-15 percent). The unit value index for manufactures decreased slightly (-0.5 percent). Thus, the overall decline in the terms of trade for sub-Saharan Africa mostly reflects the large decreases in petroleum export prices. Petroleum exports, mostly from West and Central Africa, account for about 40 percent of the region's total exports (including South Africa). The aggregate index is heavily influenced by Nigeria which has the largest weight in the overall index. Other countries affected by the decline in petroleum prices include Cameroon, Angola, the Congo and Gabon. The negative overall index also reflects negative terms of trade of metal and mineral exporters such as Zambia, for which copper accounts for 75 percent of export earnings.

Increases in the overall non-petroleum commodity price index in late 1993 and early 1994 reflect the firming of timber and beverage (coffee and cocoa) prices. Increases in coffee prices benefited in particular Uganda, Ethiopia and the United Republic of Tanzania where the average share of coffee exports in total export earnings is 80, 50 and 32 percent, respectively.

Political events and intraregional cooperation

In 1993, the sub-Saharan Africa region witnessed the ending of several conflicts and civil strife as well as the beginning of others.

Civil strife continued in Somalia, requiring the intervention of the major world powers and the UN. Although the security situation in the country has improved somewhat, permitting the partial resumption of farming and market activity, the overall economic environment remains fragile and uncertain.

In the Sudan, the effects of recurring droughts (three in the last decade alone) have been exacerbated by the continuing war. In 1993, agricultural production, marketing and food aid have been severely disrupted.

The disruption of production, transportation and marketing of agricultural commodities and localized famines continued in Angola where the civil war recommenced in 1993, interrupting two continuous years of good harvests.

Zaire achieved a record cereal crop in 1993, but the breakdown of central government authority has caused the disruption of marketing activities in the urban areas which are, consequently, facing a serious risk of food shortages.

In Liberia, parties in conflict burnt rubber plantations, causing a drop in rubber production from 106000 tonnes in 1989 to 10000 tonnes in 1993.

The conflict in Rwanda, where more than 500000 people are estimated to have been killed, is the largest and possibly the most catastrophic - addition to the long list of civil confrontations that have lacerated the African continent.

On the positive side, the civil war in Mozambique has ended and the country is slowly heading towards normality. This will positively affect neighbouring countries (such as Malawi and Zimbabwe) which provided shelter for displaced refugees. Furthermore, cereal production in the country is recovering from the devastating drought of 1992.

The GATT agreement and Africa

The conclusion of the Uruguay Round of GATT negotiations and the subsequent signing of the Uruguay Round Agreement was a major event in 1993, with short-term and long-term consequences for all developing countries. The effects of trade liberalization will have an impact on developing countries through access to markets, terms of trade, direct effects on growth from efficiency gains and indirect efficiency effects through growth in other liberalizing countries.

The partial liberalization of grain trade is expected to increase world grain prices (assuming other factors to be constant). This will have negative effects on those sub-Saharan African countries that have a high ratio of food to overall imports or exports (Burkina Faso, Guinea-Bissau, Sierra Leone, Togo) as well as for countries that are prone to natural disasters, such as drought (e.g. Botswana and Ethiopia), and rely on food imports and/or emergency food aid.

An important aspect of the Uruguay Round Agreement for Africa is the reduction in the value of the numerous trade preferences that Africa currently receives from developed countries (i.e. the Generalized System of Preferences [GSP], the Lomé Convention and, when applicable, least-developed country [LDC] preferences). By reducing non-preferential rates, the agreement reduces the advantage of countries enjoying preferential treatment. Nearly four-fifths of sub-Saharan Africa's exports go to developed countries, with the European Community (EC) absorbing 60 percent and North America about 30 percent of the region's total exports to developed countries. Ninety-seven percent of African exports enter the EC duty-free, while the average tariff on sub-Saharan African exports to the EC ranges from zero to three-tenths of 1 percent. Such preferences give sub-Saharan African countries a 2 to 4 percentage point "preference margin.

A reduction of most favoured nation (MFN) tariffs by 30 percent by the EC alone is expected to cause a loss of (non-fuel) export revenues of $70 million per year to sub-Saharan African countries. Some of this loss could be compensated by the reduction in non-tariff barriers (NTBs) for products such as textiles, clothing and temperate zone agricultural products, but the overall effect is expected to be negative! This is in contrast to the projected overall positive effects of agricultural trade liberalization on other developing regions.

Regional cooperation

The process of democratization and integration of South Africa in the world, regional and subregional economic systems following the abolition of the apartheid system was intensified in 1993. A historic benchmark in this process was the free participation of all citizens in the 1994 presidential elections.

The sheer size of the country and its advanced stage of economic and technological development means that its moving away from isolation may have a significant economic impact on the economies of the subregion. While South Africa accounts for 17.6 percent of the total area occupied by the ten Southern African Development Community (SADC) countries plus South Africa itself, its population is about 30 percent of the total and its GNP about 4.8 times that of all SADC countries combined. With a per caput GDP of about $2500, South Africa and Botswana ($2888) are by far the richest countries in the subregion. In addition, South Africa's natural resource deposits (diamonds, gold, coal and nonferrous metals) are among the richest in the world.

These features have imparted new momentum to the issue of economic cooperation among the countries in the region - and the related issue of South Africa's possible role as a "locomotive" for enhancing regional growth potential and welfare.

Currently, South Africa is a signatory to few economic cooperation agreements in the area. Examples include the Southern Africa Customs Union (SACU) and the Multilateral Monetary Area (MMA). The 1992 transformation of the Southern African Development Coordination Conference, whose objectives included reduced dependence on South Africa, into the Southern Africa Development Community was, in part, in anticipation of South Africa's likely accession to the community.

The ongoing efforts aimed at trade liberalization are likely to change the modalities and institutions of economic cooperation in the subregion. Currently,, a host of trade policies as well as more or less effective multilateral and bilateral trade agreements exist in the area, often complemented (or subverted) by informal cross-border arrangements. Trade in the area is dominated by South Africa. According to the African Development Bank (AfDB) the total merchandise trade involving the ten SADC countries plus South Africa in 1990 was $54.5 billion. Of that total, $3.2 billion only was accounted for by intraregional flows and only $0.9 billion by intra-SADC trade.

Intra-SADC trade is constrained by the similar patterns of competitive advantage of the countries in the region. With the exception of South Africa, Zimbabwe and Mauritius (which have significant manufacturing activities), countries in the region produce similar primary agricultural commodities and minerals and export them largely unprocessed.

Under the existing patterns of trade, domestic trade policies and regional institutions, the incorporation of South Africa in a regional trading arrangement in southern Africa will not have a large impact. However, liberal domestic and trade policies, including a shift from self-sufficiency to more open policies in South Africa, may result in significant changes in competitiveness with South Africa exporting more manufactured goods to the countries in the region and importing more agricultural products. in such a case, a form of a welfare-increasing, net trade-creating arrangement may emerge. Moreover, South Africa is expected to phase out cereal production subsidies, resulting in diminishing exportable surpluses unless corresponding improvements in productivity are achieved.

Several other forms of cooperation, short of full economic integration, are possible. In its study (see footnote 8), the AfDB identified a number of areas of fruitful regional cooperation in southern Africa with the participation of South Africa. The successful cooperation between maritime and landlocked countries of the subregion in dealing with the 1991/192 drought showed the benefits of having a coordinating mechanism for transport and information activities.

In agriculture, opportunities exist for the coordination of research on plant and animal disease control. As South Africa is the country with the most advanced agricultural research system, it could become the centre of agricultural research and training activity for the area. A regional agency could be established to coordinate the research carried out by national research centres and universities. Another area of fruitful cooperation in the region is farm investment. The ongoing land reform in Zimbabwe and the one that will inevitably occur in South Africa means that a large number of experienced farmers will probably move out of Zimbabwe and South Africa. A successful subregional land swap or resettlement programme would retain those farmers in the subregion and encourage them to invest in agriculture in countries with a relative abundance of good-quality land reserves, such as Angola, Mozambique, Tanzania and Zambia. Steps have already been taken in that direction by some SADC countries.

Country policies

Macroeconomic policies of the countries of the region continued to pursue stabilization of their economies, the achievement of internal and external balances, low inflation and price stability and undistorted exchange rates. Such policies continue to have a profound impact on the agricultural sector.

In addition, a number of sector-specific reforms are being undertaken, aimed at liberalizing market institutions, enhancing private sector activity and reducing direct state involvement in production and distribution.

Adherence to these general principles characterized a number of recent policy interventions affecting agriculture. Thus, pursuing its agricultural sector reform programme, in, February 1993 the Government of Kenya abolished all restrictions on wheat trade by drastically reducing the role of the National Cereals and Produce Board (NCPB). In the future, the functions of the NCPB are expected to be limited to market stabilization and maintenance of the strategic reserve.

In Tanzania, liberalization of the grain trade has been pursued, raising the private sector's participation in this trade to 90 percent in 1993, while leaving prices to be determined by market forces. As in Kenya, the government's role was restricted to the maintenance of a strategic reserve. Input distribution has also been liberalized. United States Department of Agriculture (USDA) estimates of producer subsidy equivalents (PSEs) show that, in 1992, both Tanzanian and Kenyan agricultural producers were actually subsidized, reversing a longstanding trend of overall (direct and indirect) taxation of the sector.

In Zambia, increased transport costs and mixed signals on the part of the public sector regarding its role in maize marketing resulted in the private sector purchasing and transporting less than the available quantity of maize. The government had to resume grain marketing through agents. In an effort to redress the poor performance of the agricultural sector, the Zambian Government, in cooperation with donor agencies, has initiated (November 1992) an ambitious Agricultural Sector Investment Programme (ASIP) which will establish agricultural sector objectives, strategies and policies and a detailed investment programme for each subsector. It will also harmonize and coordinate donor-funded agricultural projects to optimize the utilization of financial and material resources.

In Uganda, price decontrol coupled with the liberalization of agricultural trade has increased private sector participation in agricultural marketing and reduced the role of the public sector in those activities. Coffee procurement for export by private traders increased from nil in 1990/91 to 3 percent in 1991/92 and 44 percent in 1992/93. Private traders exported lint cotton for the first time (8 percent of total exports) and handled 11 percent of tea exports. There has also been an enhanced role of the private sector in the importation of agricultural inputs, while the government's role is mostly regulatory. Meanwhile, the liberalization of the investment code and the abolition of export taxes have resulted in a large increase in the applications and proposals for investments in the country.

A mixed set of policies were followed in Nigeria. On the one hand, the free float of the naira (N) was stopped and the currency was pegged at N 22 to the US dollar, reversing the floating currency policy that was followed in the last few years. Interest rates were also fixed. On the other hand, the ban on wheat imports, enacted with the onset of the structural adjustment programme in 1986, was largely relaxed.

Seed production and marketing were liberalized in Malawi as part of the government's effort to encourage private participation in those activities.

Zimbabwe and Botswana are taking measures to accelerate recovery from the recent drought and prepare for eventual future droughts. In Zimbabwe, high priority is given to the agricultural and water sectors (the construction of dams and irrigation schemes), while labour-intensive rural projects are being set up in Botswana to provide employment and income opportunities for the victims of the last drought.

Devaluation of the CFA franc

On 11 January 1994, at the end of a two-day summit in Dakar, Senegal, the 14 African countries of the franc zone announced a devaluation of the CFA franc, to take effect from 12 January 1994. The fixed exchange rate with the French franc went from a rate of CFAF 50 per French franc, which had remained unchanged since 1948, to CFAF 100 per French franc. At the same time, the Comorian franc was devalued from CF 50 to CF 75 per French franc. The devaluation in no way affects the institutional framework or mechanisms of the franc zone, which remain in place.

The African franc zone comprises 13 countries (excluding the Comoros which has its own central bank) which are grouped into two separate monetary unions, each with its own central bank. The West African Monetary Union (UMOA) - now the West African Economic and Monetary Union - comprises Benin, Burkina Faso, Côte d'Ivoire, Mali, the Niger, Senegal and Togo. The second group constitutes the Bank of Central African States (BEAC), the members of which are Cameroon, the Central African Republic, Chad, the Congo, Equatorial Guinea and Gabon.

Each of the two groups has its own separate currency, issued by the central bank. Both currencies are commonly referred to as the CFA franc. The functioning of the African franc zone is based on the free convertibility of the CFA franc into French francs at a fixed rate guaranteed by the French Treasury. Each of the two central banks, as well as the Banque centrale des Comores, runs a so-called operations account with the French Treasury, into which they are obliged to deposit 65 percent of their foreign exchange reserves. The convertibility of the CFA franc into French francs is supported by the possibility of overdrafts on the operations accounts. Interest is charged on overdrafts and paid on credit balances. In addition, the rules call for the central banks to implement restrictive monetary policies in the case of the operations account balances failing below a certain level. There are also limits on credit that can be accorded by the central banks to governments.

The franc zone arrangements have provided the African member countries with a stable framework for macroeconomic policies. They have secured tow rates of inflation, comparable to industrial country inflation rates and significantly below the levels experienced on average by the non-CFA African countries. Until the mid-1980s the CFA countries also enjoyed sustained economic growth, with the average annual rate of GDP growth calculated by the International Monetary Fund (IMF) to be 4.6 percent in the period 1975-85. In the following years, however, their economic growth stagnated. Average annual changes in GDP in the CFA countries for the period 1986-93 is indeed estimated by the IMF to be only 0.1 percent, compared with a non-CFA average in Africa of 2.5 percent.

The problems confronted by the area since the mid-1980s had their inception in two major external shocks. From 1985 onwards, the member countries suffered a sharp deterioration in terms of trade. This was due to sharp declines in world market prices for main CFA commodity exports such as cocoa, coffee, cotton and petroleum. Indeed, during the second half of the 1980s, according to IMF estimates, the external terms of trade of the CFA countries worsened by almost 50 percent. Problems were exacerbated by a concomitant appreciation of the real effective exchange rate of the CIA franc, as the dollar depreciated significantly and developing country competitors in Asia, Latin America and Africa devalued their real effective exchange rates in response to the deterioration in their terms of trade. The result was a sharp worsening in the external competitiveness of the franc zone countries.

The period since the mid-1980s has seen the CFA countries engaged in efforts of internal adjustment, relying on domestic macroeconomic and structural policies only, and not a nominal devaluation. Although country experiences differ to some extent, on the whole these efforts have not been successful. The period has been characterized by a long and protracted stagnation of economic growth and a consequent sharp decline in per caput GDP. Government balances have also suffered as fiscal revenues, traditionally heavily dependent on the export sector, have declined. The social impact of the prolonged stagnation has been extremely harsh.

The Bretton Woods institutions (along with many other analysts) estimated that the CFA franc was significantly overvalued and that, although not sufficient, a devaluation was a necessary element in any adjustment effort with prospects of success. Still, the extent and durability of any benefit from the devaluation will depend on supporting domestic policy measures. in particular, tight monetary, fiscal and wage policies are critical to control inflationary pressures following the devaluation.

For the UMOA countries, the devaluation was accompanied by the signing of a treaty which transformed the monetary union into the West African Economic and Monetary Union (UEMOA). The treaty was signed on 10 January 1994 and provides a new institutional framework for promoting the regional integration and coordination of economic and sectoral policies. In the BEAC zone, a similar project has been under study since 1991.

As for any devaluation, that of the CFA will increase the relative prices of tradables vis-à-vis non-tradables. Thus, prices of imports will increase in CFA francs, as will export prices, while there will be no initial impact on CFA prices of non-tradables. The effect will be an expansion of domestic production of tradables, owing to the improved relative price structure, accompanied by a compression of domestic demand for tradables. The trade balance will thus be positively affected both on the export and the import side.

The effectiveness of the devaluation in bringing about the described changes will depend on accompanying policy measures. First, as already mentioned, tight macroeconomic policies are essential to prevent the initial increase in prices of imported goods from starting off an inflationary spiral. Further, structural policies can contribute to enhancing the foreseen supply response and ease the factor reallocation process. Such policies would include domestic liberalization of labour, capital and product markets and the removal of constraints to competition on such markets. These would be combined with trade policy reform aimed at liberalizing export and import regimes. Other measures would be legal reforms, tax reforms and other reforms aimed at stimulating private investment in the medium term, along with increased public investment to provide supporting infrastructure and services.

Effects on agriculture

Generally, countries depending on agricultural exports should be able to increase export earnings through an expansion of export volumes resulting from the increased domestic producer prices. If the full effect of the CFA devaluation were to be passed on to producers, CFA prices would theoretically double. One major issue is, however, the extent to which the absence of effective competition in marketing and transport services may cause the CFA price increases to be largely absorbed by private intermediaries or parastatals rather than feeding through to primary producers. Also, the less crop production is dependent on internationally traded inputs, the stronger the incentive for an expansion of volumes will be.

For a number of products, such an expansion of African franc zone exports could be achieved without a significant impact on world market prices, owing to the small market share attained by the CFA countries. For products in which CFA countries have a significant share of the world market, the situation is different. This is the case for cocoa, of which Me d'Ivoire is the world's largest producer, with almost one-third of total world production, and which is also among the most important export items of Benin, Cameroon and Togo.

For food crops, the devaluation could lead to increased import substitution as domestic production expands. This would be, in particular, the case for rice in West Africa. Currently, rice production in the seven UEMOA countries covers close to half of domestic consumption. Annual imports are roughly in the magnitude of about 1 million tonnes, corresponding to an annual import bill In the order of $250 million. There are, however, significant differences between the rice sectors of the various countries and in production systems across the area as well as in their dependence on imported inputs. Prospects for expanding production consequently differ. Generally, prospects appear favourable for rain-fed rice production, which is less dependent on imported inputs and for which cultivated areas can be relatively easily expanded, while the possibilities of expansion for irrigated rice are limited in the short term. Higher costs of imported food could also induce changes in consumption habits, for example the substitution of millet and sorghum for rice. Consumption of roots and tubers may likewise increase in coastal West African or Central African countries.

Two other sectors that are liable to receive a stimulus to production are forestry and fisheries. Timber is a major export in several of the CFA countries (Cameroon, the Central African Republic, the Congo, Me d'Ivoire, Gabon) and the devaluation will provide enhanced incentives for commercial timber production. Fisheries are particularly important for Senegal, for which fresh, frozen and processed fish account for a sizeable portion of export earnings.

The devaluation will have major distributional and social implications and will affect the various geographic areas, economic sectors and social groups in different ways. Sectors of the economy and production systems, making limited or no use of internationally traded inputs and services, will be relatively advantaged in terms of costs of production. Also, the devaluation may affect urban and rural incomes differently. Generally, for countries that are highly dependent on agricultural exports, rural real incomes should be positively affected by the increased profitability of cash crop production. Urban dwellers, on the other hand, will tend to see their real incomes negatively affected by the increase in prices of imported goods (including foodstuffs), consumed mostly in urban areas. The short-term social implications could thus be highly negative on the urban poor. Consequently, social safety nets and the improvement of basic social services would appear to be necessary accompanying measures to the devaluation.

Finally, the devaluation of the CFA franc may have a certain environmental impact. The improved profitability resulting from the devaluation may lead to the intensification of crop and livestock production, with possible detrimental environmental effects, although the increased cost of imported inputs could limit somewhat the scope for crop intensification. The enhanced profitability of agricultural production might also represent an increased incentive for the conversion of forest land to agriculture. The improved incentives for commercial wood production could also increase the pressure on forests, while the same could be the case for fish resources. The devaluation would thus appear to strengthen the need for appropriate resource management policies in both sectors.

In conclusion, rather than being a solution in itself to the serious economic problems of the African franc zone, the devaluation of the CFA franc represents an opportunity which, if accompanied by appropriate macroeconomic, structural and social policies and by adequate assistance from the international community, could help put the CFA countries back on the path of economic growth.

Ghana

Ghana has been for some time the centre of attention of the development and donor community, since it has implemented stabilization and structural adjustment more consistently than any other country in sub-Saharan Africa. This report follows the evolution of the economy since independence, analysing the factors that led to the economic crisis, the reform measures and their effects and the economy's future prospects. Particular emphasis is given to the role of macroeconomic policies in shaping the environment for agricultural growth. it is shown that, although macroeconomic and exchange rate policies were determining factors in the decline of the agricultural sector, a reversal of such policies may not be sufficient in itself to revive agricultural growth.

General characteristics and economic setting

Ghana spans an area of 238537 km² and has a population of about 16 million, according to the mid-1991 UN estimates. Population growth was estimated to be 2.6 percent between 1961 and 1992.

Agriculture's share in GDP, about 42.4 percent, is declining, as other sectors have grown faster in recent years. About 13.6 million ha or 57 percent of total land area is classified as suitable for cultivation; approximately one-third is actually cultivated. There are big regional differences in soil quality and rainfall patterns.

Agriculture employs about 49.1 percent of the economically active population (EAP) (1991 data). The EAPs share in agriculture is declining, although it is increasing in absolute numbers (from 2.3 million in 1980 to 2.8 million in 1991).

Although cocoa is the dominant commodity, its share in agricultural GDP has been halved in the last ten years (from 30 to about 15 percent) while the share of food crops has been increasing. FAO's index of food production in Ghana shows increases from 100 in 1979-81, to 125 in 1988 and to 160 in 1992. Ghana is self-sufficient, or nearly so, in roots and tubers, plantain, fresh fruit, vegetables and eggs. its main imports are wheat (not produced in the country), rice, maize, dairy, fish, edible oils and sugar.

Agriculture accounts for approximately 35 percent of total exports; cocoa beans and cocoa butter make up some 70 percent of total agricultural exports. Since 1992, gold has become the top foreign exchange earner (40 percent), overtaking agriculture. Forestry products account for about 12 percent of total merchandise exports. A number of agricultural commodities (about 50) are classified as nontraditional exports (cola nuts, pineapples, cotton seed, natural rubber, yams, palm kernels, etc.). Their contribution to overall exports averaged 3 percent between 1988 and 1992. Agriculture now contributes about 11 percent to government revenue, down from 26 percent in 1987.

Ghanaian agriculture is mainly rain-fed and dominated by smallholders, using traditional production methods. Traditional farming systems using the hoe and the cutlass prevail, while bullock farming, although still rare, is increasingly practised. Only about 0.2 percent of all cultivated land is under irrigation. There are some large farms and plantations producing rubber, coconuts and oil-palm, while a few produce rice, maize and pineapples.

The roots of economic crisis. When Ghana became independent in 1957, it was one of the richest countries in Africa. It had an established manufactured goods sector, it exported minerals (especially gold) and it was the world's leading exporter of cocoa, which provided about 60 percent of the country's export earnings. A combination of negative exogenous shocks and ill-focused and/or badly implemented economic policies caused a turnaround of the country's economic fortunes and prospects. In the ensuing economic crisis, macroeconomic policies were crucial and their effects on agriculture were critical. As a result, by the early 1980s the country was on the verge of economic collapse and drastic policy reform measures had to be taken to turn the economy around.

Macroeconomic policies before 1983

Following independence, Ghana adopted a development model which emphasized import substitution and rapid industrialization supported by the erection of high protective tariff and non-tariff barriers to protect infant industries. The public sector was given a prominent role in the development process, Including direct participation in the production and distribution sectors. Macroeconomic policies emphasized fiscal expansion to support public investments and current expenditures for an increasing civil service.

The country's fiscal receipts were heavily dependent on the cocoa revenue. Fuelled by the windfall receipts from high cocoa prices between 1953 and 1957, government expenditures increased dramatically during those years and kept increasing throughout most of the period up to 1983. A large part of current expenditures supported an increasingly bloated public sector, including many unproductive and fictitious (ghost) workers. As most public enterprises that constituted the cornerstone of import substitution policies incurred heavy losses, they had to be supported from the government budget.

Declines in international cocoa prices after 1957 and the heavy domestic taxation of cocoa (see The cocoa sector, p. 107), reduced cocoa profitability and eventually production, leading to declines in fiscal revenues that were not matched by reductions in government spending. Thus, the budget surplus of 3 percent of GDP in 1955-57, became a deficit of 4 percent of GDP during the period 1958-71, rising to 10.1 percent for the period 1971-75 and 7.5 percent for the period 1976-82. During the same period, the domestic savings rate was almost halved. Deficits were mostly financed by a highly accommodating monetary policy, with the Bank of Ghana extending large amounts of credit to the government. In certain years (for example 1979 and 1982), the primary source of monetary growth was direct lending by the Bank of Ghana to public enterprises. The money supply grew by an average of 40 percent between 1971 and 1982, giving rise to high inflation which ran at a rate of more than 50 percent per year in the decade before 1982 and reached 123 percent in 1983.

Increases in total imports, both by private importers and by the government to implement its capital-intensive investment programme, could not be met by foreign exchange receipts. Pressures on the country's current account appeared as far back as the beginning of the 1960s.

The exchange rate policies of successive governments up to 1983 epitomize the macroeconomic mismanagement in Ghana. A major characteristic of economic policy was the "sanctification" of the fixity of the nominal exchange rate. This was exaggerated to the point that attempts to devalue the currency caused governments to be overthrown. In the face of rising inflation, the exchange rate policy resulted in an overvalued real exchange rate and a gap between the parallel market and the official rate, ranging from an average of 17 percent in 1958-66 to 68 percent in 1967-72 and 925 percent in 1973-83.

Policies for the agricultural sector

The cocoa sector. The importance of cocoa for the Ghanaian economy and for its macroeconomic balances (as a source of both foreign exchange earnings and tax revenues) makes the performance of the cocoa sector a determining element in the overall performance of the economy. The macroeconomic policies discussed above provided disincentives for cocoa producers. The overvalued real exchange rate shifted domestic terms of trade against all tradable commodities, but agricultural exports were most affected as industrial tradables, were protected through tariff and non-tariff trade barriers. Policies directed at cocoa often added to the negative effects of macroeconomic and exchange rate policies.

The purchasing of cocoa in Ghana was handled by the Cocoa Marketing Board (CMB), established in 1947 to combat cocoa price volatility. The system provided preannounced fixed producer prices and centralized marketing. The CMB levied export duties on cocoa bean exports and local duties on cocoa bean deliveries to local processing factories, and passed those taxes on to the government. The government approved allowances for the CMB's operational expenses.

In 1965, the CMB was required to transfer all operating surpluses to the central government, thus eliminating the distinction between the CMB surpluses and payments to the government. Government revenue from cocoa was the "remainder" from the cedi (¢) equivalent of the f.o.b. price (at the official exchange rate) after payments to farmers and marketing costs had been covered.

Gradually, the cocoa sector became a major and convenient source of general tax revenue. It provided one-quarter to one-third of total government revenues in the 1960-1980 period. Over time, the size of the CMB increased, as did cocoa marketing costs. By 1982, the CMB employed some 105000 workers. In the face of large fixed costs and increasing inflation, the share of total sales going to marketing costs increased. Thus, according to Stryker (footnote 19, p. 107), in 1981/82, with the parallel exchange rate about 15 times the official rate, the costs of the CMB (excluding payments to farmers) exceeded the value of f.o.b. sales at the official exchange rate.

Because the producer price was preannounced, it could turn out to be lower or higher than the price the farmer would have received if the payment was made at the time of the sale (assuming the same marketing cost). In the latter case, the government's revenue was negative. Even when that was true, the absolute real price to the farmer was too low relative to its level at-the equilibrium exchange rate. The real price to farmers for cocoa decreased from ¢355 per tonne in 1962-72 to ¢ 165 in 1973-83. In addition to the price-based taxation, the cocoa marketing system was fraught with inefficiencies that resulted in prolonged delays in payments to farmers.

Food crop policies. Imported food commodities that were considered essential (maize, rice, wheat, sugar and vegetable oils) were imported by the Ghana National Trading Corporation (a state monopoly) and were distributed either by the corporation's own shops or by licensed wholesalers. The retail price was determined as, the c.i.f price (calculated at the official exchange rate), augmented by a tariff, marketing costs and costs of working capital. The retail price was controlled, the controls being more effective at the corporation's shops and less so at the outlets of the wholesalers.

Because open market food prices were generally higher than controlled prices, especially with the onset of inflation, plenty of opportunities existed for rent seeking and corruption. Part of the imported foodstuffs were finding their way to the open market, and licence holding became a lucrative activity. Open market prices in the late 1970s were up to five times the official price. Ghanaians spent an enormous amount of time to obtain access to the scarce goods at low prices and profiting from the difference between the official and open market prices (an activity known as the kalabule system). There were no policies that directly affected other non-tradable foods. Indirect effects from macroeconomic policies on non-tradable food crops were in terms of high transport costs and deteriorating transport infrastructure (see Overall and agriculture-specific effects of pre-1983 policies). Although time is great uncertainty regarding the trend of food prices in Ghana, it is unlikely that real food prices suffered large declines as a result of direct price intervention.

Policies on inputs and agricultural services. Public policy on inputs focused on subsidization of modern inputs and credit. Direct subsidies on imported modern inputs such as fertilizer, sprayers and chemicals were added to the indirect subsidy resulting from exchange rate overvaluation. The effects of such subsidies were uneven across the agricultural sector because not all farmers had access to the subsidized inputs. Government investment in agriculture was biased towards the large-scale mechanized sector, while research and extension for small farmers were neglected.

Overall and agriculture-specific effects of pre-1983 policies

Ghana's economic decline precipitated during the later part of the 1970s and the early 1980s. Until then, various government controls on prices and imports were able to mask the real state of the economy to a degree and keep the deteriorating macroeconomic situation under some control. A turnaround in world cocoa prices after the sharp increase in 1977 and 1978, together with concomitant declines in cocoa production, reduced government tax revenues, aggravated the budget deficit and inflation and reduced foreign exchange receipts and the ability to import. As real producer prices deteriorated, increasing quantities of cocoa were smuggled out of the country and nonproductive rent-seeking activities became widespread. The deficit rose to 127 percent of total government receipts in 1978, while inflation reached 116 percent per annum in 1977 and 123 percent in 1983. Ghana's infrastructure was run down, transport capacity was reduced by a lack of spare parts and lubricants and social services were in a state of collapse.

Although GDP grew by an average of 0.2 percent per year between 1970 and 1980, it fell by 6.1 percent between 1979 and 1982 (-3.1 and -9.4 percent, respectively, on a per caput basis). Export volumes fell by 8.4 percent and agricultural GDP by 1.2 percent annually in the 1970s. The import substitution industrialization development strategy proved to be self-defeating: declining export revenues meant that Ghana could not import intermediate inputs and raw materials essential for other sectors. Industry's decline was equal to that of agriculture in some industries, utilization of capacity fell to 10 to 15 percent. A lack of investment in the gold industry damaged another source of foreign revenue for the country.

By 1982, Ghana's comparative advantage in cocoa production was severely eroded. in the early 1970s, it had been a leading cocoa exporter with more than 30 percent of the market but, by 1981/82, the share had been almost halved. The government was unable to continue increasing the salaries of the oversized public bureaucracy. This, coupled with high inflation, caused real wages to decline drastically. In 1983 the real minimum wage had fallen to about 13 percent of its 1975 value. The sharp declines in civil service salaries caused severe discontent and a massive exodus of skilled personnel.

In the 1978-1982 period, successive governments attempted to save the formal economy from complete collapse. A number of measures were initiated in 1978, including a devaluation of the cedi to ¢2.75 per US dollar, currency reform, the introduction of an austerity budget and increases in the price of cocoa. They also included an intense anti-corruption campaign and tighter monitoring of compliance with price controls. However, these economic measures were probably "too little too late".

In 1982 and 1983, a number of exogenous shocks caused further hardship for the Ghanaian economy. Nigeria cut oil shipments because of Ghana's inability to pay. Poor rains in 1982 and 1983 caused a severe shortfall in maize production, which tightened food supplies and increased prices. The drought also caused a major shortfall in the hydroelectric power on which Ghana depends heavily. The situation was exacerbated by the influx of -one million Ghanaian workers who were forced to return from Nigeria.


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