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Deals and DevelopmentThe Political Dynamics of Growth Episodes$

Lant Pritchett, Kunal Sen, and Eric Werker

Print publication date: 2017

Print ISBN-13: 9780198801641

Published to Oxford Scholarship Online: December 2017

DOI: 10.1093/oso/9780198801641.001.0001

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Political Settlements and Structural Change

Political Settlements and Structural Change

Why Growth Has Not Been Transformational in Ghana

(p.159) 6 Political Settlements and Structural Change
Deals and Development

Robert Darko Osei

Charles Ackah

George Domfe

Michael Danquah

Oxford University Press

Abstract and Keywords

This chapter explores the extent to which political settlements interacting with the rents space affect the nature of the deals space and consequently help explain economic growth in Ghana. The discussions are centred around four break points and therefore five growth episodes for Ghana: pre-1966, 1966–74, 1974–83, 1983–2001, and 2001–14. First, there are signs that the post-2001 period has been more ordered and open than the first twenty-five years after independence. Second, the political settlement has also changed somewhat over the years, from a dominant to a more competitive type. However, it is argued that political patronage remains rife. Third, the chapter finds that the interplay of political settlements and rent space has been important in shaping the nature of the deals space in Ghana. Finally, it highlights two types of positive and negative feedback loop relating to these variables over the years.

Keywords:   economic growth, political settlements, deals environment, Ghana, rent space

6.1 Introduction

The typical economic growth story of Ghana starts with how, for the first two-and-a-half decades after independence, growth experienced significant fluctuations. The era of structural adjustment and Ghana embracing multiparty democracy followed these growth fluctuations. This latter period has seen more stable and improved growth (Killick, 2010). Writing on the growth performance of Ghana, authors such as Bogetic et al. (2007) argue that the factors which explain Ghana’s growth include high commodity prices, increased investments, an improved policy environment, and improved aid effectiveness. They subsequently argue that the country could sustain its medium-term growth prospects if it invested more in infrastructure, improved the investment climate as well as public sector efficiency, and maintained macroeconomic stability. This view is pervasive in the wider economics literature on Ghana (see, inter alia, Aryeetey and Harrigan, 2000; Osei and Quartey, 2014; Osei, 2012).

In Fosu’s (2012) characterization of the responsiveness of the country to economic reforms in the 1980s, he argues that positive macroeconomic changes occurred because of the reforms. He makes a further point about the political economy–growth nexus, arguing that the country had reached ‘the growth-enhancing democratization regime’ (Fosu, 2012: 496). This political economy–growth connection tends to be implicit in many of the writings on (p.160) Ghana’s economic growth. An oft-cited argument is that political stability will encourage investment and therefore growth (see, for instance, Darko, 2010). Taken to its logical extension, this argument would suggest that growth maintenance occurs with political stability, and consequently a politically stable country will allow structural transformation of the economy to take place in a way that makes it less fragile. Unfortunately, this has not been the case for Ghana, and growth has not translated into significant changes in the structure of the economy (Osei, 2012; Killick, 2010). Indeed, despite macroeconomic instability during periods closely aligned with electoral cycles, Ghana has remained a politically stable country. However, the progress that was anticipated in the late 1980s and early 1990s has not materialized. This suggests that a greater investigation into the political economy–growth nexus is needed, to understand better how the country can more effectively consolidate the initial gains made through economic growth.

In this chapter, the deals and development framework conceptualized in Chapter 1 is used to theorize that the nature of political settlements in a country has a bearing on the environment for business (deals environment), and that in turn affects the very factors that are critical for growth to be accelerated and maintained. In other words, this chapter explores the extent to which the nature of the political settlement, interacting with the rents space, has influenced the nature of the deals environment and contributed to Ghana’s growth and transformation story.

The chapter is organized as follows. Section 6.2 discusses Ghana’s growth episodes over the post-independence period to date. As part of that discussion, recent trends in growth as well as structural transformation will be examined. In Section 6.3, the framework discussed in Chapter 1 is used to explain the growth episodes. This is done under five main themes, namely: the nature of the deals environment over the identified growth episodes; the rents space in Ghana; the evolution of politics and political settlements in Ghana; how political settlements and the rents space have contrived to affect the nature of deals environment; and the nature of feedback loops for all these variables. Section 6.4 presents a summary of the main findings and some concluding comments.

6.2 Ghana’s Growth Episodes

As discussed in Chapter 1, Kar et al. (2013) combine a statistical and an economic-based filter to identify major trend shifts in economic growth in 125 countries over the period 1950–2010. For Ghana they find five growth episodes over the period covering the immediate post-independence period to date. More specifically, they identify transitions between breaks in growth (p.161) over the years 1966, 1974, 1983, and 2002. Apart from the 1974 break, all the identified breaks have been associated with an increase in economic growth (see Figure 6.1). Indeed, these breaks are consistent with those that have been implicitly identified, albeit in an ad hoc way, in research on Ghana (see, inter alia, Jedwab and Osei, 2012; Killick, 2010). As can be noted from Figure 6.1, three of these breaks are related to the period when there was high volatility in the Polity index (which is extensively used in the literature as a measure of democracy) and therefore political instability was high in Ghana. This is not to suggest any causation, but rather to highlight the correlation between the Polity index and growth over the years. However, the level of democracy alone is not adequate in explaining these identified growth episodes. Therefore, this chapter seeks to analyse Ghana’s growth story using the conceptual framework discussed in Chapter 1 and situate the discussions within these identified growth phases.

Political Settlements and Structural ChangeWhy Growth Has Not Been Transformational in Ghana

Figure 6.1. Growth episodes in Ghana, 1960–2014

Source: World Bank, World Development Indicators, 2015 and Polity IV data.

Notes: The vertical lines reflect the periods when the breaks in growth are identified in Kar et al. (2013); lgdp is log of GDP, and polity2 is the Polity 2 measure from Polity IV data.

6.2.1 Growth Without Structural Transformation

Trends in Economic Growth

We note that between 1960 and the early part of the 1980s real GDP growth fluctuated around zero. Indeed, real GDP growth over this period averaged about 1.1 per cent, which translated into a negative per capita growth of −1.3 per cent. From 1983 onwards, the trend did change positively, with a marked reduction in the fluctuations in real GDP growth and a positive per capita (p.162) GDP—real GDP averaged about 4.3 per cent over the period 1983–99. This change in the economic fortunes of Ghana during the early 1980s has been widely investigated within the literature (see, inter alia, Killick, 2010; Kraev, 2004; Jedwab and Osei, 2012). This literature concludes that a combination of policy measures alongside increased foreign aid flows were the catalysts for changing the fortunes of the country. This continued right through to the late 1990s. The growth situation has improved further since 2001. The period from 2000 to 2012 saw an increased acceleration in the growth rate—it increased from the 1983–99 annual average of about 4.4 per cent to about 6.5 per cent. The very tail end of the sample has, however, seen a slowdown in this growth, reaching under 5 per cent in 2014.

It is shown in Figure 6.2 that economic growth in Ghana picked up from the mid-1980s and showed some features of growth maintenance. Unfortunately, this has not been associated with a marked transformation of the economy.

Political Settlements and Structural ChangeWhy Growth Has Not Been Transformational in Ghana

Figure 6.2. Evolution of real GDP for Ghana, 1960–2014

Source: World Bank, World Development Indicators, 2015.

Note: The vertical lines reflect the periods when the breaks between growth episodes are identified.

Figure 6.3 highlights the contribution of GDP shares for Ghana over the period 1960 to 2014. The importance of agriculture was reduced over this period, overtaken by the services sector from the early 1980s. Importantly, two features of the trends in GDP shares are worth pointing out. First, the services sector has become more important relative to agriculture over the years (this is especially apparent after GDP revisions undertaken by the government in (p.163) 2010). Second, manufacturing shares have actually declined over the years. Do these trends in GDP share reflect the changing structure of the economy?

Political Settlements and Structural ChangeWhy Growth Has Not Been Transformational in Ghana

Figure 6.3. Evolution of GDP shares in Ghana, 1960–2012

Source: World Bank, World Development Indicators, 2015.

The literature on economic development (for example, Herrendorf et al., 2013) suggests that when a country is developing, there is initially a manufacturing sector boom, with the contribution of agriculture to national income declining, while that of other sectors, especially manufacturing, rises. In the case of Ghana, we observe a declining agriculture sector that is associated with an increasing share of the services sector, while the manufacturing sector, at best, has been stagnant. (The rise in industry shown in Figure 6.3 captures the petroleum boom; manufacturing is a subset of industry.) This suggests that Ghana might have leapfrogged the manufacturing sector boom stage, which is typically associated with an increased supply of jobs for the many that are leaving the agriculture sector. According to McMillan and Rodrik (2011), structural transformation is growth-enhancing if it is associated with a shift of resources from low-productivity sectors to high-productivity sectors. Jedwab and Osei (2012) have argued that labour from the declining agriculture sector has not necessarily moved to highly productive wage employment sectors in services and manufacturing. Rather, they have moved to the equally low-productivity areas of the services sector. In essence, Ghana has urbanized without industrialization (Gollin et al., 2013).

Trends in the Structure of Ghana’S Exports

As highlighted in Figure 6.4, even though the dominance of cocoa has decreased, primary products continue to dominate Ghana’s exports. The (p.164) (p.165) (p.166) share of raw cocoa beans decreased from about 65 per cent in the early 1960s to about 11 per cent in 2013. The start of oil production, which was about 24 per cent of exports in 2013, means that all other items have had their shares reduced. In the early 1960s, over 80 per cent of all exports came from primary produce—cocoa, crude minerals, and timber. By 2013 this list had expanded, but it was still dominated by primary exports, notably gold, petroleum, and cocoa beans, butter, and paste.

Political Settlements and Structural ChangeWhy Growth Has Not Been Transformational in GhanaPolitical Settlements and Structural ChangeWhy Growth Has Not Been Transformational in Ghana

Figure 6.4. Trends in the composition of exports from Ghana, 1962–2013

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

The Hausmann et al. (2013) economic complexity measure captures the productive structure of a given economy. It reflects the stock of knowledge that the country possesses and measures this through the composition of the output of any given country. In other words, the index captures the capabilities of the country by using the array of products that it produces (Hidalgo and Hausmann, 2009).

Figure 6.5 plots the economic complexity of Ghana, as well as that for the 1st and 100th ranked countries. This graph highlights that the trend for Ghana over the years supports the argument made with respect to the structure of the Ghanaian economy—that the composition of GDP has changed, but the structure remains largely unchanged. There are three important features relating to the structure of the Ghanaian economy since the early post-independence period that this graph shows. First, the economic complexity measure for Ghana in 2012 is not considerably different from what it (p.167) was in 1960. Second, the measure for the 100th ranked country (based on the 2010 economic complexity data) has caught up with Ghana in terms of productive capacity over the period. Finally, there seems to have been little convergence between Ghana and the highest ranked country over the years. These trends suggest that, in spite of the changes in the composition of output in Ghana, true structural transformation, of the kind suggested by McMillan and Rodrik (2011), has yet to occur.

Political Settlements and Structural ChangeWhy Growth Has Not Been Transformational in Ghana

Figure 6.5. Trends in the Economic Complexity Index for Ghana, 1960–2012

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

6.3 Explanation of the Growth Episodes

6.3.1 The Deals Environment in Ghana

Using the conceptual framework developed in Chapter 1, we provide an assessment of the nature of the deals environment in Ghana. As noted in the framework, the deals environment remains central to firms’ decisions about investment, production, innovation, and, consequently, sustained growth. Generally, openness in the deals space facilitates new firm entry and drives competition. The result is that there is an increase in the production of more complex products and a shift of resources from low-productivity sectors to high-productivity sectors. In other words, the movements within the deals space may explain the growth path for countries. The evolution of the deals space is not linear and so it is not automatic that institutions will evolve, independently, from one state to the other over time. The following section examines the evolution of the deals environment in Ghana in relation to the previously identified growth episodes.

Deals Environment (1957–66)

Following on from Ghana’s independence from the United Kingdom in 1957, the regime led by Kwame Nkrumah subscribed to a central planning approach for the economy. While Ghana did experience a significant and sharp growth increase at the end of this period, this success was short-lived. As part of the central planning process, legislative controls were imposed on imports, capital transfers, licensing of industry, minimum wages, the rights and powers of trade unions, prices, rents, and interest rates (Killick, 2010: 56–60). Unfortunately, the capacity of the state to regulate, negotiate, and enforce these legislative controls was low. This lack of transparency, coupled with weak institutions, meant that you needed to ‘know someone’ to be able to get the government contracts. Therefore, for businesses that dealt with government agencies, connections really did matter. This unfortunately encouraged and entrenched a deals space that was closed but somewhat ordered for the formal sector. For the informal sector the deals space was largely open but disordered (p.168) and was therefore limited in scope in terms of opportunities to expand. It is not surprising that this period experienced a growth decline in 1966.

Deals Environment (1966–83)

Following the military overthrow of Nkrumah’s civilian government in 1966, the ideological stance changed to one that was more pro-private business. The new government, led by Kofi Abrefa Busia, introduced reforms to liberalize exporting sectors of the economy, among other policies (see Frimpong-Ansah, 1992). It is fair to say that the government at the time sought to make the deals space more open by liberalizing not just trade, but also devaluing the exchange rate to reflect the market fundamentals. This liberal stance led to the overthrow of the government in January 1972. The reforms during this period, however, did not significantly affect relations among economic agents. It is therefore reasonable to assert that, even though the intent to make the deals space more open was there, it never materialized in practice over this period. Indeed, as Killick (2010: 64) notes:

There remained much continuity after 1966; attempts to move towards greater use of the market mechanism were half-hearted and partial; and the soldiers who overthrew Busia in 1972 rapidly demonstrated a faith in a command economy similar to Nkrumah’s, even though they displayed little interest in his socialism.

The 1972–83 epoch was one of sustained deterioration in the economy under five different governments. The policies of the period emphasized import substitution, underpinned by a restrictive foreign exchange regime, quantitative restrictions on imports, and price controls, with the state playing a major role as producer. Very few business leaders had the political connections necessary to make deals. However, even for the connected, they could not be certain that officials would deliver. Indeed, this problem was exacerbated by the capricious nature of the changes in government, coupled with the haphazard way in which policies were implemented. It is little wonder that Killick (2010: 398) describes this period as the ‘black years’. The deals space was largely disordered and closed in this period, which was reflected in highly variable growth.

Deals Environment (1983–2001)

The beginning of this period was characterized by Ghana undertaking a World Bank-sponsored structural adjustment programme (SAP). Under the SAP, exchange rate policy, fiscal and monetary policies, and trade policies all saw dramatic changes. There was a renewed push for market-friendly interventions, and the policy prescription of ‘stabilize, privatize, and liberalize’ (Rodrik, 2006: 973) was applied within Ghana to numerous infrastructure projects in telecommunications, roads, and power. Generally, and for the formal sector, the deals environment become more ordered over this period, (p.169) yet remained closed. However, the formal economy’s dependence on the state lessened somewhat during this time. One of the immediate benefits of the SAP was a turnaround in growth. This was made possible due to the injection of foreign aid, as well as the deals space becoming partially opened (through de-controlling prices and relaxing some of the import restrictions) to allow some level of economic activity to begin.

Deals Environment (2001–12)

The period from 2001 to 2012 saw a strengthening of the judicial and legislative arms of government. Additionally, laws to guide and promote business decisions improved, with the aim of reducing reliance on personal connections to secure government contracts. One such example was the introduction of the procurement law in 2003. The act enshrined the public procurement authority that changed the bidding process for public contracts in Ghana. The more formal and transparent process meant that deals became more open. While challenges remain (see Ameyaw et al., 2012), this act was a significant leap forward from the disordered, closed nature of the deals space before.

This period saw the biggest attempted shift towards a more open and ordered deals space. Although there might be some closed deals for natural resource exporters, particularly in the mining and petroleum sector, as well as firms in energy production, deals partially opened for many firms in the local market. For instance, among businesses interviewed as part of this study, differences in opinion were evident over whether the business playing field was level, with rentiers and powerbrokers supporting the view that it was. Their focus and examples were in relation to gaining contracts from the public sector. In their view, it is important always to have good relationships with key actors in society. This, they claim, is necessary for their business growth. One of the points all interviewees agreed on was that good relationships with actors such as politicians, technocrats, and union leaders are important for business growth. They further argued that, while the relationship with low-ranking bureaucrats and union leaders is predictable and ordered, the relationship with high-ranking civil servants and politicians is less so.

6.3.2 Nature of the Rents Space in Ghana

In the framework in Chapter 1, the rents space combines with the nature of political settlements to engender the type of deals environment that prevails in a given country. In order to understand how this framework applies to the Ghana case, this section discusses the rents space using sectoral GDP contributions for 2014.

Figure 6.6 shows that workhorses (32.3 per cent) lead Ghana’s rents space, followed by powerbrokers (30.2 per cent), rentiers (28.9 per cent), and (p.170) magicians (8.7 per cent). This classification is very much consistent with Sutton and Kpentey’s (2012) enterprise map of Ghana. It is argued that the nature of Ghana’s rents space is influenced by two key factors: first, it is a resource-rich country; and second, in the last twenty-five years it has been a highly aid-dependent country. Ghana is rich in point source resources (see Auty, 2001) such as gold, diamonds, and, more recently, oil. State-owned enterprises and a few multinational companies have dominated these sectors. Additionally, Ghana has a diffuse resource in cocoa, which many smallholder farmers are involved in cultivating. However, due to the use of the state-owned cocoa marketing board, cocoa has features of a point-sourced resource, i.e. a single identifiable source of cocoa, which has meant that the rents of this sector have been captured by the state.

Political Settlements and Structural ChangeWhy Growth Has Not Been Transformational in Ghana

Figure 6.6. Contribution of Ghanaian firms to GDP

Source: Author’s estimation based on 2014 budget statement.

This resource-rich nature of Ghana has been important for the development of both the rentiers and powerbrokers. However, in the case of powerbrokers, its importance has been reinforced by the large inflow of foreign aid to Ghana. The large aid inflow has supported many social programmes, mainly channelled through the government (Osei et al., 2005). This in turn has supported domestic contractors as well as service providers, and reinforced the importance of powerbrokers in Ghana. Interviews with businesses point to the fact that connections with political elites will get a firm a contract to supply goods and services. We therefore have a situation where rentiers and powerbrokers, who control approximately 60 per cent of the economy, have strong links (p.171) with officials within government and, as a result, will typically favour a closed deals environment.

Workhorses appear to be important in Ghana, based on their contribution to GDP. However, their true influence is exaggerated by this statistic. This is due to the fact that sectors in which a majority of workhorses operate (wholesale retail traders, food crop farmers) contain a large number of small enterprises that are not well organized. Therefore, as they have no collective voice, this lack of organization, plus the high levels of competition within these sectors, means that the economic rents gained within them are almost zero. Due to these factors, firms in this sector, which are characterized by the ease of entry into these markets, favour a more open deals environment.

Magicians have remained the least important component of the Ghanaian economy and they have continued to struggle throughout the country’s economic history. This sector of the economy consists of manufacturing, services, and other non-traditional exporters. The magicians in Ghana are typically dynamic, but operate in a competitive market. They typically benefit from, and therefore prefer, an open deals environment.

In summary, firms that operate in a less competitive market setting therefore dominate Ghana’s rents space. These firms typically favour a closed deals space. Firms that would prefer a more open deals space, due to operating in a more competitive environment, constitute around 40 per cent of the economy but lack sufficient organization to influence the deals space. Consequently, the deals spaces in Ghana are skewed in favour of a closed deals environment.

6.3.3 Political Settlements and How They Have Evolved in Ghana

Political settlements, as noted in Chapter 1, refer to the balance of power between social groups and/or classes. Where the balance of power favours only a few elite members, then the economic and social choices made are likely to reflect the preferences of this group and therefore benefit them disproportionately. In other words, the ideas and beliefs of the political elite will shape the policy actions that are undertaken in any given country. The extent to which the ideas of the political elite influence policy actions will be a function of the horizontal and vertical distribution of power, as well as their own beliefs. In terms of the horizontal distribution of power, where excluded factions are weak, there will tend to be a dominant party (see Chapter 1 and or Khan (2010) for more discussion on political settlements). The nature of the political settlements will have a bearing on the policy choices that are made and consequently on the deals environment that evolves.

(p.172) In the case of Ghana, this chapter seeks to understand how political settlements and the nature of the rents space have contributed to the deals environment that exists and therefore to growth. Section 6.3.4 discusses the evolution of Ghanaian politics, and how this has in turn affected the nature of the political settlement.

Nature Of Politics and Political Settlements (1957–66)

After a few years of political agitation, the British government granted the Gold Coast independence on 6 March 1957. Prior to the declaration of independence, general elections were held on 17 July 1956. The Convention People’s Party (CPP) of Kwame Nkrumah won 57 per cent of the total votes cast and was thus granted the mandate by the British to form a government (Nohlen et al., 1999). While the CPP described itself as socialist, the main opposition, the United Party (UP), was pro-capitalist. The pre-independence agitation therefore gave way to an internal ideological wrangling between the CPP and the UP (McLaughlin and Owusu-Ansah, 1994). The country became a republic on 1 July 1960, with Nkrumah emerging victorious in the presidential elections. Shortly after this, Nkrumah nearly gained absolute political power and proclaimed himself life president. He amended the constitution in 1964 to allow him to dismiss any judge from the bench. He succeeded in controlling the judiciary, the media, the clergy, and the traditional chiefs (Boafo-Arthur, 2000). Within Ghana, he was the fulcrum around which everything happened. Most of his political opponents had to flee the country, and the few who stayed and challenged him were prosecuted under the Preventive Detention Act. Therefore, the political settlements in Ghana over this period gradually moved from being competitive around the period of independence to being dominated by the time Nkrumah was deposed in 1966 by the National Liberation Council (NLC), led by Emmanuel Kwasi Kotoka.

Nature of Politics and Political Settlements (1966–83)

The NLC assumed the executive powers of Ghana after toppling the CPP administration in 1966. The leadership of the coup justified their takeover by claiming that the CPP administration was abusive and corrupt (McLaughlin and Owusu-Ansah, 1994). Their main preoccupation, therefore, was to restore order to the inherited political settlements. Political parties were sanctioned to operate by the end of 1968. In 1969, the first competitive nationwide political contest since 1956 was held (Miller et al., 2009).

The pro-capitalist Progress Party led by Busia won the elections and took over from the NLC. This government initiated two policy measures soon after assuming office: the expulsion of large numbers of non-citizens from the country, and an accompanying measure to limit foreign involvement in small businesses. While the government became popular among local (p.173) business entrepreneurs for the introduction of these two policy measures,1 the decision to devalue the national currency in 1971 was seen as the catalyst for the instability that engulfed Ghana and Busia (Asamoah, 2014; Manboah-Rockson, 2016).

Also during this period, upon recommendation from the IMF, Busia introduced austerity measures, including a wage freeze and tax increases. These measures severely affected the middle class and the salaried workforce, and eventually precipitated protests from the Trade Union Congress. On 13 January 1972, the army staged a coup to end the Second Republic (Miller et al., 2009). Once again, the elements that favoured a dominant political settlement had prevailed.

The government’s intention of utilizing local capacity to build an independent economy was overridden by oil price hikes in 1974, a decline in cocoa output, drought, and the lack of foreign exchange. Disillusionment with the government developed and allegations of corruption, favouritism, and incompetence in the management of the economy were levelled against the new military head of state, Ignatius Kutu Acheampong, and his associates. The government’s response to the discontent was to issue a decree to forbid propagation of rumours. Additionally, a number of independent newspapers were banned, and some of their journalists detained. Disaffection with the government deepened, and in July 1978 some officers of the Supreme Military Council forced Acheampong to resign and replaced him with his second-in-command, Lieutenant General Frederick W. K. Akuffo.

Akuffo’s tenure as president was also short-lived, as Flight Lieutenant Jerry Rawlings toppled this government on 4 June 1979. Interestingly, the new military government, which called itself the Armed Forces Revolutionary Council, made sure that the planned elections took place, and Ghana returned to constitutional rule by the end of September 1979. However, after twenty-seven months in office the civilian government of the People’s National Party, led by Dr Hilla Limann, fell, once again brought down by Rawlings and his colleagues, who argued that the civilian government could not perform to expectations.

Upon assumption of executive powers on the eve of 31 December 1981, Rawlings established the Provisional National Defence Council (PNDC) and suspended the 1979 constitution, which effectively banned the existence of political parties within Ghana. This period therefore saw continued contestation of the nature of political settlements with ‘vampire’ elements (Frimpong-Ansah, 1992)—elites who maintained control over key elements of the Ghanaian economy regardless of the political administration, and managed to keep the political (p.174) settlement as a strong dominant party, as such a settlement best served their interests. The few attempts over this period to move political settlements towards a competitive one were short-lived.

Nature of Politics and Political Settlements (1983–2001)

In an attempt to solve the mounting economic problems confronting the country, the PNDC government proclaimed an SAP package, popularly known as the Economic Recovery Programme (ERP), in 1983 (Kraev, 2004). While aid immediately started flowing to Ghana with the start of the ERP, donors applied pressure on the government to open up the political process (Whitfield, 2011). In response to this, the government planned a process to return to democratic rule by 1992. Overall, Ghana enjoyed remarkable political stability throughout the period, with occasional protests, but no civil unrest, and no effective opposition to the SAPs imposed on Ghana (Kraev, 2004).

Not only did Rawlings’ National Democratic Congress (NDC) win the November 1992 presidential elections, but also a subsequent boycott of the December parliamentary elections by the New Patriotic Party (NPP) and the other opposition political parties gave way to the NDC-dominated first Parliament of the Fourth Republic. Rawlings held on to power, successfully serving two terms, which ended in 2000. The process of change in the nature of the political settlement had begun. Even though competitive elections started, the biggest change in political settlement during this period was in the ideas of the elites towards stronger faith in markets as a means of allocating resources. This in turn was somewhat driven by donors using foreign aid to shape ideas around development.

Nature of Politics and Political Settlements (2001–14)

The current economic and political climate has its roots in 1992, when the country adopted constitutional rule. After the demise of Rawlings from the political scene, John Agyekum Kufuor, who stood on the ticket of the opposition party, the NPP, won the election, and became president on 7 January 2001. He was re-elected in 2004. After eight years of absence, the NDC won the 2008 general elections. The new president, Professor Evans John Atta Mills, died in July 2012, before the end of his first term. His vice president, John Dramani Mahama, took over and won the 2012 general election to become the president of Ghana.

Many years after Rawlings left power, and even though elections have become highly competitive, the degree of political patronage remains high. Ghana’s current political system is multiparty, but the results of the various presidential elections since 1992 indicate a de facto two-party system. While (p.175) the executive wields excessive powers, the country still displays a number of features of an institutionalized democracy, which makes it a success story of democratic development in Africa (Oduro et al., 2014). There is a winner-takes-all approach to governance, which is implicitly engendered by the constitution. Even worse was the institutionalization of political patronage at the technocratic level. There have been changes in technocratic heads when there is a change in the ruling party. This compromises continuity within ministries, government departments, and agencies; and it makes technocrats less apolitical.

6.3.4 Political Settlements, Rents Space, and the Deals Environment in Ghana

It is important to recall the argument made earlier in the chapter that Ghana has experienced growth with limited structural transformation. Implicit in that discussion is the fact that the deals environment has not favoured sustained private investments for the maintenance of growth and employment creation. This chapter has argued that generally the deals environment in Ghana has been closed—being ordered in some years and disordered in others. In this section, we provide an assessment of the extent to which this environment has been produced by the interaction between the nature of the political settlement and the rents space.

In large part, the discussion of the evolution of politics in Ghana shows that political settlements have been largely dominant from the early years after independence to the 1990s. More recently, however, this has changed to one that is more competitive clientelist, albeit dominated by two political parties. Vertically also, one notes an increasing degree of power for lower-level factions. This increasing degree of power is, however, not uniform across the board and relates more to ‘party foot soldiers’. Additionally, groups such as trade unions have slowly begun to increase their influence, which in turn has led to some degree of power over policies, even during the phase when political settlements were largely dominant. Other lower-level factions, such as disability groups, have had limited influence on policy.

The uneven distribution of power at the lower levels has not favoured groups that are biased towards a more open deals environment. These lower-level factions typically seek to benefit disproportionately, and directly, from rents within the economy. Typically, party foot soldiers will push for one of their own to be appointed to a position of power. They therefore use their power to achieve this critical objective of patronage. For these foot soldiers, it is an avenue by which they can access the deals space and benefit from the limited jobs available, largely in the public sector. It is common knowledge in Ghana these days that recruitment to the public services is linked to political cronyism. For these lower-level factions, it is one of the few avenues available (p.176) to extract some part of the rents. According to an entrepreneur interviewed as part of this study, the reason why people make use of government-initiated credit facilities and yet fail to pay back their loan is because ‘we view it as payback for voting for them’.

Trade unions are no different in this regard. They will typically use their collective bargaining position to extract as much of these rents (in the form of wages) as possible for their members. Trade union members constitute a small proportion of the labour force and yet absorb a significant part of the government budget. It is no wonder that the strongest members of the trade unions have been civil servants and (private-sector) mineworkers. Most trade union agitation and negotiations are centred around wage increases, and are not always focused on ideas. Even in cases such as the economic partnership agreements (and trade generally), where they have had a position on the policy, it has been in support of an outcome that is not competitive. It is fair to say that the trade unions have not been forceful in driving some of the basic tenets of an open deals environment. This position is consistent with Asem et al. (2013), who argue that regulatory change in Ghana has been driven by external donors using foreign aid as both carrot and stick.

Business associations, such as the Private Enterprise Foundation and the Association of Ghanaian Industries, have not made great strides in pushing for change generally. Their degree of importance in the rents space is low and this limits their influence in driving change. This may be partly due to the fact that most members of these private-sector groups operate as magicians or workhorses, with limited rents and therefore limited influence on the political establishment.

To a very large extent, the type of deals environment that has dominated the Ghanaian landscape has been a result of the interplay between the rents space and the nature of political settlements in Ghana. Over the 1957–66 period, the government subscribed to a central planning approach. This meant that legislative controls were imposed on imports, capital transfers, licensing of industry, minimum wages, the rights and powers of trade unions, prices, rents, and interests rates (Killick, 2010: 56–60). This encouraged and entrenched a deals space that was closed but ordered within the formal sector. Not much changed in the period that followed until 1983, with half-hearted attempts in market-based reform. As a result, the political settlement remained uncompetitive and highly personalized. Indeed, the unpredictable nature of the changes in government, coupled with the haphazard way in which policies were implemented, meant that not only did the deals space remain closed, but it had become quite disordered by the end of this period.

In the initial years of structural adjustment up to the start of multiparty democracy, political settlements in Ghana remained dominant. However, some of the sources of rents and political patronage, particularly those that (p.177) emanated from import and exchange controls, were diminished with the SAP. The consequence was that the deals environment became more ordered, even though it remained closed, especially for the dominant and high-rent-seeking sectors like mining. All the firms interviewed as part of this study (apart from the workhorses) argued that having connections is necessary for business growth. One entrepreneur asserted: ‘That is the order of the day in Ghana. If you can’t pay your way through by giving bribes, you can’t succeed in anything.’ The period from 2002 to date has probably seen the biggest attempted shift towards a more open and ordered deals space. Donors have contributed to these changes, particularly in the regulatory environment, with limited private-sector influence on these changes. The discovery and production of oil, coupled with the change in the country’s status to middle income, has meant that the influence of donors is waning.

6.3.5 Feedback Loops

We have noted that interactions between the political settlements and the rents space have been important in shaping the deals environment, which consequently affects growth. Furthermore, and as noted in Chapter 1, the nature of growth can also have feedback effects on the rents space and political settlements interaction and therefore affect future growth. We discuss the importance of this feedback effect on the growth story of Ghana.

There are some key features of Ghana’s growth episodes that one can tease out from the story so far. First, in the period up to 1983, growth maintenance was absent for Ghana. Generally, over this period, the dominant political settlement, fuelled by the presence of strong rentiers and powerbrokers, meant that the deals environment remained largely closed. In the first and second growth episodes, growth was driven by natural resource sectors. Over much of this period, resource rents acted as a cushion for the political elite, who therefore could afford to leave the deals space closed. However, once the resource rents shrank, the ruling elites became less dogmatic and more willing to embrace new ideas. This explains why a government with socialist leanings went to the IMF/World Bank and began the implementation of an SAP. However, the economy over this period remained vulnerable and, consequently, adverse external shocks, such as that experienced in the 1970s due to oil price increases, had negative implications for growth.

Second, over the post-1983 period, some degree of growth maintenance became apparent. Here the political settlement moved from being a strong dominant party towards a competitive clientelist one. Furthermore, under the SAP, some of the key avenues for rent extraction, and therefore political patronage, were dismantled. This had the effect of opening up the deals space, while encouraging growth among workhorses and magicians. The (p.178) effect on the political settlement in Ghana was to change the ideas and beliefs of political elites. This had a positive effect on the regulatory environment and consequently the deals space. Here the feedback has been reinforcing. Ideas have mattered for Ghana. From 2001 onward, the ruling elites recognized that they needed a vibrant economy of workhorses and magicians as the basis for growth and therefore prioritized this. They pushed for regulatory changes that favoured a more open deals space. For some sectors the deals space remained closed. The important idea here is that the opening up of the deals space did help to maintain growth for a period in the 2000s. This in turn has helped create a growing middle class that owes its prosperity to the growth of the private sector, and which is increasingly becoming a strong political faction. There is no doubt that this will help maintain the momentum for a more open deals space. This view is reflected in the optimism of businesses interviewed for this chapter. They were generally positive about the business environment, and some stated that the source of their optimism for future business growth in Ghana is the growing middle class. However, exporting firms further argue that their growth will have to be supported by strategic government policies, citing the example of interest rates.

6.4 Conclusion

This chapter provides an assessment of how the nature of political settlements, interacting with the rents space, has affected the nature of the deals space and consequently economic growth in Ghana. It centres the discussions on four growth episodes. The first growth transition was in 1966 (a significant increase in the growth) and coincided with Nkrumah’s ‘big push’ for industrialization within Ghana (Meng, 2004). The second, in 1974, was negative (i.e. a significant decrease in the growth rate) and coincides with an external oil price shock. The third, in 1983, was positive and coincides with the start of the SAP. Finally, the fourth, beginning in 2002, was positive and was concomitant with improved state–business relations. Our discussions were also enhanced by interviews with twenty-one enterprises and key informants on the nature of the deals space as experienced by them, as well as their prospects for growth. The main findings of this study can be summarized as follows.

First, we note that Ghana has seen sustained economic growth since the mid-1980s. We note further that this growth has been associated with the changing contributions of different sectors. In particular, we note that the services sector has become more important relative to agriculture over the years, with the manufacturing sector remaining the same as it was at the start of independence. Also, labour from the declining agriculture sector has not necessarily moved to higher productivity wage employment in the services (p.179) and manufacturing sectors. Rather, it has largely moved to equally low-productivity activities in the services sector. We note that the country’s exports have continued to be dominated by a small number of products: mainly timber, gold, cocoa, and, more recently, oil—all resource-based. We therefore argue that true structural transformation has yet to occur in Ghana.

Second, our discussion of the deals environment over the different growth episodes suggests that it has largely been closed. There is no doubt that the closed nature of the deals space has influenced the fact that economic growth in Ghana over the years has not been of the transformative type. But, there seems to have been a change in the deals space from around 2000. Here we have also argued that the nature of the deals space varies according to different types of firms. For firms in sectors that contribute the most to GDP, the deals space remains closed. Firms interviewed affirmed this, by noting that knowing top politicians or bureaucrats is critical to securing government contracts.

Third, the chapter argues that political settlements in Ghana have generally been characterized by dominant party settlements, even though there has been a shift towards a more competitive type in recent times. One of the main changes in political settlements has been in the ideas of political elites, driven in part by donors and in part by less dogmatic views on economic policy. We also see increasing power for lower-level and mid-level factions. We argue that there is still some way to go for Ghana, in spite of the strides it has made democratically. In particular, we argue that political patronage is exploited, even at the expense of strengthening institutions.

Fourth, we argue that the interplay of political settlements and the rents space has been important in shaping the nature of the deals space. In the first two growth episodes, the dominant political settlements were made possible by the nature of the rents space. The government subscribed to a central planning approach, as it saw itself largely as a redistributor of wealth. After the near growth collapse, brought about by the disordered deals environment, resource rents became minimal and so the elite began to embrace new ideas around market-based reforms. Added to this were other forces—increasing power to lower-level factions and donors using foreign aid as leverage to encourage political leadership to consider new ideas. These factors combined to make the deals space more ordered and increasingly more open.

We conclude by noting that Ghana has exhibited two interesting features of the feedback loop between political settlements, rents space, the deals environment, and growth. In the first and second growth episodes, where growth was largely driven by natural resource sectors, the feedback effect was negative. In other words, natural resource-driven growth resulted in a political settlement that was characterized by a dominant party settlement and favoured a closed deals space. This in turn resulted in lower growth and further (p.180) pressure for a dominant political settlement. Within the 1960–83 period, therefore, growth maintenance was difficult. On the other hand, during the phase where growth increasingly emanated from workhorses and magicians (from 1983 onwards), it conferred positive feedback on the political settlement and the deals space. There were two sources of this positive feedback for Ghana. The first was the change in the ideas and beliefs of political elites in favour of less control of the markets. The second source was a growing middle class, which has increasingly become a strong faction pushing for political settlements that favour a more open deals space.


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(1) The policies forced foreigners out of the retail sector of the economy, especially Lebanese, Asians, and Nigerians, who were perceived as unfairly monopolizing trade, to the disadvantage of Ghanaians.