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Contributions from
the Column
Focus
Lessons learnt from East Asia
Ghana: problems with private sector promotion
Private business as technology partner
Making FDI work for the poor
Benefiting from globalised value chains
05/2005
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Ghanaian mismanagement
Politically, Ghana has been regarded as an African model country for a number of years. Economically, however, it does not seem to get into gear. The government is trying to promote private enterprise but its incentives often do not meet the private sector’s needs. Apart from that, many small businesses suffer from problems of their own making and need professional advice.
[ By Tillmann Elliesen ]
Working conditions in the glass office tower in the business centre of Accra are tough. 500 women sit shoulder-to-shoulder at computer keyboards, typing data from doctors’ bills for American health insurance companies. By satellite, these data are beamed straight back to the customers in the United States. Nimble fingers fly over keyboards, yet one in ten of the women is dropped from the payroll after some time on the job because she fails to meet her output target.
When the US service provider ACS set up this data processing centre in Ghana’s capital, it did so primarily because of the low wages. Nevertheless, many see the investment as evidence that Ghana could become the high-tech hub of West Africa. “And why not?” says ACS manager Steve Tippetts. “The country is moving in the right direction.”
But away from the capital, in the rural areas where the majority of Ghanaians live and work, such fantasies quickly fade. Ghana’s economy is driven largely by cocoa and gold exports. The two products generate half of the country’s export revenues. Therefore, Ghana depends on global commodity prices. Agriculture contributes more than a third to GNP – but it does not offer enough jobs for the country’s growing population. The consequences are migration to the cities and a resurgence of rural poverty, that bucks the nationwide trend.
President John Kufuor’s government, confirmed in office last December, is trying to promote manufacturing. Agro-processing, in particular, is seen as a source of more exports and provider of jobs. To quote the country’s poverty reduction strategy paper, the “government’s objective is to develop the country to become an agro-industrial economy by the year 2010”.
One example of such ambitions can be inspected at Mim, a small town around 400 kilometres north-west of Accra. The factory processing cashew nuts for export is located outside the town in the bush. At first glance, it looks like an agrarian version of the data-processing centre in the capital: workers, nearly all of them female, sitting or standing side by side at long rows of desks. But these women do not hammer on keyboards; they crack cashew nuts, using simple machines, in 9-hour shifts. They earn up to 25,000 cedis a day (roughly three dollars) – depending on how many nuts they manage. 25,000 cedis is more than twice the statutory minimum wage. The heat comes from the kiln where the nuts are dried before being shelled and sorted. Three of the few men among the 160-strong workforce pack the white kernels in airtight bags for shipment to Europe. “At present, we output 500 tons a year,” says Hermann Bähni, the director of the company with Ghanaian-Italian-Swiss ownership. “Our target is twice that volume. Then we will become interesting to the big European fruit importers.”
But Hermann Bähni does worry. He needs money, the equivalent of 300,000 US dollars to buy the next harvest of Mim cashew-growers. The factory has only been back in operation for just over a year; Bähni’s predecessor had shut it down. If the company fails to get the required injection of cash now, it will face the same fate again.
Lack of capital is one of the Ghanaian private sector’s biggest headaches. Until recently, wooed by astronomical interest rates of up to 50 percent, Ghana’s banks invested in practically nothing but government bonds. Since last year’s sharp drop in those rates, the situation has eased – but businesses still find investment capital hard to get. Bähni complains that he cannot afford a commercial loan.
In Ghana, however, the private sector is not just short of cash. The government wants to lead the country into a “Golden Age of Business,” but the road ahead is littered with obstacles. Responsibility for the biggest hurdles often rests with the government: misguided measures make life extra-difficult for Ghanaian business.
Annoyance with the government
Ruthven-David Adzogble appears stressed – not an unusual state for the manager of a major enterprise. His company Aluworks employs over 400 people and processes 22,000 tons of aluminium a year – if all goes well. The man does not look as if he has much time for a journalist from Germany. But then the question of government policy is raised. Adzogble gives a dismissive wave. “They just talk; they have no idea what business needs. We make sheet metal which other companies turn into products, such as household utensils. Unfortunately, because of corporate tax arrangements in Ghana, it makes better sense to export than to sell to Ghanaian companies. That does not exactly help promote local manufacturing.”
A foreign consultant working closely with the Ghana Investment Promotion Center says that what the government lacks is a sensible plan for promoting the private sector. Instead, the trade minister dreams of Ghana becoming a second Malaysia. That said, the Kufuor government’s strategy is certainly geared to the right objectives: removal of red tape, regulation and other obstacles to investment coupled with selective promotion of key industries. But the government incentives often miss the mark; in the worst instances, they channel scarce capital into businesses with no future.
All of Ghana’s 110 districts, for example, are supposed to set up three new companies each to broaden the country’s agro-processing base. Selection of entrepreneurs for special support is at the district administrations’ discretion – an arrangement that throws the system wide open to cronyism and local corruption. Cashew processing manager Bähni sounds frustrated: “Why doesn’t the government start by checking what private-sector initiatives already exist?” Most of Ghana’s cashew nuts go unprocessed to world market leader India, where companies enjoy government protection. “A bit more support would not hurt us either,” Bähni complains.
Government showpieces are the so-called Presidential Special Initiatives, set up to promote the export of selected products, including textiles and cassava. The programme was announced by President Kufuor in summer 2001 and farmers were called upon to plant more cassava. Shortly afterwards, the government built a large factory in the south of the country to produce cassava starch for industrial purposes. The problem is that Thailand sells starch on the world market for a much lower price – so much lower that Ghana cannot subsidise cassava exports enough to win market share from the Thais. The ones to suffer are Ghana’s farmers, who are left with cassava roots for which they cannot find a market. “An example of how not to do export promotion,” comments a foreign government adviser.
Doubts are also harboured about the plan to turn Ghana into a textile processing centre – with the Multifibre Agreement defunct since the beginning of 2005 and the world market firmly in the grip of cheap Asian suppliers, notably China. Since the government has been promoting the sector, a number of new textile factories have sprung up in the greater Accra area. But that does not mean they are all profitable. “We employ 250 people and can produce 100,000 T-shirts a month,” says Richard Abeku Dadson, the brash director of a new factory in the west of Accra. He sees a glorious future for his Mauritian-financed company. “Our target is half a million T-shirts a month, with a workforce of 700.”
What Dadson is speculating on are the US export quotas granted to garment makers in Ghana under the Africa Growth and Opportunity Act (AGOA). The reality in November was, however, that just 30 men and women were sitting at sewing machines in the company’s otherwise empty factory. And they were not making garments; they were sewing party flags for Ghana’s upcoming presidential elections. “We expect a major order for shirts any day now,” the director’s assistant explained – and asked his visitor not to take photographs.
The Presidential Special Initiatives are a response to the model recommended to African governments by economists Måns Söderbom and Francis Teal (2004), who argue for the promotion of large export-oriented enterprises with labour-intensive production. What Söderbom and Teal do not say, unfortunately, is how to to do that – and above all how to avoid pumping money into uncompetitive industries.
Oliver Bär, manager of the French-owned cable factory Nexans in the Tema industrial area outside Accra, believes the problem is rooted in the government’s desire to create something new. “It does not look closely enough at ways in which it can help existing industries,” he says. “Import duties on the primary products we need for our manufacturing processes are just as high as the duty on finished cables. Which does not exactly make life easy for us, of course”. There are more than 70 government agencies supposedly devoted to helping the private sector. But as the government itself admits, they are not very effective, there are too many of them and the ways in which they work need to be reviewed. The enterprise promotion action plan unveiled by the relevant ministry last year states that a “pro-private-sector mentality” needs to be inculcated in public officials.
Employers’ association under fire
There are also a number of employers’ associations – some of them with a bilateral background, like the Ghanaian-German Economic Association (GGEA). The largest organisation is the Association of Ghana Industries (AGI), which lobbies for around 500 members and provides them with services such as help to participate in trade fairs.
Opinions differ on the influence of the AGI and the quality of its work. Godfred Frempong of the Science and Technology Policy Research Institute in Accra sees the association as a “strong advocate” (2004) for its members. Tony Mensah, managing director of fruit juice producer Athena Foods, disagrees. “The people at the top of AGI are too far away from our problems,” he says. “They do their best but they lack the background.”
Small enterprises suffer most
Those who suffer most from poor policy and weak business associations are small and medium-scale enterprises (SMEs) – although they are the ones private-sector promotion is supposed to help most. Accra’s Business & Financial Times has commented that it is “disheartening to realise that there is virtually no concrete plan to empower small- and medium-size companies in this country to progress beyond their predominantly subsistence levels of production”. It was high time, the newspaper pointed out, that small companies were listened to more closely.
Large investors from abroad have less trouble in this respect: ACS manager Steve Tippetts makes no bones about the fact that being on good terms with President Kufuor does not hurt the company.
Local firms, however, often fail because of problems of their own making. A.D. Somuah, head of the Small Business Services Network in Accra, reports that many small entrepreneurs sell their products far too cheaply, for example, because they do not keep an eye on production costs. “Then they are surprised when they go bust even though sales figures are good,” Somuah says. The Network helps by providing consultants, who produce market analyses and draw up business and financing plans for private enterprises.
Philip Boahem is one of them. A young agricultural economist, he was trained as a business consultant by German Technical Cooperation (GTZ) in a project conducted in the western region of Brong Ahafo. In Wenchi, a small town 150 kilometres north of Kumasi, he has a client: fruit juice maker Nuamah Twum. Twum runs a low-tech one-man business extracting juice from prekesse, a carob-like fruit, filling it into plastic bottles and delivering to two sales points in the region. Business is good; Ghanaians regard carob as a healthy food option. “Twum has found a niche in the market,” Philip Boahem says. “A bit more advertising and he could sell even more, perhaps even employ a few people.”
Nuamah Twum is interested in the advice Philip Boahem offers. That is not always the case. Many small entrepreneurs fail to understand that a proper plan is vital for business success and that money spent on one is not money wasted. Many will only accept expert advice if they believe that will help them to obtain a rare bank loan.
Another problem is that many companies are unreliable. Products sometimes turn out substandard, suppliers fail to meet deadlines, trading partners deliver less volume than agreed. “Shortcomings like these are a significant impediment to long-term stable trade relations with advanced countries,” says Marcus Casel, who advises the AGI on matters of enterprise promotion.
Many Ghanaians agree. “First of all, we need to develop our local markets. Our entrepreneurs need to learn to meet standards and deliver uniform quality,” says Augustine A. Otoo of the Ghana Investment Promotion Centre (GIPC). “Only then can we develop export markets. And our first focus should be on West Africa.” Ghana-watchers agree that the only Ghanaian companies capable of competing in rich-country markets are those which can draw on foreign capital and expertise. Attracting foreign investors to Ghana is therefore a primary objective of the GIPC. But Ghanaian companies must not be forgotten, Otoo warns. “Where Ghanaians show confidence through vigorous investment, foreign investors come forward unbidden.”
Literature:
Frempong, Godfred, 2004: Institutional framework for entrepreneurial development within small-scale enterprises of Ghana, in: Wohlmuth, Karl, et al (ed.): African Entrepreneurship and Private Sector Development. Münster, Lit (African Development Perspectives Yearbook, Vol. IX)
Teal, Francis und Måns Söderbom, 2004: How can policy towards manufacturing in Africa reduce poverty?, in: ibid
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