I
The Competitiveness of Ghana’s Industry
DISSERTATION
der Universität St.Gallen,
Hochschule für Wirtschafts-,
Rechts- und Sozialwissenschaften (HSG)
zur Erlangung der Würde eines
Doktors der Staatswissenschaften
vorgelegt von
Anton Fidelis Hoefter
von
Wollerau (Schwyz)
Genehmigt auf Antrag der Herren
Prof. Dr. Jean-Max Baumer
und
Prof. Dr. Hans Georg Graf
Dissertation Nr. 2494
Difo-Druck GmbH, Bamberg
II
Die Universität St.Gallen, Hochschule für Wirtschafts-, Rechts- und Sozialwissenschaften (HSG), gestattet hiermit den Druck der vorliegenden Dissertation,
ohne damit zu den darin ausgesprochenen Anschauungen Stellung zu nehmen.
St. Gallen, den 23. Januar 2001
Der Rektor:
Prof. Dr. Peter Gomez
III
Meiner Familie mit Dank
für die Geduld und Unterstützung
IV
Preface
The motivation to write a thesis on Ghana was born out of a friendship with late Father
Joseph Apuri from Navrongo, Ghana. A good friend of my father from University, I
had gotten to know him already as a child, and continued to be fascinated by his home
country and the challenges of his people. Although I have not contributed a lot, I hope
that a part of this work could provide some explanation and help on how to improve
the economic conditions of Ghana.
Many people have helped me to complete this thesis. In Ghana, I had the opportunity
to talk to a large number of people, and I would like to thank all my interview partners
for their time and interest in my work, and the hospitality that many of them offered.
Without the advice and support of Prof. Jean-Max Baumer, this thesis would not have
been possible. I would like to thank him for his help, encouragement and patience
during this time. I would also like to thank Prof. Dr. Hans Georg Graf for his valuable
input and advice.
McKinsey & Company has given me the opportunity to work part-time for some
months to get this thesis off the ground, and many of my there friends have helped and
encouraged me during these years.
I am particularly grateful to my friends from St.Gallen. Hans-Gereon Früh, Andreas
Steininger, Jürgen Krotzinger, Benedikt Braumann, Katharina Fehr, Pascal Guillet and
Thomas Petermann (in no particular order) were always there for long discussions, and
helped with their input and support.
Special thanks goes to my family. My parents who have always encouraged and
supported me. And particularly my wife and friend Myriam, for giving her loving
patience to a husband who had to combine a normal working day with an academic
project. Our son Richard accompanied us during the last months of this thesis and
motivated me to complete this work.
Zürich, January 30
Anton Hoefter
V
Overview of content
Overview of content
Table of content
Table of figures
Table of tables
Abbreviations
V
VII
XIII
XIV
XV
I INTRODUCTION
1
1 Motivation
1
2 Research approach
3
II OVERVIEW OF GHANA’S ECONOMY
7
3 The political background of Ghana’s economic development
7
4 The structure of Ghana’s economy
21
5 The role of foreign trade in Ghana’s economy
30
6 Other research on Ghana’s competitiveness
34
III THEORETICAL AND METHODOLOGICAL CONCEPTS
41
7 Competitiveness – a definition
41
8 Theoretical approach
45
9 Methodology to measure competitive advantage
61
10 Methodology to explain impact of determinants of competitive advantage 68
IV ANALYSIS OF COMPETITIVENESS OF GHANA’S INDUSTRIES
71
11 Ghana’s competitive and uncompetitive industries
71
12 The competitive advantage of the Aluminum industry
78
13 The competitive advantage of the Cocoa industry
94
VI
14 The competitive advantage of the Food industry
111
15 The competitive advantage of the Gold industry
125
16 The competitive advantage of the Timber and Furniture Industry
138
17 The competitive disadvantage of the Textile and Garment industry
151
V CONCLUSIONS ON DETERMINANTS OF COMPETITIVE ADVANTAGE
163
18 Factor conditions
163
19 Demand conditions
177
20 Related and supporting industries
181
21 Strategy, structure, and rivalry
184
22 Government
192
23 Summary - the challenges of Ghana’s Diamond of National Advantage
208
Sources
214
VII
Table of content
Overview of content
Table of content
Table of figures
Table of tables
Abbreviations
V
VII
XIII
XIV
XV
I INTRODUCTION
1
1 Motivation
1
2 Research approach
2.1 Main question and contribution
2.2 Framework for analysis
2.3 Working hypothesis
2.4 Data availability
2.5 Structure and research design
3
3
3
4
5
5
II OVERVIEW OF GHANA’S ECONOMY
7
3 The political background of Ghana’s economic development
3.1 The political economy of Ghana until 1983
3.1.1 Trade in gold and slaves main source of profit before colonialism
3.1.2 Specialization on cocoa during colonial rule
3.1.3 The history of decline: 1957 to 1983
3.1.4 The basis for decline: Nkrumah’s industrialization program
3.1.5 “Killing the golden geese”, the consequences of failed policies
3.2 Economic reforms after 1983
3.2.1 Main elements of Ghana’s Economic Reform Program
3.2.2 Political structure since 1992
7
7
7
8
9
11
15
16
17
19
4 The structure of Ghana’s economy
4.1 Ghana’s macroeconomic development after the ERP
4.2 Sectoral structure of Ghana’s economy
4.2.1 Agricultural sector
4.2.2 Mining and manufacturing sector
4.2.3 Service sector
21
21
23
24
26
28
VIII
5 The role of foreign trade in Ghana’s economy
5.1 Overview of Ghana’s export structure
5.2 Overview of Ghana’s import structure
30
30
33
6 Other research on Ghana’s competitiveness
6.1 Ghana’s competitiveness based on real exchange rate movements
6.2 Other research on Ghana’s competitiveness
6.2.1 Competitiveness reports
6.2.2 Degree of economic freedom reports
6.2.3 Evaluation of research on competitiveness
34
34
35
35
37
39
III THEORETICAL AND METHODOLOGICAL CONCEPTS
41
7 Competitiveness – a definition
41
8 Theoretical approach
8.1 “Diamond of National advantage”
8.2 Innovation as driver of competitive advantage
8.3 Review of work leading to “Competitive Advantage of Nations”
8.3.1 Industry structure determining competitive strategy
8.3.2 Management of firm’s value chain to gain competitive advantage
8.3.3 National attributes as determinant of national competitive advantage
8.4 Comparison of Porter with neoclassical approaches
8.5 A short critique of Porter’s Competitive Advantage of Nations
8.6 Adaptation of Porter approach to specific situation of Ghana
45
45
47
49
49
50
51
53
57
59
9 Methodology to measure competitive advantage
9.1 World market share of exports as indicator for competitive advantage
9.2 Measuring the World market export share of Ghana’s industry
9.2.1 Poor quality of Ghana export data
9.2.2 Most exports from gold and cocoa
9.3 Revised methodology to measure the competitiveness of Ghana’s industry
61
61
64
64
65
66
10 Methodology to explain impact of determinants of competitive advantage 68
IX
IV ANALYSIS OF COMPETITIVENESS OF GHANA’S INDUSTRIES
71
11 Ghana’s competitive and uncompetitive industries
11.1 Ghana’s competitive industries
11.2 Ghana’s uncompetitive products
11.3 Selection criteria for industry analysis
71
71
74
77
12 The competitive advantage of the Aluminum industry
12.1 Structure of Ghana’s Aluminum industry
12.1.1 Buyers
12.1.2 Competition
12.1.3 Substitutes
12.2 History of Ghana’s Aluminum industry
12.3 Aluminum’s Diamond of National Advantage
12.3.1 Factor conditions
12.3.2 Domestic demand conditions
12.3.3 Relating and supporting industries
12.3.4 Firm structure, strategy and rivalry
12.3.5 Influence of Government Policy
12.4 Summary and conclusion on Ghana’s Aluminum industry
78
78
80
81
83
83
85
86
88
89
90
91
92
13 The competitive advantage of the Cocoa industry
13.1 Structure of Ghana’s Cocoa industry
13.1.1 Buyers
13.1.2 Competition
13.1.3 Substitutes
13.2 History of Ghana’s Cocoa industry
13.3 Cocoa’s Diamond of National Advantage
13.3.1 Factor conditions
13.3.2 Domestic demand conditions
13.3.3 Related and supporting industries
13.3.4 Firm structure, strategy and rivalry
13.3.5 Influence of Government Policy
13.4 Summary and conclusion on Ghana’s Cocoa industry
94
94
96
97
99
100
103
103
106
106
106
107
108
14 The competitive advantage of the Food industry
14.1 Structure of the Ghana’s Food industry
14.1.1 Buyers
111
111
113
X
14.1.2 Competition
14.2 History of Ghana’s Food industry
14.3 The Food industry’s Diamond of National Advantage
14.3.1 Factor conditions
14.3.2 Domestic demand conditions
14.3.3 Related and supporting industries
14.3.4 Firm structure, strategy and rivalry
14.3.5 Influence of Government Policy
14.4 Summary and conclusion on Ghana’s Food industry
114
115
118
118
121
121
121
123
123
15 The competitive advantage of the Gold industry
15.1 Structure of Ghana’s Gold mining industry
15.1.1 Buyers
15.1.2 Competition
15.1.3 Substitutes
15.2 History of Ghana’s Gold mining industry
15.3 Gold mining’s Diamond of National Advantage
15.3.1 Factor conditions
15.3.2 Domestic demand conditions
15.3.3 Related and supporting industries
15.3.4 Firm structure, strategy and rivalry
15.3.5 Influence of Government Policy
15.4 Summary and conclusion on Ghana’s Gold mining industry
125
125
126
126
127
127
130
130
133
133
134
135
136
16 The competitive advantage of the Timber and Furniture Industry
16.1 Structure of Ghana’s Timber and Furniture industry
16.1.1 Buyers
16.1.2 Competitors
16.1.3 Substitutes
16.2 History of Ghana’s Timber and Furniture industry
16.3 Timber and Furniture’s Diamond of National Advantage
16.3.1 Factor conditions
16.3.2 Domestic demand conditions
16.3.3 Related and supporting industries
16.3.4 Firm structure, strategy and rivalry
16.3.5 Influence of Government Policy
16.4 Summary and conclusion on Ghana’s Timber and Furniture industry
138
138
139
141
142
142
144
145
147
147
147
149
149
XI
17 The competitive disadvantage of the Textile and Garment industry
17.1 Structure of Ghana’s Textile and Garment industry
17.1.1 Buyers
17.1.2 Competition
17.1.3 Substitutes
17.2 History of Ghana’s Textile and Garment industry
17.3 Textile and Garment’s Diamond of National Advantage
17.3.1 Factor conditions
17.3.2 Domestic demand conditions
17.3.3 Related and supporting industries
17.3.4 Firm structure, strategy and rivalry
17.3.5 Influence of Government Policy
17.4 Summary and conclusion on Ghana’s Textile and Garment industry
151
151
152
153
154
154
156
157
158
159
159
160
161
V CONCLUSIONS ON DETERMINANTS OF COMPETITIVE ADVANTAGE
163
18 Factor conditions
18.1 Raw Material
18.2 Human resources
18.2.1 Basic education level
18.2.2 Secondary and tertiary education
18.2.3 Internal training
18.3 Specialized factors
18.3.1 Research and development
18.3.2 Management and entrepreneurship
18.4 Capital availability
18.5 Physical infrastructure
18.6 Information infrastructure
18.7 Administrative infrastructure
18.8 Conclusions on Ghana’s factor conditions
163
164
164
165
166
167
168
168
168
169
171
173
174
175
19 Demand conditions
19.1 Size of Ghana’s home market
19.2 Quality of Ghana’s home market demand
19.3 Conclusions on Ghana’s home demand
177
178
178
179
XII
20 Related and supporting industries
20.1 Presence of supporting industries
20.2 Presence of related industries
20.3 Conclusions on Ghana’s related and supporting industry
181
181
182
182
21 Strategy, structure, and rivalry
21.1 Structure and rivalry
21.2 Climate for investments
21.2.1 Investment and trade laws, taxes
21.2.2 Labor market policies
21.2.3 Political and economic uncertainty
21.3 Strategy
21.3.1 Strategic focus
21.3.2 Value chain presence
21.3.3 Management practices and goals of individuals
21.4 Conclusion on strategy and structure of Ghana’s industry
184
184
185
186
187
187
188
188
189
189
191
22 Government
22.1 The role of government in promoting competitive advantage
22.1.1 Ensure macroeconomic stability
22.1.2 Provide enabling microeconomic environment
22.2 Ghana’s macroeconomic and microeconomic track record
22.3 Ghana’s macroeconomic environment
22.4 Ghana’s microeconomic environment
22.4.1 Government influence on factor conditions
22.4.2 Government influence on demand conditions
22.4.3 Government influence on related and supporting industries
22.4.4 Government influence on firm strategy, structure, and rivalry
22.5 Conclusions on Ghana’s government
192
192
192
193
193
195
197
197
203
203
204
206
23 Summary - the challenges of Ghana’s Diamond of National Advantage
23.1 Nature of competitive advantage
23.2 Capacity to innovate
23.3 Conclusion
208
208
211
212
Sources
Literature
Interviews
214
214
227
XIII
Table of figures
FIGURE 1: GOVERNMENT REVENUES FROM COCOA, 1956 - 1985 (PERCENT OF TOTAL)
FIGURE 2: COCOA PRODUCTION AND PRODUCER PRICES, 1950 - 1989
FIGURE 3: KEY ECONOMIC INDICATORS, 1965 - 1983
FIGURE 4: REAL EXCHANGE RATE CEDI/USD 1951 - 1985
FIGURE 5: DEVELOPMENT OF REAL GDP PER CAPITA, 1975 - 1998
FIGURE 6: FOREIGN DIRECT INVESTMENT INFLOW 1987 - 1998
FIGURE 7: GHANA’S GDP STRUCTURE, 1972-1996
FIGURE 8: AVERAGE PRODUCTIVITY RELATIVE TO BEST PRACTICE IN GHANA
FIGURE 9: EXPORT SHARE IN GDP BY EXPENDITURE CATEGORY, 1993 - 1997
FIGURE 10: EXPORT VALUES OF MAJOR PRODUCTS, 1983 – 1997
FIGURE 11: GHANA'S TOP TEN EXPORT DESTINATIONS, 1996
FIGURE 12: AFRICA'S COMPETITIVENESS INDEX, 2000
FIGURE 13: THE DIAMOND OF NATIONAL ADVANTAGE
FIGURE 14: FIVE FORCES DETERMINING INDUSTRY PROFITABILITY
FIGURE 15: FOUR GENERIC STRATEGIES
FIGURE 16: CLUSTER CHART TO HIGHLIGHT COMPETITIVE PATTERNS
FIGURE 17: GHANA'S ALUMINUM INDUSTRY, 1997
FIGURE 18: STRUCTURE OF GHANA'S COCOA INDUSTRY, 1997
FIGURE 19: EXPORTS OF RAW AND PROCESSED COCOA FOR MAJOR EXPORTERS, 1990
FIGURE 20: STRUCTURE OF GHANA'S FOOD INDUSTRY, 1997
FIGURE 21: GOLD PRODUCTION 1901 - 1995
FIGURE 22: STRUCTURE OF GHANA'S TIMBER AND FURNITURE INDUSTRY, 1997
FIGURE 23: STRUCTURE OF GHANA'S TEXTILE AND GARMENT INDUSTRY, 1997
FIGURE 24: INFLATION, EXCHANGE RATE AND INTEREST RATES IN GHANA, 1992 - 1997
FIGURE 25: TERMS OF TRADE AND PRICE DEVELOPMENT OF COCOA, GOLD, ALUMINUM
12
13
15
16
22
23
24
25
31
31
32
36
45
49
51
63
79
95
97
113
129
139
152
196
209
XIV
Table of tables
TABLE 1: STRUCTURE AND RESEARCH DESIGN
TABLE 2: CHRONOLOGY OF MAJOR EVENTS, 1957 - 1996
TABLE 3: RELATIVE PRODUCTION VOLUME OF FOOD CROPS, 1962 – 1988
TABLE 4: DEVELOPMENT OF GHANA'S MANUFACTURING STRUCTURE, 1987 – 1993
TABLE 5: MAIN TRADE INDICATORS, 1989-1997
TABLE 6: CONSTRAINTS ON ECONOMIC FREEDOM IN GHANA, 1997
TABLE 7: OVERVIEW OF ELEMENTS OF COMPETITIVE ADVANTAGE REVIEWED
TABLE 8: CLUSTER CHART FOR COMPETITIVE UPSTREAM INDUSTRIES
TABLE 9: CLUSTER CHART FOR COMPETITIVE FINAL CONSUMPTION GOODS
TABLE 10: CLUSTER CHART FOR UNCOMPETITIVE UPSTREAM INDUSTRIES
TABLE 11: CLUSTER CHART FOR UNCOMPETITIVE FINAL CONSUMPTION GOODS
TABLE 12: DETERMINANTS OF ALUMINUM'S COMPETITIVE ADVANTAGE
TABLE 13: MARKET LEADERSHIP IN WORLD COCOA INDUSTRY
TABLE 14: OVERVIEW OF COCOA PRODUCER COUNTRY CHARACTERISTICS
TABLE 15: PERCENTAGE SHARE IN COCOA EXPORT REVENUES, 1995
TABLE 16: DETERMINANTS OF COCOA'S COMPETITIVE ADVANTAGE
TABLE 17: WHOLESALE PRICES FOR PINEAPPLES, 1997
TABLE 18: DETERMINANTS OF FOOD'S COMPETITIVE ADVANTAGE
TABLE 19: DETERMINANTS OF GOLD MINING’S COMPETITIVE ADVANTAGE
TABLE 20: EXPORTS OF GHANESE TIMBER PRODUCTS BY DESTINATION, USD '000, 1996
TABLE 21: DETERMINANTS OF TIMBER’S COMPETITIVE ADVANTAGE
TABLE 22: COST AND PRODUCTIVITY COMPARISONS FOR SHIRT PRODUCTION, 1994
TABLE 23: DETERMINANTS OF TEXTILE AND GARMENT'S COMPETITIVE ADVANTAGE
TABLE 24: SUMMARY OF FACTOR CONDITIONS
TABLE 25: ACCESS TO EDUCATION IN GHANA AND SUB-SAHARAN AFRICA
TABLE 26: TERTIARY STUDENTS IN TECHNICAL FIELDS (PERCENT OF POPULATION)
TABLE 27: RATES OF RETURN (PERCENT) TO HUMAN CAPITAL IN GHANA
TABLE 28: FINANCIAL MARKET RATES, 1991-1997
TABLE 29: GHANA'S PHYSICAL INFRASTRUCTURE COMPARED TO SELECTED COUNTRIES
TABLE 30: SUMMARY OF DEMAND CONDITIONS
TABLE 31: SUMMARY OF RELATED AND SUPPORTING INDUSTRIES
TABLE 32: SUMMARY OF FIRM STRUCTURE, STRATEGY, AND RIVALRY
TABLE 33: SUMMARY OF GOVERNMENT DETERMINANTS
TABLE 34: WORLD BANK EVALUATION OF GHANA’S ECONOMIC REFORMS - OVERVIEW
TABLE 35: GOVERNMENT SPENDING ON EDUCATION AND ECONOMIC SERVICES
TABLE 36: PUPIL/TEACHER RATIOS AND PERCENTAGE OF TRAINED TEACHERS
TABLE 37: PUBLIC EXPENDITURE ON EDUCATION, SELECTED COUNTRIES
TABLE 38: SAVING AND INVESTMENT (PERCENT OF GDP)
TABLE 39: OVERVIEW OF BUSINESS REGULATION CHANGES
5
10
14
28
30
39
69
72
73
75
76
85
96
98
99
103
114
118
130
140
144
154
156
164
166
166
168
170
171
177
181
184
193
194
198
199
200
201
205
XV
Abbreviations
CAGR
Compound annual growth rate
CMB / Cocobod
Cocoa Marketing Board
ECOWAS
Economic Community of West African States
e.g.
For example
ERP
Economic Reform Program
EU
European Union
FAO
Food and Agricultural Organization
FDI
Foreign direct investment
FOB
Free-on-board
GATT
General Agreement on Tariffs and Trade
GDP
Gross domestic product
GNP
Gross national product
ha
Hectares
HS
Harmonized System (trade classification system)
i.e.
that is to say
IMD
IMD School, Lausanne
IMF
International Monetary Fund
kg
Kilogram
km
Kilometer
MWh / gWh
Mega Watt hours / Giga Watt hours
N/A
Not available
OECD
Organization for economic cooperation and development
p.a.
Per annum
R&D
Research and Development
SITC
Standard International Trade Classification
SOE
State-owned enterprise
UKP
British pound
UN
United Nations
US
United States
USD
US Dollar
1
I INTRODUCTION
Chapter 1 of the introduction describes the importance of analyzing the
competitiveness of Ghana’s industries. The second chapter outlines the research
approach with the main questions, the framework for analysis and the research design.
1 Motivation
Over the last 15 years, Ghana has become a showcase of successful macroeconomic
reforms and stabilization programs.1 Starting with its economic reform program in
1983, Ghana’s government has managed to achieve a broad budget balance, to
implement a system of flexible exchange rates, and to liberalize the country’s trade
regime. Also, it started to install an investor-friendly regulatory environment, initiated
the privatization of 230 state owned enterprises, and began to significantly reduce the
export tax on cocoa, the country’s second most important export product after gold.
However, the currently low GDP growth rates indicate that this has not been sufficient.
Even though the structural adjustment program provided the basis for sustainable
economic development, Ghana’s economic performance has been relatively
disappointing. Between 1985 and 1995, Ghana’s total GNP grew by 4.2 % p.a., and
real GDP per capita had an average annual growth of 1.3 percent. Exports, though they
had been growing at a rate of 7.5 percent annually between 1990 and 1997, made up
only 13 percent of GDP between 1990 and 1995.
Ultimately, a nation’s productivity, the prerequisite for prosperity, is the sum of the
productivity of its companies. Their productivity is driven by three variables: (1) stable
political and legal institutions coupled with macroeconomic stability; (2) an enabling
microeconomic business environment, such as infrastructure and education standards;
(3) the strategies and operational structures of the private sector, which determine the
sophistication with which companies produce and compete.2 The objective of Ghana’s
current government is to make Ghana a middle-income country within one generation.
To achieve this, it plans to double Ghana’s annual economic growth rate from the
1
2
Reflected in articles and comments like NZZ December 19, 1994, p. 11 “Ghana weiterhin
Westafrikas Hoffnungsträger”; and World Bank (1994) p. 69: “Ghana as most advanced trade
policy reformer in Sub-Saharan Africa after Mauritius”
See Porter (1998a) p. 41
2
current 4 percent to about 8 percent for the next 30 years, with agriculture’s share
dropping to 20 percent of GDP, and industry’s share rising to 37 percent by the year
2020.3 To realize this ambitious growth target for industrial development, Ghana
needs much more vigorous private sector participation and investments from home and
abroad. However, “while much progress has been made in understanding the
macroeconomic side of development, there has been an increasing recognition that
macroeconomic reform is necessary but not sufficient. As, or more, important are the
microeconomic foundations of development, rooted in the nature of firm strategies and
in the institutions, resources, and policies that constitute the environment in which
firms compete.”4 Ghana has worked intensively on implementing structural reforms
and providing a stable macroeconomic environment, but the effect has not met its
expectations. This could be either because the macroeconomic reforms did not go far
enough, or because other conditions needed for the successful development of
industries5 have been lacking. To guide the actions of Ghana’s government, an
analysis is needed on the conditions of the variables that are responsible for the
success or failure of industries, and how these conditions should be improved.
3
4
5
Presidential Report to Parliament (1995) p. vii; for the industrial sector this translates into 12%
annual growth, ibid. p. 36
Porter (1997) p. x
In the context of this work, ‘industry’ is used to describe a sector of the nation’s economy, equal
to the German connotation ‘Industriezweig’ or ‘Branche’. Unlike many research papers on
Africa’s and Ghana’s industrial development (see for instance Teal (1998a&b); Elbadawi (1999);
Biggs et al. (1996); Lall, Navaretti, Teitel, Wignaraja (1994)) the focus here is not exclusively on
the performance of the manufacturing sector, but includes all sectors of the economy.
3
2 Research approach
2.1 Main question and contribution
The objective of this thesis is to understand the specific conditions that enabled
individual industries in Ghana to become internationally competitive. The main
questions of my thesis are:
¶ Which industries in Ghana are globally competitive?6
¶ What are the success conditions that have led to a competitive advantage
of certain industries in Ghana?
The contribution of this research has two elements. The first is the application of
Porter’s framework developed in “Competitive Advantage of Nations” to Ghana, to
analyze and explain the competitiveness of Ghana’s industry. The second element is
the conclusions from the analysis of Ghana’s industry. These conclusions could be
the basis for policy actions to improve the current conditions for competitiveness.
2.2 Framework for analysis
To analyze the industry of Ghana and to determine the conditions that make certain
industries successful, a framework is required that allows structuring all the factors
influencing an industry’s competitiveness in a consistent and convincing way.
The framework used in this thesis is based on Michael Porter’s ‘Diamond of
National Advantage’; a framework developed to answer the question why a nation is
home base for a globally competitive industry.7 There are two major reasons for
using this framework to analyze the competitiveness of the Ghanaian industry. First,
it is internally consistent, with an empirically tested methodology, based on
extensive empirical research on several industries in ten countries.8 Second, it goes
down to the level of the individual industries, and produces very specific
recommendations on what to change to make a particular industry more successful.
6
7
For the definitions of “industry” and “competitiveness” see Chapter 7
Developed in Porter (1990a &b)
4
The ‘Diamond of National Advantage’ as a framework encompasses the influencing
factors on a company’s productivity: the macroeconomic conditions, the
microeconomic business environment, and a company’s strategy and organization.
The framework will be adapted to the specific conditions of Ghana and changed to
incorporate aspects that are different from Porter’s original question.9 In this
adapted form, the framework allows to structure the answer to the two main
questions of this thesis: Which industries located in Ghana are internationally
competitive, and what are the conditions that enabled them to be internationally
successful. The answer is then the basis for a discussion on how Ghana’s ‘Diamond
of National Advantage’ could be upgraded and improved.
2.3 Working hypothesis
In Ghana, there are companies and industries that are able to successfully compete
on the World market. They are internationally competitive because of certain
conditions in Ghana, and because the economic reform program has improved some
conditions for doing business in Ghana. Other industries, however, in which both the
government and the private sector have invested significantly, have not managed to
compete successfully on the World market, or against imports.
Two main hypotheses will be analyzed:
1. The continuing dependence on natural resources did not create advanced
factors such as specially skilled labor or innovative processes
2. Ghana’s structural adjustment program has not gone far enough, and
regulatory uncertainty, unpredictable macroeconomic policy and
bureaucratic inefficiency did not create a microeconomic environment
conducive to business
The analysis of competitive industries in Ghana should allow us to verify whether
these hypotheses are correct, or whether other reasons are responsible for the
competitiveness of Ghana’s industries.
8
9
Porter (1990b) p. 76
One of the most important adaptations is the focus on all companies within Ghana. Porter only
analyzed the companies that had their home base in the nation researched. This thesis will also
look at foreign direct investment in Ghana to understand the overall attractiveness of a
country’s economic environment.
5
2.4 Data availability
The main challenge to overcome in this thesis was to work with partially incomplete
and inconsistent information. As in many other developing countries, Ghana’s
statistical data is often incomplete, or inconsistent if compared across different
sources. This concerns in particular data on Ghana’s trade activities, information on
foreign investment activities, and information on the structure of industries or
individual companies. To alleviate the problem of unreliable information, all
important information was reviewed with personal interviews and crosschecked with
information from other sources as far as possible.
2.5 Structure and research design
The thesis has five major parts. After the introduction, the second part provides a
brief overview on the structure of Ghana’s economy. The third part is a critical
review of the Porter theory and methodology, with adaptations to the methodology
to apply it to Ghana. The fourth part is the application of the methodology to analyze
the competitiveness of Ghana’s industry. The fifth part summarizes the findings
from the analysis of Ghana’s competitive industries to describe Ghana’s
determinants of competitive advantage (Table 1).
Table 1: Structure and research design
I. Introduction
II. Overview of Ghana’s Economy
III. Theoretical and methodological concepts
Theoretical approach
Methodology
IV. Analysis of competitiveness of Ghana’s industries
V. Conclusions on determinants of competitive advantage
Factor
Demand
Related &
Strategy,
Influence of
conditions
conditions
Supporting
Structure,
Government
industries
& Rivalry
Policy
6
7
II OVERVIEW OF GHANA’S ECONOMY
Part II provides an overview of Ghana’s economy and its development, for a better
understanding of the general conditions for Ghana’s industries and companies. Chapter
3 describes the historic developments that have formed the structure of Ghana’s
economy. In Chapter 4 the current economic situation of Ghana is described, followed
by a brief look at the three main sectors of the economy. Chapter 5 discusses the role
of trade in the Ghanaian economy. Chapter 6 is a review of the current research on
Ghana’s competitiveness.
3 The political background of Ghana’s economic development
The objective of this chapter is to give a brief overview on the political economy of
Ghana. The first part explains the main political elements responsible for the country’s
decline from independence until the start of structural economic reforms in 1983. The
second part describes what actions were taken in the economic reform program to
reverse Ghana’s economic decline.
3.1 The political economy of Ghana until 1983
Ghana’s current economic structure is significantly dominated by the activities and
structures that were established with the beginning of colonialism in the 19th century,
and that have been subsequently reinforced throughout independence until today.
3.1.1 Trade in gold and slaves main source of profit before colonialism
West Africa has been connected to Europe already for several hundred years through
the trade across the Sahara. In the 15th century, the Portuguese were the first Europeans
to establish a trading mission on the Gold Coast, followed by the English, Swedish,
Danish and Dutch. In that time, trade with Ghana was mainly in gold. In the 16th
century, about 10% of the global gold production were mined in Ghana.10
Gold, however, was soon to be replaced by slaves: for about two centuries, the coastal
and Ashanti tribes provided more than half a million slaves to European traders, not
10 Von Gnielinski (1986) p. 76
8
counting those that had died while being captured, or during the transportation to the
coast.11 The effects of the slave trade were clearly detrimental to the development of
the Gold Coast. The continuous raids on villages disrupted all economic activities in
the country, and mostly the young and vigorous were captured as slaves. Mining was
abandoned because mining workers from Benin were pulled away by the slave trade,12
and early cottage manufacturing activities were eroded by cheaper imports from
Europe as payments for slaves.
3.1.2 Specialization on cocoa during colonial rule
The end of the slave trade in the 19th century marked the beginning of the British Gold
Coast colony. Several wars were started between the Ashanti and the coastal tribes,
whose living had depended upon slave trade. As these wars started to touch the
interests of British merchants, the British government decided to intervene, won the
war against all parties involved, and proclaimed the Gold Coast formally as a colony.
West Africa was not chosen to be a settler’s colony, and the British governed their
West African colonies indirectly, by establishing close relationships with the local
rulers. The West African colonies were an excellent location to produce cash crops
like cocoa, coffee, cotton, and rubber, in exchange for manufactured items from
Europe.13 The Gold Coast became the most important producer for cocoa and gold,
and by 1911 the country was the world’s largest cocoa exporter, producing about 40%
of the total World supply between 1920 and 1940.14 The cocoa production itself
remained almost entirely in African hands, and is still today dominated by smallholder
farming. However, cocoa trade was firmly controlled by European trading houses and
the colonial government. As a result of improved transportation and communication,
companies like Cadbury’s were able to establish their own agencies, displacing most
African trading firms.15 These trading oligopolies also had sole import and
distribution rights for certain British goods, and pushed small newcomers out of the
market through destructive price-cutting.
11
12
13
14
15
La Verle (1995) p. 133
Agbodeka (1992) p. 34; see also Petchenkine (1993) pp. 147
Agbodeka (1992) p. 71
Rimmer (1992) p. 20
In the mid 1930s, less than 1% of the cocoa shipped abroad came from indigenous traders, while
the top four Gold Coast trading firms controlled 70% of the exports. Kennedy (1988) p. 36 and 39
9
The British rule provided a relatively stable legal and political structure, and led to a
remarkable increase in agricultural output, and investments in infrastructure and
education.16 However, while the British initiated the building of infrastructure to
transport the cash crops to the coast, they prevented the development of indigenous
industries in order to keep the colonies as a protected market for their own
manufactured exports.17 In several industries, trading licenses had to be acquired from
the government, making most kinds of business more or less illegal for Africans. By
forbidding or licensing the import of machinery, and with export bans on items such as
locally woven cloth, the government consciously clamped down all major
industrialization efforts.18 Ghanaians had limited access to financing because of the
difficulty of getting a collateral to secure bank loans, as most of the land was still
owned communally.19 As a result, African entrepreneurs and traders were confined to
traditional activities in which the European firms had no commercial interests. This
was mostly internal trade in foodstuffs between the forest and Savannah areas of West
Africa, or small-scale commercial ventures at the bottom of the European trading
hierarchy. When the British left the Gold Coast, the colony was focused on the
extraction of minerals and the production of cash crops. While the Africans had solid
trading experience, there was no industrial base, and limited entrepreneurial
experience to manage large industrial corporations.
3.1.3 The history of decline: 1957 to 1983
Ghana started independence with over UKP 500 Million in foreign exchange reserves,
and a GDP per capita of about USD 300, making it a middle-income country with a
per capita income equal to South Korea at that time.20 Even though a solid industrial
base was lacking, the country had inherited from the British a sound economy that had
experienced sustained growth over the past decades.21 In fact, the economy appeared
16 Kennedy (1988) p. 12
17 See also Frimpong-Ansah (1991) p. 47 on the theory of that a colonial predatory state survives
primarily because of superior military technology, and has no real interest in the development of a
colony if this conflicts with the economic goal of the ruling country.
18 Agbodeka (1992) p. 135
19 Kennedy (1988) p. 40
20 Leith, Lofchie (1993) p. 226
21 Alpine, Pickett (1993) p. 91
10
stable and prosperous, with the country being the worlds leading cocoa producer,
boasting a well-developed infrastructure and relatively advanced education system.22
By 1983, after 36 years of independence (Table 2), Ghana had a GDP per capita of
USD 300, not higher than at the beginning of independence. Production of cocoa, the
main export product over all these years, had dropped from a peak of 572,000 tons in
1964 to 180,000 tons in 1983. Between 1960 and 1982, the productivity of labor had
declined by 3.6 percent p.a., and the productivity of capital declined 2.0 percent p.a.,
with total factor productivity for all sectors of the economy decreasing by 2.3 percent
p.a.
Table 2: Chronology of major events, 1957 - 1996
Year
Events
1957
Independence, Nkrumah as prime minister
1964
Single party (CPP) government
1965
1 serious drop in World market price of cocoa (from USD 467/t to USD 91/t)
1966
Military coup against Nkrumah and establishment of National Liberation Council
(NLC)
1967
Devaluation of cedi from 0.71 cedi/USD to 1.02 cedi/USD
1969
Election of K. Busia
1971
2 serious drop in World market price of cocoa (from USD 517/t to USD 289/t),
devaluation of cedi from 1.02/USD to 1.82/USD, followed by urban unrest
1972
Military coup overthrows Busia, and establishment of National Redemption
Council under Acheampong, revaluation of cedi to 1.15/USD, import and
exchange controls tightened
1975
Acheampong replaces NRC by Supreme Military Council.
st
nd
Investment Policy Decree to establish minimum 55 percent Ghanaian ownership
of all manufacturing enterprises
1978
Acheampong replaced by General Akuffo, cedi devalued to 2.75/USD, triggering
urban strikes and unrest
1979
Military coup by J.J. Rawlings, SMC replaced by lower ranks with Armed Forces
Revolutionary Council, elections won by Limann
1981
New coup by Rawlings to establish Provisional National Defense Council
1982/83
Series of disastrous events: drought and fires, murder of judges, expulsion of 1
rd
million Ghanaians from Nigeria, failed coup attempt, 3 serious drop in World
market price of cocoa (from USD 2935/t to USD 980/t)
1983
Economic Recovery Program launched, cedi devalued to 30/USD
1986
Auction system for foreign exchange introduced, import licensing abandoned, new
mining code established
22 La Verle (1995) p. 134
11
1988
Foreign exchange bureaus established
1989
Initialization of privatization of State-owned enterprises (SOEs)
1992
New constitution introduced, with multiparty elections. Retired flight-lieutenant J.J.
Rawlings elected as president
1994
Implementation of fully liberalized investment code
1996
J.J. Rawlings reelected to president for second term, leading National Democratic
Congress has 132 (of 200) seats in parliament
Source: Leith, Lofchie (1993) Table 6.1, p. 231; EIU (1997a) pp. 7; Dordunoo, Nyanteng (1997) pp. 18
As will be shown further on, the origin of Ghana’s economic decline was the transfer
of resources from the highly profitable cocoa sector to finance state-owned industries,
coupled with a regime of import substitution that protected indigenous companies
from efficient foreign competition. Rampant corruption and private rent seeking
aggravated the detrimental effects of this policy, which was nourished by a system of
import licenses and foreign exchange quotas. The consequence of this policy was a
steady decline of cocoa exports, leading to serious balance of payment deficits, high
inflation, and finally to the collapse of the economy in 1983.
3.1.4 The basis for decline: Nkrumah’s industrialization program
When Nkrumah took over as the first president of Ghana, he believed that growth and
development in Ghana would only come from massive investment into the
mechanization of agriculture and industrial development. His economic goal was to
diversify Ghana’s economic base through industrialization, thereby reducing the
country’s exposure to World commodity price fluctuations.
Industrialization was to be achieved with two instruments: a protectionist trade regime,
and state-owned enterprises. Ghana’s entrepreneurial class was judged too small to
take over a leading role in such a massive industrialization effort, and a strong local
entrepreneurial class also represented a political threat.23 In line with Nkrumah’s
socialist background, it was the government that had to assume responsibility for both
the selection of appropriate sectors, and the management of the state-owned
enterprises. The main source of revenues for this massive industrialization program
was the export earnings from agricultural commodities, primarily cocoa (Figure 1).
23 Aryeetey, Baah-Nuakoh, Duggleby, Hettige, Steel (1994), p. 4
12
Figure 1: Government revenues from cocoa, 1956 - 1985 (percent of total)
40%
35%
30%
25%
20%
15%
10%
5%
0%
1956-60
1961-65
1966-70
1971-75
1976-80
1981-85
Source: Jakobeit (1991) Table 12.2
Since 1939, colonial statutory marketing boards controlled the export of cocoa and
other cash crops. Originally, the purpose of these produce-buying boards was to cut
the link between fluctuating World prices and local prices. The Cocoa Marketing
Board (CMB) would buy the goods at from the producer at a fixed price, and sell them
at the World price. Depending on the direction of change, it might either make a loss
or a surplus. The surplus would be kept as a stabilization reserve to finance deficits of
other seasons. In reality, however, the statutory monopoly boards had already in
colonial times produced a high rate of enforced and collectivized savings,24 and
functioned almost never to design. The marketing boards acted as monopsonies,
paying fixed prices to African farmers well below World market export prices. The
accumulated funds were either invested in British government securities – leading to
large outflows of capital to finance the British wars – or were used for investments in
infrastructure building.25 After independence, the CMB became the funding agency
for government development plans, as well as a source of public employment and
political patronage. 26 Between 1949 and 1985, payments to farmers exceeded the
CMB’s FOB sales only once, and in only 14 years did the farmers receive more than
50% of the gross value of their crops (Figure 2).
24 Rimmer (1992) p. 42
25 Kennedy (1988) p. 15, Schmidt-Kallert (1994) p. 41. Compare Rimmer (1992) pp. 41 for a
detailed account on the differences between original objectives and reality.
26 By the end of 1982, the Cocoa Marketing Board had more than 100’000 people on its payroll.
Rimmer (1992) pp. 201
13
Figure 2: Cocoa production and producer prices, 1950 - 1989
700
600
CMB
purchases
('000 tons)
500
400
Real producer
price per ton,
indexed (1963
= 500)
300
200
100
1987/88
1985/86
1983/84
1981/82
1979/80
1977/78
1975/76
1973/74
1971/72
1969/70
1967/68
1965/66
1963/64
1961/62
1959/60
1957/58
1955/56
0
Crop year
Source: Jakobeit (1991) Table 12.2; Leith, Lofchie (1993) Table 6.2, p. 232
The CMB was a central instrument to shift resources from the rural population to the
urban dwellers. To promote industrial development, the government was willing to
sacrifice the interests of the farmers, since its political survival depended primarily on
the happiness of urban workers,27 and because only little opposition was expected
from the rural population.28
To limit the impact of reduced prices for export crops, a large number of farmers
switched to alternative products that were not under the control of the government, but
could be sold freely in the market. As a result, food production fell continuously, with
27 The push towards independence had been initialized by urban riots in 1948. Unemployment
among ex-servicemen and primary school leavers, a shortage of housing and sharp rises in the
cost of imported consumer goods were the main reasons for the urban discontent. The urban
social groupings were the main constituents of Nkrumah's Convention People’s Party, the main
political force in the Gold Coast and Ghana until 1966. The political power of urban workers was
revealed again in 1972, when the Busia government was overthrown in a military coup after it
had tried to devalue the cedi. This devaluation prompted again urban unrest since prices of
imported consumer goods had gone up. Bates (1981) p. 33; Leith, Lofchie (1993) p. 228
28 The cost of organized opposition is significantly higher for the rural population than for the urban
population. Their attachment to their land limits their possibilities to participate in national
politics, and being disunited, there was no effective way to protect their interests. As a result,
farmers used the market as a less costly alternative, and shifted production to other products. See
Bates (1981) p. 82
14
the food self-sufficiency ratio dropping from 83 percent in 1961-66 to 71 percent in
1978-80 (Table 3).29
Table 3: Relative production volume of food crops, 1962 – 1988
1962
1982
1988
Cocoa
100
56
48
Rice
100
116
270
Maize
100
157
341
Millet
100
117
295
Sorghum
100
81
170
Source: Alpine, Pickett (1993) Table 25
Ghana’s method of implementing its import substituting industrialization policy led to
dismal results from the beginning. The number and range of industries chosen for
protection were vast, and no economic criterion for their selection could be
identified.30 A chaotic mix of subsidized credits, tariffs, import quotas, exchange
controls and outright import bans granted protection from cheaper imports.31 The
state-owned enterprises (SOEs) had virtually unlimited borrowing rights from the
banking system, and made substantial losses early on.32
To add to the inefficiency of Ghana’s SOEs33 and the poor performance of the
agricultural sector, personal rent seeking consumed even more of the country’s
economic resources. The public service organization was not very well developed and
driven beyond its capabilities.34 The weakness of the administration combined with
the political elements of import licensing and state-owned industries provided ample
29 La Verle (1995) p. 159
30 Well illustrated by the fact that at the end of the 1970s, Ghana had 36 car assembly plants and 40
pharmaceutical manufacturers. Asamoa (1996) p. 80
31 See also Pickett, Shaeldin (1990) pp. 25
32 Leith, Lofchie (1993) p. 237. For background on the ideological foundations of Ghana’s
industrialization policy see ibid. pp. 240
33 See Rimmer (1992) p. 91. In 1967, out of a sample of 40 firms, broadly representative for largescale manufacturing, only six were efficient in the sense that they were transforming domestic
resources into foreign exchange at a rate equal or less than the official value. A further four
companies were efficient if the shadow exchange rate was considered. In the large mechanized
farms, the production of rice fell from 1.11 tons/ha in 1962 to 0.59 tons/ha in 1982. Alpine,
Pickett (1993) Table 14
34 Frimpong-Ansah (1991) p. 44
15
opportunity for personal enrichment in public office.35 Incidents involving massive
corruption became known early on, but were popularly tolerated.36 Personal rent
seeking, coupled with strong interest groups, also explains why the policies that had
shown to be ineffective already in the mid 1960s, were pursued for almost twenty
more years.37
3.1.5 “Killing the golden geese”, the consequences of failed policies
Ghana’s desolate economy in the early 1980s was marked by chronic inflation, fueled
by fiscal deficits (Figure 3).38
Figure 3: Government surplus and inflation, 1965 - 1983
60
140
40
120
100
20
80
0
1965 1970 1975 1976 1977 1978 1979 1980 1981 1982 1983 60
-20
Government
surplus (cedis
100 million),
left axis
Rate of
inflation
(percent), right
axis
40
-40
20
-60
0
Source: Leith, Lofchie (1993) Table 6.2, p. 232
Between 1965 and 1980, agricultural output increased at an average annual rate of 1.6
percent, while manufacturing grew by 2.5 percent per year.39 The implicit taxation of
35 Import licenses and tariffs were based on 6-digit code, allowing a very precise definition of the
relevant products. This indicates that they were geared towards the protection of individual firms.
Furthermore, import licenses were issued for a commission, payable to the responsible minister in
person. Bates (1981) p. 67 & p. 101
36 In Ashanti, using political authority to accumulate, display and enjoy wealth is part of an
indigenous historical tradition, and patronage is even socially obligatory. Rimmer (1992) p. 46
37 Leith, Lofchie (1993) p. 245
38 Alpine, Pickett (1993) p. 91
39 Pickett, Shaeldin (1990) p. 22
16
exports and subsidization of licensed import purchases led to a gap between imports
and exports, resulting in serious balance of payments deficits and rapidly falling
exchange rates (Figure 4). The agricultural pricing policies had led to a huge income
transfer out of agriculture, in favor of government (net revenues), urban consumers
(lower food prices) and industry (cheap raw material and other inputs).40 For the rural
population, the consequence of this policy was a decommercialization of the economy,
since they moved towards subsistence farming, and abandoned the production of cash
and export products. The rest of the economy, however, depended heavily on imported
raw material, capital equipment and spare parts – yet foreign exchange was drying up.
Figure 4: Real exchange rate Cedi/USD 1951 - 1985
Nominal rates deflated by trade-weighted index of foreign wholesale prices relative to Ghanaian
consumer price index for non-traded goods
1.6
1.4
Cedis/USD
1.2
1
Official (real)
Black market (real)
0.8
0.6
0.4
0.2
85
83
19
81
19
79
19
77
19
75
19
73
19
71
19
69
19
67
19
65
19
63
19
61
19
59
19
57
19
55
19
53
19
19
19
51
0
Source: Rimmer (1993) Table 9.4, p. 209
3.2 Economic reforms after 1983
In his 2nd military coup in 1981, Rawlings was determined to root out the corruption
that had dominated Ghanaian politics during the past twenty years. Most of his support
at that time came from the left, and Rawlings’ Provisional National Defense Council
was closely associated with neo-Marxist and neo-Colonialist groups.41 During the first
two years of his government, Rawlings pursued a radical populist approach to
economic recovery. This populist approach led to an atmosphere of social chaos and
40 Nowak et al. (1996) p. 41
41 Rimmer (1992) p. 180; Leith, Lofchie (1993) p. 258
17
further decline, and Ghana was unsuccessful in getting assistance from the “true
friends of Africa”, the Soviet Union, Eastern Europe, Cuba or Libya.42 By 1983, the
lack of external support and a series of other events such as the drop in cocoa prices
and the expulsion of a large number of Ghanaians from Nigeria had brought Ghana
close to economic collapse. When Rawlings turned to the IMF and the World Bank as
lenders of last resort, neither would provide financial aid without major economic
reforms.43
The virtual breakdown of the country’s economy enabled Rawlings to break with the
politics of the past. Even though the detrimental effects of the policies of the 1970s
had been transparent before, they were kept alive because they generated rents for the
supporters of these regimes. In the beginning of the 1980s, however, the real exchange
rate had dropped to 10 percent of the rate at independence. Export earnings had been
eroded, credits from donors and commercial sources dried up, and there was no more
foreign exchange available for distribution of rent-generating import licenses. The glue
that held the former regimes together had vanished. The reforms were widely
supported, as there was no additional hardship from the structural adjustment
measures. The educational system and health care had ceased to deliver services to the
majority of the population.44 And finally, the real purchasing power had already fallen
as the official prices, salaries and exchange rates had no economic function anymore.
3.2.1 Main elements of Ghana’s Economic Reform Program
Ghana’s Economic Recovery Program (ERP) had five key objectives:45 (1) The
realignment of relative prices to encourage production and exports; (2) a progressive
shift from direct intervention towards the reliance on market forces; (3) the restoration
of fiscal and monetary discipline; (4) the rehabilitation of social and economic
infrastructure; and (5) structural and institutional reforms to enhance the efficiency of
the economy and to encourage the expansion of savings and investments.
42 Rimmer (1992) p. 180 See also Ahiakpor (1985) for an account about Rawlings’ transformation.
This brief period of radicalism has not yet been forgotten by many Ghanaian business people,
who still do not sincerely trust in Rawlings’ economic policy, and are skeptical about his attitude
towards private business.
John Kufuor defeated presidential candidate of the opposition NPP in 1996, has been cited with
the words in the Financial Times, June 22, 1998 (Database download): “Fidel Castro remains his
idol. His closest advisers have been card-carrying communists.”
43 Leith, Lofchie (1993) p. 266
44 Compare Leith, Lofchie (1993) p. 263, and p. 259
45 See Kapur et al. (1991) for a detailed description
18
The devaluation of the cedi and the liberalization of the exchange rate were the first
reform steps undertaken. As a start in 1983, the Rawlings government introduced
export bonuses and import surcharges, two measures that had the same effect as
devaluation but needed not to be communicated as such.46 After half a year, the taboo
of devaluation had been broken, and the government devalued the cedi continuously
until 1986, when it introduced an auction system to depoliticize the exchange rate
policy and to remove the burden of acting from the government. As a final step, the
government absorbed the remaining parallel market in 1988 by establishing foreign
exchange bureaus.47 In the view of many Ghanaians, the creation of these exchange
bureaus had made market-determined foreign exchange a permanent fixture, the basis
for the belief in the sustainability of the economic reforms.48 In parallel to the
liberalization of the exchange rate reform, the country’s trade and investment policies
were reformed. The government eliminated the highly complex import licensing
system that had been the basis for political favourism and corruption. For almost all
imports a uniform tariff was established.
While trade reforms were implemented very rapidly, the complex legal and regulatory
framework for investments and corporate taxes was dismantled only slowly. In 1991,
the government called in an advisory group to identify constraints on the private sector
and to pave the way to revisions in the regulatory framework.49 However, a fully
liberalized investment code was only established in 1994, incorporating a broad range
of investment incentives. The privatization of Ghana’s SOEs was initiated in 1987, but
started only in 1992. During the first phase of the ERP, Ghana’s reform strategy was
not to reduce the SOE sector, but to expose it to competition as a forcing device. Only
after 1992 did the divestiture program really start. By the end of 1998, 212 of the more
than 300 SOEs had been either sold or liquidated. However, sectors such as
transportation (airlines, ports) and utility (electricity, oil) are still government
monopolies dominated by SOEs.50
46 Rawlings exchange rate policy was not in line with the ‘cold turkey’ policy recommended by the
IMF, as he considered this equal to political suicide. Urban unrest and political turmoil had
always followed devaluation of the cedi in previous regimes, with the consequence that all
Ghanaian governments used every trick to disguise devaluation. See Herbst (1993) p. 53
47 Kapur (1991) pp. 17 - 21
48 Leith, Lofchie (1993) p. 271
49 Nowak et al. (1996) p. 38
50 Divestiture Implementation Committee, Web page (April 1998)
19
Together with the institutional reforms, Ghana also made strong efforts to adjust its
fiscal and monetary policy. To establish a solid fiscal basis, Ghana simplified and
rationalized its tax system to improve both its efficiency and equity.51 On the income
side, tax exemptions and tax brackets were reformed to reduce the progressivity of
personal income tax, corporate taxes were reduced and sectoral differences were
removed. Expenditures were cut and restructured to favor development and
rehabilitation activities. The main measures were a reduction of subsidies for
agricultural inputs coupled with the removal of price controls, the introduction of cost
recovery programs in health care and education,52 and a significant reduction of the
civil service.53 In order to keep a stable monetary environment and to enable credits to
the private sector, restrictive monetary and credit policies were implemented to reduce
government borrowing from the banking system. Monetary control was to rely on
market-based instruments, and credit controls and administrative interest rates were
dismantled. To rebuild the country’s decrepit infrastructure and to start industrial
production, a USD 4.2 billion program was prepared by the IMF and the World Bank
for infrastructure repair, energy imports, and the import of key inputs for the export
industries.54
3.2.2 Political structure since 1992
Since 1992, Ghana is a constitutional democracy based on the US system, with
executive power in the president, who is elected by universal suffrage every four
years, with tenure limited to two four-year terms. The cabinet is appointed by the
president and approved by a single-chamber parliament.
Ghana’s last elections in 1996 resulted in a second term of Rawlings and his party, the
National Democratic Congress. Support for the NDC comes mainly from rural areas,
where people have benefited most from the economic reforms. Ghana has two major
opposition parties: one is the People’s Convention Party, which consists largely of left
leaning groups and Nkrumahists. The other opposition force is the New Patriotic Party,
51 Roe, Schneider (1992) p. 75
52 The impact of these measures was not so adverse because formal charging combined with
improved availability of items such as textbooks and drugs partly replaced the informal costs of
delays and bribes associated with a system characterized by chronic shortages and very low
quality of service. Roe, Schneider (1992) p. 75
53 Relative to the size of the population, Ghana in 1992 still had one of the largest civil services in
Africa. Leechor (1994) p. 167
54 La Verle (1995) p. 145
20
which is dominated by lawyers, academics and business people, and is largely
identified with the Ashanti region.55
55 EIU (1998b) p. 8
21
4 The structure of Ghana’s economy
The objective of this chapter is to first describe the impact of the ERP on Ghana’s
economy, and then to briefly introduce the characteristics of Ghana’s agricultural,
industrial, and service sector.
4.1 Ghana’s macroeconomic development after the ERP
Ghana’s reform program was implemented in three phases: In the first phase
between 1983 and 1986, the focus was on getting prices right, and on reducing the
government’s budget deficit by increasing revenues. Between 1987 and 1990, efforts
were concentrated on the initiation of structural changes, such as the liberalization of
the exchange rate and the trade system, the start of the SOE divestiture program, and
civil service reforms. In the third phase, after 1990, the government started to look at
the more demanding structural and institutional reforms.56
The implementation of these policies resulted in a major turnaround between 1983
and 1991. Inflation declined, the overall balance of payment position stabilized, and
GDP growth recovered from negative numbers to about 5.5 percent p.a., and the real
GDP per capita grew by 4.2 percent p.a. After 1991, Ghana’s macroeconomic
performance suffered a marked downturn. In 1992, as part of its election campaign,
the government granted large increases in wages and benefits for public sector
employees. This fiscal shock helped to fuel inflation, and led to an increase in
government debt. In the election year 1996, the government repeated the same
mistakes as in 1992, when spending levels were massively increased and the
government deficit rose from 6 percent to 10 percent of the GDP. Between 1992 and
1998, GDP growth averaged 4.2 percent, and real GDP per capita 2.0 percent p.a.
(Figure 5).
56 Kapur et al. (1991) p. 57
22
Figure 5: Development of real GDP per capita, 1975 - 1998
1 ,8 0 0
2.0%
PPP adjusted (1995) USD
1 ,6 0 0
-4.3%
4.2%
1 ,4 0 0
1 ,2 0 0
1 ,0 0 0
800
600
400
200
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
-
Source: Data file from Centre for the Study of African Economies, University of Oxford57
The overall response of the private sector to Ghana’s structural reforms has not been
particularly strong, and overall investment rates are low compared to other lowincome countries.58 Total investments have risen from 14 percent of GDP in 1993 to
17 percent in 1997, but more than half of that came from government capital
expenditure. Private investments had risen to about 8 percent of GDP in 1991, but in
1992 the government’s fiscal policy prompted a 42 percent drop.59 In 1996, after the
second fiscal shock, private investments had fallen to 4 percent of GDP.60 In part,
the low investment rates in the private sector can be tracked back to the high cost of
capital and scarcity of capital available for private investments. Net savings
increased from 5 percent of GDP in 1993 to 9 percent in 1997, which is very low by
57 The constant price series was obtained by taking World Bank data for GDP per capita at
purchasing power adjusted USD rates, and deflating it by the unit value export price for US
exports
58 Elbadawi (1999) p. 5 cites research that found from a vast set of developing countries that a 6
percent real GDP growth would require about 28 percent of investment. The same ratio is
mentioned by Leechor (1994) p. 175 for high-growth developing countries.
59 EIU (1998b) p. 14
60 Euromoney April 1998, p. 214, “A framework for progress”
23
international and also by Sub-Saharan African standards.61 In addition, uncertainty
about the government’s long-term attitude towards private enterprises probably
increased the cost of capital and further reduced the incentives for capital
investments.
Foreign aid, debt, and direct investments have financed most of Ghana’s increase in
investments. In 1997, per capita aid averaged about USD 50, more than double the
Sub-Saharan average, and contributed about 55 percent to the total investment
level.62 Foreign direct investments (see Figure 6) were substantial between 1993 and
1996 when the gold mining industry was privatized, but have declined since then.
USD million
Figure 6: Foreign direct investment inflow 1987 - 1998
250
200
150
100
50
0
19871992
(avg)
1993
1994
1995
1996
1997
1998
Source: UNCTAD (1999), Annex table B.1, p. 478
4.2 Sectoral structure of Ghana’s economy
Ghana’s economy continues to be dominated by the agricultural sector. Although its
importance has diminished since 1972, it is still responsible for 40 percent of the
GDP. The second largest sector after agriculture is the service sector, in particular
trading. Industry only commands about 15 percent of the GDP (see Figure 7),
61 Saving rates from CEPA (1998) p. 17. The Sub-Saharan average is about 13 percent; the Asian
average is about 28 percent of GDP. Leechor (1994) p. 174
62 IMF (2000a) p. 16. According to CEPA (1998) p. 25, foreign aid made up 70 percent of total
government development capital expenditure.
24
indicating that Ghana is still at the initial stage of industrialization, even compared
with other countries in the region.63
1 0 ,0 0 0
8 ,0 0 0
S e rvic e s
In d u s try
A g ric u ltu re
6 ,0 0 0
4 ,0 0 0
2 ,0 0 0
0
19
72
19
75
19
80
19
83
19
90
19
91
19
92
19
93
19
94
19
95
19
96
prices
Million cedis at constant 1975
Figure 7: Ghana’s GDP structure, 1972-1996
Y e a rs
Source: IMF (1998) Table 1; Rimmer (1992) Table 7.11, p. 159 and 7.13, p. 161
Most of Ghana’s industrial activity is concentrated around the capital Accra and the
adjacent industrial area of Tema. Kumasi, the capital of the Ashanti region, is home
of most sawmills and wood processing companies. The bulk of precious natural
resources are mined in the Western, Central, Ashanti and Accra region. Ashanti also
contains the largest share of the country’s cocoa trees, as well as a large part of the
country’s timber resources. Northern Ghana is the main area for the production of
staple foods.
4.2.1 Agricultural sector
Agriculture is Ghana’s most important sector, representing 40 percent of GDP, 30
percent of export earnings, and 70 percent of employment. Its performance since
1983 has been below expectations. Between 1983 and 1990, the overall sector grew
by 2.6 percent per year, and slowed down to 2.2 percent from 1990 until 1996.
63 In neighboring Cote d’Ivoire, the share of agriculture is only half as large as in Ghana, and
industry represents a much larger share of the output. IMF (2000a) p. 6
25
Ghana’s farming is dominated by smallholdings which are rarely larger than 4 ha.
The main production method is mixed cropping, a combination of tree crops with
roots and other agricultural products. The introduction of large scale, mechanized
farming during the 1960s proved to be a failure, and as of now hardly any large
farms continue to be in operation. Food crops are the most important contributors to
agricultural output, followed by cocoa, timber and fishing. Ghana’s most important
staple crops are root crops like cassava and yams.64 The most important tree crops
are palm fruit and cocoa.
Historically, most important cash crops like palm oil and cotton had been marketed
by government monopolies. During the ERP, the government removed food price
controls, and abandoned most marketing monopolies except for cocoa. The results of
these measures were mixed. After the removal of price controls, mainly the
production of starchy staples and cereals, and fresh fruit appear to have risen, while
the production of most other crops has not taken off. Overall, the productivity of
Ghana’s agricultural sector is quite low, estimated to operate only at 20 percent of its
capacity because of low investments and poor technology (Figure 8).65 Low
investments since 1983, coupled with the removal of subsidies on fertilizers66 and
other agricultural inputs, have not helped to improve its productivity, leaving
considerable unexploited potential for further expansion.
Figure 8: Average productivity relative to best practice in Ghana
Millet
Maize
Yam
Cassava
0%
20%
40%
60%
80%
100%
Source: CEPA (1998) Table A-1, p. 99 (best practice of farms in Ghana)
64 See von Gnielinski (1986) pp. 136-186 for a detailed description of Ghana’s agricultural sector
65 EIU (1998b) p. 26 and p. 27
66 However, Cleaver, Donovan (1995) p. 13 found that Ghana was among the Sub-Saharan
countries with the most rapid increase in fertilizer use between 1985 and 1991.
26
Given the current level of technology, farming labor is already scarce.67 No “Green
Revolution” as in Asia is likely to take place as long as slow technological
innovation and poor infrastructure blunt farmer’s incentives to switch from
extensive subsistence farming to market-focused, intensive production. No
agricultural machinery is used, irrigation is absent, and a large part of the land is still
under shifting cultivation.68 Outputs remain very vulnerable to weather
conditions,69 which has a large effect on the country’s export earnings as well as
domestic inflation. A large amount of the output is wasted along the value chain –
mainly because of the absence of adequate storage facilities, very poor rural roads
and the dominance of human portage.70
The growth experience from Asia points towards agriculture as initial impetus for
rapid development. Profits from agriculture would create export surpluses, which
can then be used to finance growth in manufacturing and manufactured exports.
Ghana, however, has not been able to achieve a similar agriculture-led growth path.
The key shortcomings of its reforms were, as critiques point out, a too slow
upgrading of the agricultural infrastructure, such as extension services, feeder roads,
and urban markets. At the same time, the slow removal of marketing and
distribution monopolies gave farmers not enough incentives to push up their
production.71
4.2.2 Mining and manufacturing sector
Between 1990 and 1996, the total sector has grown at 4.2 percent, with most of the
growth coming from the mining and construction-related sector. Ghana’s mining
sector is dominated by gold mining. With the introduction of a new mineral law in
1986 and the privatization of the country’s largest gold mines, the mining industry
has been thriving, and gold output has increased more then five-fold between 1987
and 1996 (see Figure 21: Gold production 1901 - 1995, p. 129). Ghana is one of the
67 World Bank (1993) p. 33
68 Cleaver, Donovan (1995) p. 24
69 Only about 1.1 percent of West Africa’s arable land is irrigated. See Aspesi, Lloyd, Crenshaw,
D’Oyen, Yeboah-Amankwah, Abiola (1998)
70 Aspesi, Lloyd, Crenshaw, D’Oyen, Yeboah-Amankwah, Abiola (1998) estimate that every
year in Ghana about USD 110 million of maize are being lost between the field and end
consumer, mainly because of the inability to draw on a sufficiently large labor pool during the
harvest, old storage facilities, and bad transportation.
71 See Nowak et al. (1994) p. 42
27
world’s largest exporters of manganese, and mines some bauxite and diamonds. The
diamond, manganese and bauxite sectors have also recovered after considerable
contraction during the decline in the 1970s, increasing its output by almost 50
percent between 1990 and 1996.72
The impact of the ERP on the manufacturing sector has been mixed. Ghana has a
broad industrial base across almost all sectors. Most of today’s larger manufacturing
companies were established as state-owned enterprises in the 1960s. Between 1983
and 1990, the manufacturing sector grew by 8.1 percent per year, benefiting from
the availability of imported inputs, which enabled them to use their existing excess
capacity. From 1990 onwards, growth slowed to 2.2 percent, mainly because of the
exposure to import competition; and the abandonment of subsidies forced companies
to rationalize and improve their performance. Employment in manufacturing fell
from 78’000 in 1987 to 28’000 in 1993,73 and the number of companies between
1987 and 1993 declined by 21 percent, from 634 companies to 500 companies
(Table 4).
The largest sector in manufacturing – based on gross output – are the non-ferrous
metal industry, the wood industry, food manufacturing, chemical products and
tobacco manufacturing, which accounted for 54 percent of the gross output in
1993.74 Most seriously hit by import competition were the food, textile, furniture
and chemical industry, where a significant number of companies were forced to
close down. While both the food and chemical industry managed to recover in terms
of output, the textile industry continues to do badly.
72 IMF (2000a) p. 10
73 African Development Bank, cited in Lall (1995) p. 2025, not fully consistent with Ghana’s
Manufacturing Survey cited below.
74 Based on Ghana Manufacturing Survey 1993. Another survey had been planned for 1998, but
was not executed because of lack of financing.
28
Table 4: Development of Ghana's manufacturing structure, 1987 – 199375
USD million (at average rate)
Industry
Companies
1987
1993
Persons engaged
1987
1993
Gross output
1987
1993
Value added
1987
1993
Food manufacturing
88
43
11'628
7'418
135
146
42
Beverage industry
27
27
5'057
3'418
84
97
68
56
4
3
1'856
1'060
66
124
59
110
117
43
14'018
10'654
72
98
35
31
93
Tobacco manufacturers
Textile, wearing apparel and leather
51
Wood and cork products excl. furniture
97
81
18'328
21'987
83
163
43
Furniture and fixture excl. metal
67
29
3'886
2'855
10
10
5
5
Manufacture of paper products
5
13
761
1'461
6
25
3
11
8
Printing, publishing and allied industries
40
48
4'518
4'391
13
24
8
Manufacture of industrial chemicals
13
7
747
512
10
24
4
5
Manufacture of other chemical products
37
42
3'729
4'455
59
142
21
54
Petroleum refineries
2
2
678
399
165
95
37
50
Manufacture of rubber products
5
6
1'140
2'741
5
6
3
3
Manufacture of other plastic products
5
31
319
2'963
3
43
2
16
Manufacture of non metallic minerals
30
30
3'133
3'305
34
88
16
27
Iron and steel basic industries
3
3
571
1'362
5
16
2
4
Non-ferrous metal basic industries
6
5
2'276
2'483
207
171
83
50
21
Metal products
31
41
2'978
3'553
26
51
12
Manufacture of machinery
12
11
946
646
2
5
1
2
Electrical machinery, appliances
13
18
935
1'166
8
23
4
9
Other
32
17
1'767
1'827
8
17
3
4
634
500
79'271
78'656
1'001
1'372
452
610
Total Manufacturing Sector
Source: Ministry of Trade and Industry (Ghana Manufacturing Survey, 1987); Addo, Julemun, Sonntagbauer
(1995)
In general, firms operating in export-oriented sectors, and established multinationals
have fared better than small and medium-scale industries, because these companies
had better access to credit and better marketing opportunities for their products,76
and they were better able to circumvent the problems resulting from poor
infrastructure. Most hard hit were large, inefficient SOEs, which suffered not only
from huge inefficiencies and management faults, but also from high wages and nonwage liabilities.
4.2.3 Service sector
Ghana’s service sector has been the fastest growing sector of the economy, with a
growth rate of 5.9 percent between 1990 and 1996. The bulk of service activities are
in trading and public services. Trading in particular is one of the activities that
benefited from the contraction of the manufacturing services and absorbed part of
75 Includes companies with more than 20 employees
76 Teal (1995) p. 4; Financial Times, July 9, 1996: “Ghana 1996: Hard times for manufactures”
29
their unemployed workers.77 Transportation services have grown only slowly
because of substantial structural problems, such as a poor road and railway system.
One of Ghana’s promising service sectors is tourism, which has become the
country’s third largest foreign exchange earner.78 The country’s main attractions are
the beaches and the former slave castles along the Atlantic coast, and the cities
Accra and Kumasi.
After the initiation of the ERP, Ghana’s financial sector incurred serious difficulties.
The devaluation of the cedi had raised the external liabilities of the banks, and at the
same time weakened many of their customers who depended on imported material.
The financial sector reform program was initiated in 1988. Its main elements were
the introduction of a new regulatory base with new capital adequacy rules, a cleanup of the banks’ balance sheets through a swap of all nonperforming loans against
government loans, and individual restructuring for some distressed banks.79 The
largest commercial banks have been privatized, and in 1990 a stock exchange was
established. Today, there are six commercial banks with about 280 branches across
the country, the three largest banks, Ghana Commercial Bank, Standard Chartered,
and Barclays, share 70 percent of the deposit volume. Three development banks
focus on the manufacturing, agricultural, and construction sector. Five merchant
banks are specialized on corporate finance activities. About 120 rural banks, owned
and managed by local residents, provide financing for small-scale agricultural
activities and cottage industries. In addition, there are about 16 insurance companies
active in Ghana, as well as several security brokerages, export financing and leasing
companies, and venture capital funds. The Ghana stock exchange, currently the fifth
largest in Africa, has 21 companies listed. At 4 percent turnover and with very high
bid/ask spreads, the country’s stock market remains one of the world’s least liquid
exchanges.80 Ashanti Goldfields accounts for 64 percent of the USD 1.4 billion
market capitalization.81 Besides Ashanti, the manufacturing and brewing sector
dominate the exchange, followed by the banking sector. Many of the listed
companies are local subsidiaries of foreign multinationals.
77
78
79
80
81
See also Canagarajah, Mazumdar (1997) p. 50
US Department of Commerce (2000) Chapter 1
Kapur (1991) p. 60
EIU (1999) p. 21
Year end 1998
30
5 The role of foreign trade in Ghana’s economy
Ghana’s total volume of foreign trade, both imports and exports after exclusion of
aid-funded imports, is about 35 percent of GDP – considerably lower than the trade
level for other high-growth countries, which are often above 100 percent of GDP.82
Ghana’s exports continue to be dominated by primary commodities, namely gold
and cocoa. The country’s terms of trade have been declining rapidly between 1989
and 1993 as a result of falling gold and cocoa prices.83 Capital goods, intermediate
goods, and fuel and energy dominate Ghana’s import bill.84 Increasing energy
shortages requiring additional fuel imports, and a decline in gold prices have led to a
worsening of Ghana’s trade balance particularly in 1997 (Table 5).
Table 5: Main trade indicators, 1989-1997
USD million
1989
1990
1992
1993
1994
1995
1996
1997
1998
Total exports
808
897
988
1,064
1,227
1,431
1,810
1,810
2,091
Total imports
1,006
1,205
1,457
1,728
1,580
1,687
2,296
3,041
2,897
Trade balance
-198
-308
-468
-664
-353
-256
-485
-1,231
-806
76.7
71
65
58
60
64
62
62
78
Terms of Trade (1985=100)
Source: IMF (1999a) Table 51&52, pp. 133-134; IMF (2000) Table 33 & 34, pp. 43-44
5.1 Overview of Ghana’s export structure
Between 1990 and 1997, Ghana’s total exports have grown 7.5 percent per year,
from USD 897 million to USD 1.5 billion. While in 1990, exports made up 16
percent of GDP, by 1997 its share had grown to 25 percent of GDP (Figure 9).
82 Leechor (1994) p. 175
83 The terms of trade express the purchasing power of a country’s exports in terms of the imports
they will buy. A price decrease of export products or a price increase in import products can
both lead to declining terms of trade.
84 Detailed data on import figures were only available for 1990.
31
Million cedis at constant 1993 prices
Figure 9: Export share in GDP by expenditure category, 1993 - 1997
5,00 0
4,00 0
N on -trad itiona l E xpo rts
3,00 0
T rad itiona l E xpo rts
O the r E xpe nditu re
2,00 0
1,00 0
1 99 3
1 99 4
1 99 5
1 996
19 97
Source: IMF (1999a) Table 19, p. 98; Ghana Export Promotion Council85
Ghana’s most important traditional export products, gold, cocoa, and timber,
accounted for 82 percent of Ghana’s export in 1997. Most of the growth in Ghana’s
export comes from an increase in gold production from 526’000 ounces in 1990 to
1.75 million ounces in 1997, leading to an average annual export growth of 20
percent in value per year. The recovery of cocoa, Ghana’s second most important
export product, has been sluggish, with exports growing from 267’000 tons in 1990
to 314’000 tons in 1997, equal to a two percent increase in value. Over the same
period, timber exports have grown from 370’00 cubic meters to 442’000 cubic
meters, with a value increase of 12 percent per year.
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Gold
Other mineral exports
Timber
Other agricultural exports
Cocoa and products
Other exports
19
83
19
85
19
87
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
USD million
Figure 10: Export values of major products, 1983 – 1997
Source: IMF (1999a) Table 53, p. 135; Rimmer (1992) Table 8.2 p. 186 for 1983 - 1989
85 The 1995 non-traditional export numbers are a linear interpolation of the 1994 and 1996 data
32
Between 1990 and 1997, Ghana’s non-traditional exports86 have grown 27 percent
per year, and increased their share in total exports from 7 percent in 1990 to 22
percent in 1997. The most significant factor for this growth is the effort to export
both cocoa and timber in semi-processed forms. Excluding these two products, nontraditional exports have grown by 20 percent. Responsible for the growth were
mainly increases in horticultural exports such as pineapples and yams, and other
cash crops like palm oil, sheanut, coffee and cashew, canned tuna fish, and wood
products.87
The bulk of Ghana’s exports are destined for Europe, which accounted for 54
percent of all exports in 1996, in particular to the UK, Netherlands, Germany and
France (Figure 11).88
Figure 11: Ghana's top ten export destinations, 1996
300,000
USD '000
250,000
200,000
Cocoa and cocoa products
W ood products
Fruits and vegetables
O ther
150,000
100,000
50,000
S
Ita
Be ly
lg
iu
m
Sp
ai
n
To
go
U
N
et
he U
rla K
G nds
er
m
an
Fr y
an
ce
Ja
pa
n
-
Source: Ghana Export Bulletin (1996)
Europe, Japan and the US are mainly importing minerals, agricultural products and
timber. Ghana’s manufactured products such as textiles, plastic goods and aluminum
86 Ghana’s non-traditional exports are defined in the Export and Import Act No. 503 as exports
other than cocoa beans, lumber and logs, minerals (gold, diamonds, bauxite, manganese) in
their raw forms, aluminum, and electricity.
87 The split of traditional and non-traditional exports is based on the non-traditional export figures
provided by the Ghana Export Promotion Council
88 Excluding gold exports, which went predominantly to Switzerland. Gold exports were
excluded in this statistic, as the destination was driven by the fact that Swissair, Switzerland’s
national air carrier, is specialized in the transport of valuable goods.
33
household ware are mostly destined for neighboring ECOWAS (Economic
Community of West African States) countries. Compared to the overall volume of
trade, Ghana participates very little in interregional trade. In 1996, only 2.5 percent
of the total export value went to neighboring countries and ECOWAS members.89
5.2 Overview of Ghana’s import structure
Since 1990, Ghana’s imports have risen by 8.5 percent, more rapidly then exports. In
1990, capital goods and intermediate goods dominated the country’s import bill. The
energy shortages in 1997 and 1998 however have led to an increased share of fuel
and energy inputs. The major sources for Ghana’s imports are the UK, Nigeria, the
US, and Germany.
Several critiques point out that the rapid opening for imports made it difficult for
some previously protected industries to adjust. This concerns mainly the processed
food and beverage industry, and the textile, garment, and leather industry.90
However, looking at the import mix in 1990, the liberalized trade regime enabled
manufacturers to import raw material and machinery, and a 25 percent tariff on
consumer goods still provides a significant degree of protection.
89 Ghana Export Bulletin (1996)
90 Nowak et al. (1996) p. 43
34
6 Other research on Ghana’s competitiveness
This chapter provides an overview of other research approaches to measure Ghana’s
competitiveness. The IMF91 analyzed Ghana’s competitiveness based on the relative
prices of import and export goods, reflected in the movements of the real exchange
rate. The World Competitiveness Reports92 and Index of Economic Freedom93
capture the general economic and institutional environment of Ghana in comparison
to other countries.
6.1 Ghana’s competitiveness based on real exchange rate
movements
The work of the IMF analyses Ghana’s competitiveness based on real exchange rate
appreciation and depreciation. Underlying this study is the belief that a country is
competitive if it can export more than it imports, which is equal to having a positive
balance of trade. The indicator for competitiveness is the real exchange rate. A
depreciation of the real exchange rate means that export goods are becoming
comparatively cheaper and more competitive because domestic prices increase
slower than foreign prices.94
In this analysis, the IMF’s main question was if the country’s exchange rate was
consistent with its desired balance of trade (equal to an increase of exports relative
to imports). Depending on the availability and accuracy of data, there are several
ways to calculate a country’s real exchange rate. Using a set of price and labor cost
indicators to deflate Ghana’s nominal exchange rate, the study concluded that
Ghana’s competitiveness had increased steadily between 1983 and 1994, since in all
measured cases the real exchange rate depreciated over that time. The evidence for
the three years 1995 to 1997 is mixed. Accounting for the strengths and weaknesses
of all indicators used,95 Ghana had a decrease in competitiveness between 1995 and
91
92
93
94
95
IMF (1999a) pp. 47-62
World Economic Forum (1998)
Gwartney, Lawson (197); Heritage Foundation (1997)
The theoretical framework for the study was provided by Marsh, Tokarick (1994) p. 2
And considering that in general, none of the three indicators works well across all countries,
probably because movements in real exchange rates may be dominated by the volatility in the
nominal rate. Marsh, Tokarick (1994) p. 40
35
1997, primarily because of a surge in inflation in 1995 and a drop in the prices of the
main export goods gold and cocoa.
6.2 Other research on Ghana’s competitiveness
6.2.1 Competitiveness reports
Probably the best-known reports on the competitiveness of nations are published
yearly by both the IMD and the World Economic Forum.96 The reports are an
attempt to capture in a single index the nation’s business environment, which
reflects its’ capability to promote economic growth. In these reports, a nation’s
competitiveness is defined as the ability to sustain the creation of value added,
which is the basis for the competitiveness of its companies.97 Both reports are
compiled annually, and allow to make comparisons between countries, and to track
the development of a specific country over time.
In the IMD model, four forces are driving this capability: a country’s integration in
the global economy (proximity versus globality), its attractiveness for foreign
investments and its aggressiveness in international markets (attractiveness and
aggressiveness), its factor endowments such as natural resources, infrastructure and
education (assets and processes), and its social structure and risk taking culture
(individual risk taking and social cohesiveness).98 In the model currently used by
the World Economic Forum, the competitiveness of a country is evaluated based on
eight factors of competitiveness, which are very similar to the ones used in the IMD
model. The main difference between the two models is the use of the “Forces of
Competitiveness” in the IMD model, which stem from a slightly different
aggregation of the competitiveness indicators. Each nation represented in the reports
is analyzed based on both hard statistical indicators and soft survey data from
questionnaires sent out to executives. The indicators are then grouped into eight
96 Until 1996, the World Competitiveness Report was published jointly by the two institutions.
Since 1997, the IMD and the World Economic Forum publish a separate report. While the
country’s individual rankings are now slightly different, the reports use a similar model and
apply in principle the same methodology to measure a country’s competitiveness.
97 IMD (1997) p. 14
98 IMD (1997) p. 15-16
36
factors and summed up to one indicator that reflects the relative competitiveness of a
nation compared to all other nations in the sample.99
Using a similar methodology, a report on the competitiveness of Africa was
compiled by the World Economic Forum under the leadership of Jeffrey Sachs in
1998 and 2000.100 The competitiveness of 24 African countries is calculated based
on an average of six indices: openness, government, finance, labor, infrastructure,
and institutions. On a scale ranging from +1 to –1, Ghana’s competitiveness is
indexed at 0.1, and ranked as number nine (Figure 12), unchanged from its position
in 1998.
Figure 12: Africa's competitiveness index, 2000
Tunisia
Mauritius
Botswana
Namibia
Morocco
Egypt
South Africa
Senegal
Ghana
Swaziland
Ethiopia
Zambia
Lesotho
Tanzania
Cote D'Ivoire
Cameroon
Uganda
Mozambique
Malawi
Nigeria
Burkina Faso
Kenya
Zimbabwe
Madagascar
1.0
0.8
0.7
0.4
0.4
0.4
0.3
0.2
0.1
-0.1
-0.1
-0.1
-0.2
-0.2
-0.2
-0.3
-0.3
-0.3
-0.3
-0.4
-0.4
-0.4
-0.4
-0.6
Source: World Economic Forum, Web page information (July 2000)
Unique to the Africa Competitiveness Report are an ‘improvement’ and an
‘optimism’ index, which measure the impressions of the local business communities
99 IMD (1997) pp. 40 In the World Economic Forum version, the eight factors are the aggregate
of 56 indices and the qualitative results from 3’000 surveys. World Economic Forum (1998) p.
79 & 318
100 Sachs, Sievers (1998), World Economic Forum Website (September 1998)
37
regarding past improvements in the business climate, and the expected direction of
future changes. Ghana is ranked as 13th country on the improvement index (with a
weight of 0), down from number 5 in 1998, indicating no improvements since. On
the optimism index, Ghana is ranked fifth, reflecting the overall positive attitude
coupled with some skepticism regarding expected changes in the two coming years.
In Africa, the best performing countries are those that were able to avoid extreme
economic and political turmoil in the 1970s and 1980s, and have managed to
become dynamic, stable economies with a solid export performance. The middle
performers are in general countries that have implemented reforms but are still
recovering from a long period of poor performance, such as Ghana. On the lower
part of the rankings are countries that continue to struggle with political uncertainty
and are hit by civil wars. On an overall level, the survey results suggest which
specific reforms are most important for African countries: political and policy
stability, openness to trade, transparency between business and government, the
absence of corruption, and improved infrastructure.
6.2.2 Degree of economic freedom reports
The Economic Freedom Index and the Heritage Foundation index have measured
Ghana’s degree of economic freedom. Both indices are an attempt to describe and
compare the institutional environments for business in most countries of the World.
The Economic Freedom Index tries to measure to which extent “individuals in a
nation are free to choose for themselves and engage in voluntary transactions with
others, and have their rightly acquired property protected from invasions by
others.”101 The index consists of 17 components, which are weighted and divided
into the four areas of money and inflation, government operations and economic
structure, taxes and subsidies, and international trade. On a scale from 10 (country
among the freest of the World) to 0 (least free), Ghana’s weighted overall rate for
1995 is 4.4, which ranks it 78th among the 115 countries of the study, and 11th
among the 31 African countries. The rate of 4.4 is a modest improvement over the
rates of 1985 (2.7) and 1990 (3.3), with the higher rate resulting primarily from
lower tax rates and tariff reductions since 1985. The main problem areas of Ghana
according to the report are its high and variable inflation rate, its approval
requirements for foreign investors, price controls on several products, and the great
101 Gwarner, Lawson (1997) p. 2
38
deal of discretionary authority of political officials, which allows them to intrude
and limit business activities.102
A similar index of economic freedom for more than 100 countries is provided by the
Heritage foundation.103 The index uses ten factors to assess the overall economic
freedom of a nation: trade policy, taxation policy, government intervention,
monetary policy, capital flows and foreign investments, banking policy, wage and
price controls, property rights, regulation policy, and black markets. Each factor is
the average aggregate of several indicators and qualitative criteria. On a scale
ranging from 1 (very free) to 5 (repressed), Ghana’s average rank is 3.1, “mostly not
free”, but with slight improvements from its 1995 and 1996 rankings of 3.2.104 The
main factors determining this ranking for Ghana were relatively high average tariff
rates, a high level of inflation and a high level of business regulation (Table 6).105
102 Gwarner, Lawson (1997) p. 101
103 For a comparison of the Heritage Foundation index and the Economic Freedom of the World
Index see Gwarner, Lawson (1997) pp. 9. Their main critique is that the Heritage foundation
index does not properly define what economic freedom is, and that some components of the
index are highly subjective.
104 The Heritage Foundation (1997) p. xxxi
105 The Heritage Foundation (1997) p. 200
39
Table 6: Constraints on economic freedom in Ghana, 1997
Factor
Score
Reason
Trade policy
4
High average rate of tariffs of 12.5%; handling and customs
delays are frequent
Taxation
3
Low income tax rates and moderate corporate taxes
Government intervention
3
Government consumes 12% of GDP and SOEs still dominate
many sectors of the economy; large public sector; organized
labor generally opposes governments privatization program
Monetary policy
4
High level of inflation
Capital flows and FDI
3
Moderate barriers based on new investment code, with some
investment incentives. Minimum investments of USD 50’000,
coupled with an inefficient and corrupt bureaucracy create
considerable barriers
Banking
3
Central bank heavily influenced by government, and publicsector borrowing crowds out private sector
Wage and price controls
2
Minimum wage and some food subsidies
Property rights
3
Investment code guarantees private property rights against
expropriation. Domestic owned property is less protected
than foreign-owned property, and there have been cases of
arbitrary seizure of domestic commercial property. No central
land registry
Regulation
4
High level of regulation due to burdensome business
licensing and requirements for foreign firms to hire local
employees. Bureaucratic approval required for land
acquisitions; bureaucratic inertia and politically inspired
administrative judgments reduce competition among
domestic firms.
Black market
2
Dismantling of price controls has reduced black market
activities. High tax on used clothes has encouraged
smuggling
Index:
1 – Very low
2 - Low
3 - Moderate
4 - High
5 – Very high
Source: Heritage Foundation (1997) pp. 200-202
Overall, Ghana’s worldwide position in 1997 was number 78. In 1996, only
Mauritius and Botswana ranked in the top 50 nations, with African nations
occupying half of the lowest 20 positions.106
6.2.3 Evaluation of research on competitiveness
The objective of all these reports is to provide an indicator that explains a nation’s
ability to sustain the creation of high value added products, and therefore the
106 Becker (1997) p. 7
40
competitiveness of its companies.107 For each nation, the reports aim to provide a
comparable description of the general state of its economy, of its business
environment and its institutional settings. The comparability across nations allows
potential investors to scan target countries and identify which country provides the
best environment for production. From a country perspective, these reports allow
national governments to assess their standing vis à vis other countries overall and in
particular areas, and to determine in which area further reforms seem to be most
necessary.
All indices are a mix of macroeconomic and microeconomic conditions, in the case
of the competitiveness indicators even supplemented with assessment of firm
behavior. The economic freedom indices limit themselves to measure the
institutional environment, and see the degree of freedom as possible indicator for a
country’s ability to generate welfare. The main weakness of competitiveness
indicators is the lack of a consistent theoretical model behind it. As a consequence,
they have no clear separation between indicators for competitiveness (e.g., real GDP
per capita growth), and the determinants of competitiveness (e.g., economic literacy,
alcohol and drug abuse as used in the IMD report). If we build on the premise that
competitive advantage is created at the level of industries, the reports suffer from the
same deficiency as most macroeconomic approaches. These approaches can neither
provide an explanation for success or failure of a particular industry even though on
the surface all seemingly relevant conditions are there. Also, they give no directly
applicable and actionable advice on what to change to improve the competitiveness
for a nation’s industries. However, all analyses find that Ghana’s macro- and
microeconomic environment is not providing optimal conditions for the growth of
successful companies. The main barriers to economic development are related to the
volatile macroeconomic environment, and political and regulatory uncertainty.
107 Sachs, Sievers (1998) p. 19; World Economic Forum (1998) p. 28; Heritage Foundation (1997)
p. 7
41
III THEORETICAL
CONCEPTS
AND
METHODOLOGICAL
Chapter 7 in this part defines the terms ‘competitiveness’ and ‘competitive
advantage’ in the context of this thesis, and explains why the focus is on the
competitiveness of a nation’s industries. Chapter 8 reviews the theoretical approach
used to explain why certain industries in a nation achieve a competitive advantage. It
describes first the Porter approach that will be used to analyze the competitive
industries of Ghana, then briefly reviews Porter’s previous work leading him to the
currently used approach, and finally discusses Porter in the context of other
economic theories. Chapter 9 reviews the methodology to identify competitive
industries as used by Porter, and describes how this methodology is adapted to be
used with the quality of data available on Ghana. Chapter 8 describes the method to
quantify the impact and importance of Porter’s ‘Determinants of competitive
advantage’ for the competitiveness of Ghana’s industries.
7 Competitiveness – a definition
The term “competitiveness” is one of the magic expressions used by economists,
politicians, and business people in different contexts. Competitiveness can be
defined at the level of nations, industries or individual companies. However,
different definitions about competitiveness particularly at the level of nations exist,
and a clear concept of what will be measured and explained is needed.108
At the level of individual firms, competitiveness is the ability of a firm to survive
and prosper, given the competition of other firms for the same profits. The
competitiveness of a firm is the result of a competitive advantage relative to other
firms. Porter defines competitive advantage as the ability of a company to make
products that provide more value to the customer than rival products, leading to
higher sales and higher profits for that company.109 However, the ability to create
higher value and to extract more profit at one point in time is not sufficient for a
108 For discussions of the meanings and uses of competitiveness see Blattner, Maurer, Weber
(1987) pp. 42-55. For a discussion on the dimensions of competitiveness, see for instance
Neuner (1993) pp. 6-10
109 Porter (1985) p. 2 See also Porter (1996) p. 62
42
company to have a competitive advantage. Rivals will be quick to imitate either the
products or the production processes of a firm, and compete for its profits.
Competitive advantage is only achieved if a company manages to sustain its edge
over its rivals over time.110
In this thesis, an industry is defined as a group of companies located in a nation –
regardless of ownership111 - that produce products that are viewed as close
substitutes by consumers. A nation’s industry consists of a group of companies
competing not only amongst themselves, but also as an aggregate against the same
industries in other countries. Firms position themselves within an industry through
different strategies. In most cases, however, firms in a nation’s industry pursue
similar strategies that make the industry’s strategy clearly different from the strategy
of the same industry in another nation. Important at the industry level is also the
effect of clustering, where vertical and horizontal relationships between suppliers
and buyers can lead to a mutually reinforcing process of increasing competitiveness
through external economies of scale (see Chapter 8.3.3 for more details). A nation’s
industry is competitive relative to other nations’ industries if the industry as an
aggregate has a competitive advantage that allows it to consistently create higher
value and higher profits than rival industries in other nations.
On the level of an entire nation, the term competitiveness has a more vague
connotation. A nation is not the same as a corporation or an industry; nations do not
compete against each other. When talking about national competitiveness, the term
is typically used to describe either a nation’s ability to sustain high productivity,
leading to higher standards of living for its citizens,112 or the quality of a nation’s
110 Porter (1996) p. 62. Foss (1996) p. 1 defines firm strategy to be about how to position and
manage a firm in order to create, protect and increase efficiency rents. A rent is the part of
return accruing to a resource that is not strictly necessary for keeping it in its current use. The
source of this rent must be some unique and hard-to-copy resource that prevents rapid imitation
by competing firms, eliminating the rent-yielding potential. In line with above, competitive
advantage is then the ability of a firm or an entire industry to build up such a rent and to
defend it against competing rivals (Italics added).
111 This is equal to applying the domestic principle, which includes all companies of an industry
that are located in a country, regardless of ownership. In contrast, the national principle looks
at all companies whose home base/headquarters are in that particular country and excludes
activities of subsidiaries from foreign companies. Compare Neuner (1993) p. 7
112 As for instance defined by the OECD and the US Competitiveness Council (see OECD
(1996b) p. 13)
43
business environment,113 i.e. its attractiveness as a location for production.
However, it is difficult to find a clear definition of a nation’s competitiveness, or to
determine an indicator to measure the competitiveness of a country since nations
don’t have a clearly defined bottom-line such as overall profitability or total market
share.114 Neither trade balance nor exchange rates are conclusive indicators for
gaining or loosing competitiveness relative to other countries.115 For Krugman,116
discussions about competitiveness at the level of nations can even be dangerous
because resulting policy actions may be based on a wrong understanding of the
actual problem.
What distinguishes the concept of competitive advantage from the economic concept
of comparative advantage? The main difference between the concept of competitive
advantage and comparative advantage is the notion of a one-time advantage versus
sustainable advantage in dynamic competition. A country’s industry has a
comparative advantage in a certain product if it exhibits a lower relative autarky
price for that good than a foreign country.117 This advantage exists at one point of
time, and strategic actions by rivals can compete away this one-time cost advantage.
A country’s industry develops a competitive advantage if it is able to utilize its
resources to create more value than its rivals, and if it can maintain this better
performance over time. While the concept of comparative advantage rests largely on
“historic” factor advantages, the concept of competitive advantage stresses the
importance of continuous efforts, learning and innovation in an ever-changing
environment where one-time factor advantages can easily be competed away.
In the end, the wealth of a nation is determined by the productivity of its companies
and industries. Higher living standards result from increasing salaries and capital
returns, the factor prices of both labor and capital. These prices are a direct function
of their productivity. 118 The living standard of a nation depends therefore on the
113 See Gassmann (1996) p. 39; 2nd definition used for instance in IMD/World Economic Forum
World Competitiveness Report (see below)
114 See Krugman (1994) p. 31
115 See for instance Krugman (1994) p. 31 for critique of balance of trade as useless indicator.
Others, such as Ul Haque (1994) see a nation’s competitiveness very much related to its ability
to maintain a stable balance of payments.
116 Krugman (1994)
117 Caves, Frankel, Jones (1990) p. 38
118 Productivity is the ratio of the output of goods and services – measured by their market value to the input of resources to produce them (McKinsey Global Institute (1994) Chapter 1, p. 2) or
44
capacity of its companies to achieve high levels of productivity, and to increase their
productivity over time.119 Competitive companies have a competitive advantage
because they use available resources more productively, either through creating
higher value products, or using more cost-effective production processes. The ability
of firms to achieve a competitive advantage is a function of the sophistication of
their strategy, of the quality of their microeconomic environment, and of the stability
of the macroeconomic environment. This research tries to identify why certain
industries in Ghana have achieved a competitive advantage and are competitive
relative to their rivals on the World market. An industry is defined as internationally
competitive if it has a competitive advantage relative to the best worldwide
competitors.120
The interest for industries, rather than individual companies, is based on the findings
from other countries that certain national conditions favor the competitiveness not
only of one company, but also of an entire industry. The objective of this thesis is to
identify these conditions and to explain how they support or prevent the
competitiveness of an industry. Because the needs of each industry are different,
meaningful explanations and directly applicable recommendations on how to
improve competitiveness can only be given at the level of industries or companies.
No nation can be competitive in all industries. However, “exports by above average
productivity industries raise the production volume in these industries, and thus raise
a nation’s average level of productivity. Exports also generate the needed income to
finance imports of those goods whose domestic production would occupy capital
and labor that could be employed more productively elsewhere.”121 Foreign direct
investment raises national productivity if it shifts the production of below average
productivity industries abroad, and allows the investment of repatriated profits in
high productivity industries.
equal, the value created per day of work, dollar of capital invested, and unit of the nation’s
physical resources employed. Porter (1997) p. ix, Porter (1990b) p. 84
119 See also Porter (1990b) p. 84: “The principal goal of a nation is to produce a high and rising
standard of living for its citizens. The ability to do so depends on the productivity with which a
nation’s labor and capital are employed.”
120 Porter (1990a) p. 25
121 Van der Linde (1991) p. 4
45
8 Theoretical approach
8.1 “Diamond of National advantage”
The objective of Michael Porter’s book “Competitive Advantage of Nations” is to
understand why a nation is home base for a successful industry, and why certain
nations have more successful industries than others. For him, the ability of a nation
to create higher living standards for its citizens depends ultimately on the
productivity of its industries and companies. Understanding the determinants of
productivity growth requires to understand how companies improve their
productivity, and which national conditions support or prevent productivity
improvements. The main tenet behind Porter’s theory is that industries in a country
are internationally competitive because of very specific national conditions. One or
several determinants allow these industries to build a competitive advantage. Porter
calls these determinants the “Diamond of National Advantage”, four broad attributes
that individually and as system constitute “the playing field that each nation
establishes and operates for its industries.”122 Together, they form an enabling
microeconomic environment and are the basis for sophisticated corporate strategies
(Figure 13).
Figure 13: The Diamond of National Advantage
Chance
Firm strategy,
structure, and
rivalry
Related and
supporting
industries
Demand
conditions
Factor
conditions
Government
Source: based on Porter (1990a) Figure 3-5, p. 127
122 Porter (1990b) p. 77
46
In short, these four attributes are (1) factor conditions, such as skilled labor or
infrastructure, (2) demand conditions, (3) related and supporting industries, i.e.
suppliers and related industries, and (4) firm strategy, structure and rivalry, the
conditions that govern how companies are created, organized, and managed, and
how they compete with each other. Depending on their characteristics and the
relationship amongst them, they will allow certain industries to become
internationally competitive.123
The general role of the government is to influence the four determinants; it can
upgrade the national attributes that will create an environment in which companies
can become successful. What it cannot do is create sustainable competitive
advantage: A government is not directly involved in the process in making a
nation’s industry competitive. A similar role is played by chance, such as inventions,
political decisions by foreign governments or wars.124 By itself, this determinant
cannot bring about competitive advantage, but it can strengthen and reinforce the
conditions leading to competitive advantage.
The four determinants of national advantage, influenced by government and chance,
shape the environment for competition, upgrading, and gaining and loosing
competitive advantage of industries in a nation. A favorable diamond of national
advantage tends to create an environment that promotes the development of clusters
of competitive industries – geographic concentrations of interconnected companies
and institutions, with vertical and horizontal linkages between suppliers, producers
and customers. These clusters ideally become a mutually supporting system as firms
have access to the best suppliers and most demanding customers, and benefit from a
shared pool of knowledge coming from dedicated research institutions or
experienced workers.
Porter’s theory of national competitive advantage rests on four premises.125 (1) The
nature of competition and sources of competitive advantage differ widely among
industries and industry segments. (2) Global competitors often perform some
activities in the value chain outside their home country. (3) Firms gain and sustain
competitive advantage in international competition through improvement,
innovation and upgrading, by being able to sustain operational effectiveness and by
123 Porter (1990b) p. 86
124 Borner, Porter, Weder, Enright (1991) p. 204 also include entrepreneurship as one determinant
of competitive advantage, along with chance and government.
47
having a strategy that enables them to retain an edge over their rivals. (4) Firms that
gain competitive advantage in an industry are often those that not only perceive a
new market need or the potential of a new technology, but also move early and most
aggressively to exploit it. The objective of Porter was to provide a framework that
allows him to explain the conditions in a nation that make an industry successful.
Central to his theory is the focus on industries. Ultimately, the creation of
meaningful and commercially valuable skills and technology can only be understood
at the level of particular industries.126 These conditions for success, or competitive
advantage, are created and sustained through a highly local process. It is the
differences in national economic structures, values, and cultures, institutions and
histories that make certain industries in a country successful, and that prevent the
success of other industries.127 And with fewer impediments to trade to shelter
uncompetitive firms, the conditions of a nation become more significant because
they are the source of skills and technology that underpin competitive advantage.
The end product of an analysis of the competitive advantages of a nation is a set of
actionable, directly applicable recommendations that are meaningful for both
companies and governments. Meaningful for a company means that the
recommendation can be used to change the company’s strategy and organization.
For governments, these recommendations should indicate where they should apply
their scarce resources most productively to support the development of successful
industries.
8.2 Innovation as driver of competitive advantage
In line with the definition in Chapter 7, competitive advantage is the ability of a
company to make products which are cheaper or better than competing products:
”Competitive advantage grows fundamentally out of the value a firm is able to
create for its buyers that exceeds the firm’s cost of creating it. Value is what buyers
are willing to pay, and superior value stems from offering lower prices than
competitors for equivalent benefits or providing unique benefits that more than
125 Porter (1990a) pp. 69
126 An industry is defined as a group of competitors producing products or services that compete
directly with each other. Drawing boundaries between industries will be based on the Standard
Industry and Trade Classification (SITC). See Porter (1990a) p. 33
127 Porter (1990a) p. 19
48
offset a higher price.”128 To do so, it must either increase the efficiency and
effectiveness of the production process – leading to lower costs of a product, or
improve the quality and features of a product – leading to a higher market value of
the product.
Creating and sustaining competitive advantage requires that a company always stay
ahead of its competition. “A company can outperform rivals only if it can establish a
difference that it can preserve.”129 The challenge for a company is to sustain its
competitive advantage through continuous improvements of its production process
or its products. The argument of the need for continuous improvement and
innovation is central for Porter. Innovation is the result of competitive pressure:
Companies innovate if their current advantages over their competitors are
narrowing, and their profitability is being eroded. In a global economy with free
trade, almost any advantage of a company can eventually be imitated.130
Competitors elsewhere will inevitably overtake companies that stop to innovate, and
the only way to sustain a competitive advantage is to upgrade this advantage, to
move to more sophisticated products and processes. Competitive advantage is the
result of a dynamic and challenging home market. Firms gain competitive advantage
when (1) their home base allows and supports the most rapid accumulation of
specialized assets and skills, (2) their home base provides better information and
insights into product and process needs, and (3) when the goals of owners, managers
and employees support intense commitment and sustained investment.131 Therefore,
on a global basis industries are most successful if their home environment stimulates
and prods firms to upgrade and widen their advantages over time. International trade
and mobile factors such as capital and technology force a country to continuously
compete against the “best of the World.”132 This is the reason why Porter ranks the
importance of attractiveness of an industry on its ability to improve and upgrade, to
achieve higher productivity. With mobile production factors, it is difficult for a
nation to sustain a comparative advantage stemming mainly from factor
endowments. Factor advantages allow a nation only to compete on price, always
128
129
130
131
132
Porter (1985) p. 2 See also Porter (1996) p. 62
Porter (1996) p. 62
Porter (1990b) p. 75
Porter (1990a) p. 71
See Caves, Frankel, Jones (1990) p. 185 for the argument that if some productive inputs for an
industry are “footloose”, production and trade patterns are determined by both absolute and
comparative advantages
49
being threatened by other nations with even cheaper factors, where a nation with
innovative industries can sustain its competitive advantage over time.133
8.3 Review of work leading to “Competitive Advantage of
Nations”
The framework developed by Porter in his book “Competitive Advantage of
Nations” stands at the end of three volumes of work over ten years on industry
structure and company strategy. A brief review of the main points of Porter’s work
intends to establish the basis for understanding the different elements included in
“Competitive Advantage of Nations”, as well as the relationship between Porter’s
framework and other economic theories.
8.3.1 Industry structure determining competitive strategy
The objective of Porter’s first book “Competitive strategy” was to develop a model
to analyze the structure of an industry, as basis for developing a firm’s strategy. In
this model, five forces determine the performance of an industry: the market power
of buyers and sellers, the threat of new entrants and substitute products or services,
and the rivalry within the industry (see Figure 14).
Figure 14: Five forces determining industry profitability
Threat of
new
entrants
Industry competitors
Bargaining
power of
suppliers
Rivalry among existing
firms
Bargaining
power of
buyers
Threat of
substitute
products
or services
Source: Porter (1985) Figure 1-1, p. 5
133 Porter (1990a) pp. 545
50
A firm’s strategy has to build on the understanding of the rules of competition that
determine the attractiveness of its industry, as the industry structure determines who
will keep what part of the value created for buyers. To achieve competitive
advantage, a company has to cope with these rules, and should ideally change
existing rules in the firm’s favor134, e.g., building up entry or exit barriers to change
the intensity of competition.
The focus of Porter is not on the strategy of individual companies, but mainly on the
structure of an industry, and the impact of this structure on the performance of the
entire industry. The model developed in “Competitive strategy” builds strongly on
the theory of Industrial Organization135, especially on the Structure – Conduct –
Performance approach.136 In this approach, the rules of competition are embodied in
the industry structure, which determines the profitability of the industry because it
influences the prices, costs, and required investments of the firms in the industry.137
Competition is a static process, and successful firms are able to build up barriers of
entry to protect their profitability.
8.3.2 Management of firm’s value chain to gain competitive advantage
In his second book “Competitive Advantage” Porter focused on the activities of a
firm that are required to achieve a sustainable competitive advantage. A company
can have two basic types of competitive advantage: low costs or differentiation.
Combined with the competitive scope of either focus or broad target, a company has
the choice between four generic strategies for achieving above average performance
in its industry (see Figure 15).138
134 Porter (1985) p. 4
135 The theory of Industrial Organization deals with the environmental setting within which
enterprises operate and how they behave in these settings as producers, sellers and buyers.
136 This approach focuses on the relationship between market performance and market structure.
Carlton, Perfloff (1994) p. 331. Econometric studies find weak evidence of a link between
market concentration and market performance on the level of individual industries. Ibid. p. 357
137 Porter (1985) p. 4. The five forces model has become the traditional strategy framework since.
See Coyne, Subramaniam (1996) p. 16 for a criticism and further developments.
138 Porter (1985) p. 11
51
Figure 15: Four generic strategies
Competitive advantage
Broad target
Differentiation
Cost
leadership
Differentiation
Narrow target
Competitive scope
Lower cost
Cost
focus
Differentiation focus
Source: Porter (1985) Figure 1-3, p. 12139
To understand how internal activities should be aligned in order to contribute to a
firm’s cost position or basis for differentiation, Porter introduced the value chain as
a tool. “The value chain disaggregates a firm into its strategically relevant activities
(such as R&D, production, marketing) in order to understand the behavior of costs
and the existing and potential sources of differentiation.”140 Competitive advantage
is then the result of aligning the management of the internal activities with the
strategy the company has chosen to follow. The main determinant of company
success is no longer just the barriers to entry, but the management of internal
activities and the building-up of know-how and experience.
8.3.3 National attributes as determinant of national competitive advantage
In “Competitive advantage of nations”, Porter completes his move from static
competition to dynamic competition, with clear references to the work of
139 An improved version of this framework is provided by Porter (1996), where he identifies three
ways of strategic positioning: variety-based positioning (producing only one product at very
low cost), need-based positioning (providing a complete set of activities to serve a specific
group of customers), and access-based positioning (segmenting by access).
140 Porter (1985) p. 33 Porter introduced the value chain as a tool to represent all activities of a
firm, splitting them up into primary activities (e.g., operations, marketing & sales) and
supporting activities (e.g., R&D, human resource management).
52
Schumpeter141 and evolutionary economics.142 Sustained competitive advantage of
an industry is the result of its capacity to continuously innovate and upgrade. This
capacity for innovation is a function of the ‘Diamond of National Advantage’. “Each
point on the diamond – and the diamond as a system – affects essential ingredients
for achieving international competitive success: the availability of resources and
skills necessary for competitive advantage in an industry, the information that
shapes the opportunities that companies perceive and the directions in which they
deploy their resources and skills; the goals of the owners, managers, and individuals
in companies; and most important, the pressures on companies to invest and
innovate.”143
The common element of ‘Competitive Strategy’ and ‘Competitive Advantage of
Nations’ is the importance of the external environment for a firm’s performance. In
both books, the industry is the main unit of analysis, and the success of individual
companies depends to a significant extent on their ability to work within the
structure of their industry. A connection between static position and dynamic change
is established by ‘Competitive Advantage’, where Porter describes how a firm
creates competitive advantage by building up skills and know-how in managing its
value chain – an understanding which provided the basis for innovation-driven
competitive advantage in his 1990 book.144 For Porter, a firm’s strategy is
responsible for the creation of competitive advantage, but this firm’s strategy must
be seen within the structure of the industry in which it operates. Understanding the
‘rules’ and influencing factors of an industry are therefore the basis for strategic
141 Porter (1990a) p. 20, and “My fundamental perspective is more Schumpetarian than
neoclassical. Entrepreneurship and innovation prove central to national advantage.” Ibid. p.
778 N46 referring to Schumpeter (1993) pp. 100
142 Such as Nelson, Winter (1982), referred to in Porter (1990a) p. 731, who developed a theory on
the evolution of capabilities of firms.
143 Porter (1990b) p. 77
144 With this view of competitive advantage, Porter works along similar lines as Alfred Chandler.
The management of internal activities is the main driver of competitive advantage for Chandler
(1992), who argues that the success of companies is the result of organizational and managerial
capabilities. Similar to Porter, Chandler’s learned capabilities result from solving problems
with the production process, acquiring knowledge of customers’ needs, and in becoming
knowledgeable about recruiting and training workers and managers. Only a dynamic view of a
firm’s development provides an understanding how new firms have become successful. While
Chandler focused on the evolution of the multinational firm, Porter stresses the environment
around the firms.
53
actions on the level of the firm, and influences its skills, organizational
arrangements, and success in particular fields. 145
Porter analyzes competitive advantages not only at the industry level, but also at the
industry cluster level. A cluster is a group of industries linked together through
either vertical or horizontal relationship, and Porter finds that successful clusters
tend to be geographically concentrated. The vertical and horizontal relationships
allow sharing specialized factors. They create highly sophisticated demand for
upstream machinery or inputs, and they lead to intensive competition as basis for
innovation.146 Porter’s ‘Competitive Advantage of Nations’ is a book that contains
elements of Industrial Organization theory (e.g., industry structure and competition).
However, the development of competitive industries is the result of innovation and
building of internal capabilities, a view supported by both evolutionary and
resource-based economists.147
8.4 Comparison of Porter with neoclassical approaches
Porter developed a new theory because in his view, ‘orthodox’ economic approaches
were unable to explain which decisive characteristics of a nation allow its firms to
create and sustain competitive advantage in particular fields.
Explicitly, he criticizes the theory of international trade in the Heckscher-Ohlin
version, which is based on the idea that nations have a comparative advantage
145 In his 1996 article, Porter uses his 1990 work to recommend how a company should think
about its strategy. In the ‘Model of the Past Decade’, strategy was about finding and ideal
competitive position in the industry, whereas today, sustainable competitive advantage rests on
the ability to continuously maintain a competitive edge through innovation and change
146 The phenomenon of this concentration of industries has also been modeled by Krugman, where
the origins of concentration lie in the cost of transaction across space and economies of scale,
and where the concentration of industries, once established, tends to be self-sustaining.
Krugman’s model is based on the interaction of increasing returns, transportation costs, and
demand. For him, other important reasons for industry clusters are pooled labor markets,
intermediate products, and technological spillovers. Krugman (1991) p. 99. See also Meckl,
Rosenberg (1995) for a comparison and synthesis of Porter and Krugman. In their opinion, the
idea of the industry cluster should be considered as a common ground of economics (unit of
analysis: nation) and management science (unit of analysis: firm)
147 See de Man (1993) on Porter’s work and his shift from Industrial Organization to
“Austrian/resource-based” perspective. In the resource-based theory, firms create competitive
advantage because of some unique assets that they develop over time. ” Foss (1996) also
argues that Porter’s 1980 book was firmly anchored in Industrial Organization, and that in
1990 Porter is clearly inspired by evolutionary economics.
54
because of different factor endowments. Porter supports the normative theory of
trade. This theory argues that in the absence of trade, there will be some goods
whose opportunity costs on World markets will be lower than those from obtaining
them at home, and that the country should therefore import such goods – and export
those goods in which it has a comparative advantage.148 However, for Porter the
Heckscher-Ohlin version of comparative advantage is insufficient (1) because the
theory is not able to explain current trade patterns and national developments149; (2)
because the underlying assumptions of no economies of scale, identical technology,
undifferentiated products and fixed pool of factors are unrealistic, and (3) because
the theory assumes away the role of firm strategy and leaves no recommendations
for managerial actions.150 While trade based on factor advantages is still important
in natural-resource intensive industries (with unskilled labor and identical
technology), factor advantages are an incomplete explanation for trade in goods
involving sophisticated technology and highly skilled employees. The insufficient
explanatory power of factor-based advantages leads to the conclusion that
government actions are useless if they attempt to restore the competitiveness of a
nation mainly through changes in factor costs.151
Although Porter openly criticizes only the neoclassical theory of trade, his work is
an implicit criticism of the general neoclassical approaches and its unsatisfactory
explanation of the nature and cause of the wealth of nations.152 In particular, the
theory of economic growth has not been able yet to provide a theoretically and
empirically robust model that explains national differences in economic growth
148 Stern (1989) p. 629. For Porter, Ricardo’s explanation of comparative advantage based on
productivity differences pointed into the right direction, but stopped short when it came to
explain why productivity differences existed and changed over time. Porter (1990a) p. 17 “My
perspective is Ricardian, in that I view trade (and foreign investment) as determined most
importantly by productivity differences, here broadened from Ricardo’s theory to include
differences in technology, factor quality, and methods of competing.” Porter (1990a) p. 173
149 Trade patterns are difficult to explain in a world where most developed countries have similar
factor endowments, where a large portion of traded goods have similar factor proportions, and
where companies are able to source and produce worldwide, taking advantage of low cost
factors. Porter (1990a) p. 14. Successful development can happen without natural resources,
like for instance capital-poor Korea becoming a leader in steel production, and the skill-rich
US having eroding export shares in machine tools and sophisticated electronic products. Porter
(1990a) p. 12
150 Porter (1990a) pp. 11
151 Such as devaluation of the exchange rate, wage reductions, and industry subsidies. See also van
der Linde (1991) p. 17
152 See Auerbach, Skott (1995) p. 142
55
rates. The objective of both the neoclassical and new growth theories is to explain
what factors determine the growth rate of output over long periods, and how lowerincome countries will develop in relation to higher-income countries. Neoclassical
growth theories153 predict convergence of income levels of poor and rich countries
because of diminishing returns to capital, under the condition that they have the
same population growth rate, the same saving rate and access to the same production
function. The diminishing returns of capital, however, prevented the model to
explain the wide variation in growth rates across countries and the absence of
convergence between rich and poor countries. 154 To relax the assumption of
diminishing returns to capital, two broad approaches have been followed in the new
growth literature.155 The first approach views all production inputs as some form of
capital, including human capital. The second approach models externalities in the
form of spillover of technical knowledge available to all firms. A further stream of
research incorporated R&D and imperfect competition into the growth
framework.156 As a result, the theories predict that there could be persistent
differences in growth rates among countries with different investment rates.
The main criticism from Porter (and others157) concerns the lack of a microfoundation of both the neoclassical approach and the new growth theory, in
particular the assumption that all producers are operating at their cost frontier, and
that the market will weed out inefficient producers. “Some economists think that if
the proper macroeconomic conditions can be put in place, the rest will take care of
itself… However, the gap between macroeconomic policies and company
competitiveness is a wide one. A myriad of intervening circumstances at the
153 The theory is called “neoclassical” because the neoclassical form of the production function is
the key aspect of the Solow-Swan model, as such the most prominent model in that theory. The
neoclassical production function assumes constant returns to scale, diminishing returns to each
input, and positive and smooth elasticity of substitution between inputs. In the Solow-Swan
model, this production function is combined with a constant saving rate rule to generate a
simple general-equilibrium model of the economy. Barro, Sala-I-Martin (1995) p. 10
154 Dornbusch, Fischer (1994) p. 276; Agénor, Montiel (1996) p. 513. This was patched up by
assuming that technological progress, the unexplained part of the empirical equation, occurred
exogenously. Barro, Sala-I-Martin (1996) p. 11
155 The new growth theory is also called endogenous growth theory because it attempts to
determine growth within the model, rather than by some exogenously growing variable such as
unexplained technical progress. Barro, Sala-I-Martin (1996) p. 38
156 Agénor, Montiel (1996) p. 519; Auerbach, Skott (1995) p. 144). Stern (1991) provides a good
survey.
157 Compare Stern (1991) for development economics, and also Auerbach, Skott (1995) and Ayres
(1997)
56
microeconomic level must be understood and addressed by the private sector and
through government policies if a nation’s prosperity is to improve.”158 None of the
neoclassical or new growth theory models mention factors such as management and
organization, infrastructure, and institutional arrangements of different sectors.159 In
the same line of argument, the assumption of free floating capital and public
knowledge160 is inconsistent with the empirical finding that know-how is not easily
transferable across countries, and that competitive advantage of companies stem
exactly from their ability to innovate and invent faster than their rivals, and from
their ability to create customer value through differentiated products. “Most theories
[of trade and growth] look solely at cost, treating quality and differentiated products
in a footnote.”161
The new growth theories stress the importance of invention, human capital
accumulation, development of new technologies, and financial intermediation as
important determinants of economic growth.162 However, their results cannot be
used to produce specific recommendations for firms and governments in different
countries on where to best utilize their scarce resources in order to develop
sustainable competitive advantage. For Porter, the phenomenon of economic growth
can only be fully understood at the microeconomic level, at the level of firms and
industries. In his theory Porter tries to show how the environment of a nation leads
to the success (and failure) of certain industries. Industries remain internationally
competitive if they continuously innovate and improve their products and production
processes, and the speed of innovation is a function of the home environment. In
contrast to neo-classical economists, for Porter it is not just the market that
determines the success of a company, 163 and competitive advantage of a company
158 Porter (1998a) p. 38
159 “The problem is that although productive efficiency may be a first approximation, the
approximation may be poor and differences in growth and other performance characteristics
may be related precisely to differences in the goodness of fit. Countries may perform well
economically because their industries operate with less inefficiency than in other countries.”
(Italic by author) Auerbach, Skott (1995) p. 147; “Deficiencies of infrastructure together with
the weakness of management and economic organization are likely to account for a substantial
part of low factor productivity in developing countries.” Stern (1991) p. 128
160 Although newer contributions to the theory attempt to model explicitly some monopoly power
as a result of purposive R&D activity. See Barra, Sala-I-Martin (1996) p. 12
161 Porter (1990a) p. 20
162 Agénor, Montiel (1996) p. 531
163 Stern (1991) refers to Porter as “management analyst” because of his emphasis on competition
as driver of economic growth (p. 130).
57
is the result of a dynamic process.164 Porter’s end product is a consistent and
coherent theory165 that can incorporate phenomena such as segmented markets,
differentiated products, technology differences, and economies of scale to explain
the success of individual industries.
8.5 A short critique of Porter’s Competitive Advantage of
Nations
As any economic theory, also Porter’s has some shortcomings. The Porter model
allows to integrate very different national circumstances and industry structures, to
explain the success of very different industries in different countries. Porter does not
expose his model to formal econometric testing. Instead, his work is based on stories
and anecdotes, which makes it difficult to exactly pinpoint the effects of the
“National Diamond” on industry competitiveness.166 There are cases where Porter,
after a very conclusive explanation for the success of an industry, could have found
an example pointing to the opposite of the conclusions he draws.167 This makes it
also difficult to establish a direct cause-effect relationship with his model, because
the reasons for success for every industry are very specific. What Porter provides is
a theory that can convincingly describe and explain the success of very different
industries, and to provide recommendations on how to improve certain key factors
of success. However, it is difficult to use the Porter model to look at a country’s
economic structure and to conclude from that which industries will be most
successful in the future. For instance, in 1991 Borner, Porter, Weder, Enright
identified the forwarding industry as one of the strongest Swiss industries, and at the
same time classified the Swiss insurance industry as an industry which had lost
competitiveness and was under significant pressure. Eight years later, the Swiss
164 Auerbach, Skott (1995) p. 158; de Man (1993) p. 10
165 According to Kromrey (1990) p. 21, the criteria for a theory are: a system of logically
consistent hypotheses which are empirically testable and which allow a clear formulation of
relationships and implications.
166 Although the detailed country studies, e.g. van der Linde (1991) for Germany provide a more
detailed and complete picture of a nation’s competitive industries and the “National Diamond”.
167 Dunning (1991)
58
forwarding industry still has not recovered from the EU 1992 shock, and the Swiss
insurance industry continues to be one of the leading ones in the World.168
Porter’s model is not founded completely on one dominant economic theory. Foss
(1995) criticizes what he calls “increasing eclecticism”, the fact that Porter moved
away from the theory of Industrial Organization to a more eclectic view. To him,
this is much more “a matter of quickly reacting to the need to address some new
phenomena than it has been a matter of applying outgrowths of fundamental theory.
That is, the evolution of his thinking has been much more practically driven than
theoretically driven,”169 which makes in his view Porter’s theory much less
coherent. On the other hand, Porter attempted to provide a theory that could be used
to explain the phenomenon of very different industrial settings, something to which
no economic theory has been able to provide an answer yet.
In my opinion Porter’s “Competitive Advantage of Nations” has two contributions.
The first is a consistent model that can explain why, for example, the environment in
Italy supported a successful fashion industry, and how a completely different
national setting like Germany provided the basis for successful car and machine
manufacturers. The second is that based on results of his analysis, Porter can give
directly applicable recommendations on what to change to improve the
competitiveness of an industry, and what to do to improve the attributes of a nation.
168 Borner, Porter, Weder, Enright (1991) provide an extended version of Porter (1990a) on
Switzerland. For Borner, Porter, Weder, Enright the core skill of the Swiss Forwarding
industry was the order processing and organization. With the fall of customs in Europe, this
service was no longer needed. Most forwarding companies lost significant market share to
small trucking companies that competed solely on price. Swiss forwarding companies such as
Danzas and Panalpina have been slow in offering innovative services such as integrated supply
chain management and are loosing out against fast moving US integrators like FedEx and UPS.
In Europe, the top ten industry leaders have less then 20 percent market share, and industry
consolidation has only started in 1997.
The insurance industry on the other side was able to consolidate and to assume World-wide
leadership in new profitable fields such as asset management (Zurich Financial Services) and
innovative alternative risk transfer products (Swiss Re New Markets).
169 Foss (1995) p. 17
59
8.6 Adaptation of Porter approach to specific situation of
Ghana
“Competitive Advantage of Nations” is a theory about the success of industries in
ten leading nations.170 The main focus of Porter was on the ability of a nation to
innovate and remain competitive in the most advanced and profitable industries. The
question for Porter is: why are certain nations the home base for an internationally
successful industry, what national attributes enabled an industry to build up
international leadership both through export activities and foreign direct investment.
Ghana, as most African countries, is in a different situation. Its goal is to move from
a natural resource-based economy to an innovation-based economy. On its national
agenda are different tasks: How to raise the productivity in the current industries as
prerequisite for competitive advantage, and how to attract domestic and foreign
investors to provide capital, technology and management skills for further economic
growth. For Ghana, it is more important to understand how to develop any industry,
be it domestically controlled or be it a subsidiary of a foreign multinational. The
interesting question is: What are the conditions that make Ghana a home for
internationally successful industries? This means that the focus of research will be
shift from a national perspective to a domestic perspective: Which industries are
successful in Ghana, and what are the specific attributes of the country that make
industries there successful, regardless of the owner’s nationality.
While innovation and upgrading will be important to sustain competitive advantage
later on, the first task of Ghana’s industries is to use the currently available resources
and equipment efficiently, and to acquire a basic understanding of imported
technology as basis for own innovation and upgrading. The challenge for Ghana is
to build up competitive industries in an environment where most exports are natural
resource based, where companies have difficulties understanding the need of their
foreign customers, where there is no specialized related and supporting industry in
place, where domestic competition is limited and management talent is scarce, and
where government activities are at times rather harmful to development.
Even though Porter’s model with the ‘National diamond’ is geared towards
industrialized nations, it can very well be applied to explain Ghana’s national
attributes. What will be treated different is the importance of the national attributes.
170 Fairbanks, Lindsay (1997) applied the Porter model to provide recommendations on how to
improve the competitiveness of the Andean region.
60
For instance, sophisticated domestic demand that drives innovation will be less
important than the status of the factor conditions, as these provide primarily the
basis for efficient production. Innovation in the context of Ghana will not just
include the development of more sophisticated products and processes, but also the
capability to use available technology in an effective way. Applying the Porter
model to Ghana means that the industry will be analyzed and explained based on the
model, but the recommendations with regards to the general role of the different
actors and the importance of the national attributes will be different.171
171 Porter (1990a) pp. 675-682 acknowledges that his focus has been on advanced nations, but that
the principles can be applied to developing nations as well.
61
9 Methodology to measure competitive advantage
In order to identify the industries that are internationally successful, a method to
measure the competitiveness of Ghana’s industries has to be defined.
9.1 World market share of exports as indicator for
competitive advantage
A company, and in its aggregated version an industry, is competitive if it is able to
design, produce, and/or market products that are superior to those offered by
competitors. Products or services are superior if they provide a higher value to
customers, either in the form of lower prices for equivalent benefits, or by providing
unique benefits that more than offset a higher price. 172
In order to determine which industries of a nation have a competitive advantage, we
need to define clear indicators that can be measured consistently across nations.
Producing products that add more value to the customer than competitors’ products
should have two effects for a company: it will lead to higher sales and increasing
market share because more customers demand the products; and it will result in
improved profitability because of higher sales. Hence, indicators to measure the
competitiveness of a company or an industry could be the development of the global
sales volume, relative to competitors (market share), or the industry’s profitability
relative to competing industries. Even though industry profitability would initially
be the best indicator to measure its competitiveness, it is difficult to operationalize.
Industry profitability figures are difficult to compare across countries or other
industries because of distortions stemming from domestic protection, ownership
structure, financial structure and differences in national accounting standards.173
To measure an industry’s World market share, one has to find a robust indicator that
includes both exports and sales generated by foreign direct investments, and that
takes into account the change of the total World market volume for a particular
product. Using an industry’s share in a country’s total exports reflects the industry’s
importance within this country external sector, but leaves out the sales from foreign
172 Porter (1985) p. 3
173 van der Linde (1991) p.26; Porter (1990a) p. 25
62
direct investments and the changes of the World market in which these products
compete. The same holds true for the “revealed comparative advantage”174
indicator, which does not take into account the total World market volume and also
leaves out the sales from foreign direct investments.175
In ‘Competitive Advantage of Nations’, competitiveness was defined as the presence
of substantial and sustained exports to a wide array of other nations, and/or
significant outbound direct foreign investments based on skills and assets created in
the home country.176 Substantial and sustained exports or foreign direct investments
proved that an industry was able to successfully compete on World markets. To
identify the competitive industries, the indicator selected measures the development
of the World market share of a nation’s industry, based on its exports and foreign
direct investments. This World market share of an industry is then compared with
the nation’s market share in total World exports.177 Industries whose relative share
of World exports in that particular industry equal or exceed the nation’s total share
of World trade in a certain year revealed a comparative advantage.178 For each
nation covered, after adjustments for large import shares and for foreign direct
investments179 a profile of all industries was created for three points in time, 1971,
1978, and 1985. Industries with a competitive advantage were those that continued
to have a comparative advantage over these 15 years.
174 A company reveals a comparative advantage if over time its ratio of exports to imports is
bigger than the national ratio of exports to imports, i.e. if its own ‘balance of trade’ increases
faster then the country’s balance of trade. See also Borner, Porter, Weber, Enright (1991) p. 42
175 For a review on industry competitiveness analysis based on other indicators such as factor
productivity and institutional conditions see Borner, Porter, Weber, Enright (1991) p. 42; van
der Linde (1991) pp. 17 - 19
176 Porter (1990a) p. 25. A firm was considered to have its home base in a specific nation if it was
either locally owned, or managed autonomously.
177 Porter (1990a) p. 24. The unit of research, an industry, was defined along the Standard
International Trade Classification (SITC), at the least aggregated five-digit level.
178 Porter (1990a) p. 739: “The use of this cutoff is equivalent to selecting those industries in
which the nation has a revealed comparative advantage, in the parlance of the literature on
international trade.”
179 From the initial list, industries were removed which had a negative balance of trade – unless
their export share was two times higher than average, as well as industries that were considered
to be dominated by foreign companies producing in a nation as part of a global strategy.
Industries where trade was exclusively with neighboring countries (e.g., US-Canadian
automotive trade) were excluded as well, as this trade only reflected geographic proximity.
Added to that list were industries where data indicated that a nation’s firms had made
substantial foreign direct investments in addition to exports (foreign investment data was not
always available in a systematic form). Porter (1990a) p. 740
63
All competitive industries are displayed in a cluster chart to highlight the pattern and
the connections among them (Figure 16). First, industries are grouped by three broad
end-use categories on the vertical axis. Within a broad end-use category, industries
are then grouped along their vertical relationship, from primary goods to services,
allowing an examination of the existence and depth of a national cluster. The shaded
area on the cluster chart identifies the broad sectors in which the nation’s
international competitive positions are related.
Figure 16: Cluster Chart to highlight competitive patterns
Broad
end-use
category
Upstream
industries
Industries
Materials
Forest products
Petroleum/
Chemicals
(products are input
for many other
industries)
Semiconductors/
Computers
Share of country
exports: X %
Share of World
exports: Y%
Industrial and
supporting
functions
Transportation
Power
generation &
distribution
Telecommunications
Defense
Final
consumption
goods and
services
Food/Beverage
Textiles/Apparel
Health care
Entertainment/
Vertical relationship
Industry: Forest products
Primary goods
Wood
Saw, veneer, conifer
Paper
Coated printing paper
Machinery
…
Specialty inputs
Pulp & waste paper
Services
Source: based on Porter (1990a) Figure 7-1, p 288.
Leisure
64
9.2 Measuring the World market export share of Ghana’s
industry
Porter’s approach to measure the competitive advantage of an industry is primarily
based on its World export share.180 Information on a country’s exports is available
in a consistent and comparable form. Two major factors make it difficult to apply
the same approach to Ghana: The availability of reliable data, and the dominant
shares of cocoa, and gold, which account for 70 percent of Ghana’s exports.
9.2.1 Poor quality of Ghana export data
In the Porter approach, UN trade statistics were used to measure the World share of
exports of a certain industry in a nation. These statistics are the only available source
of internationally comparable and reliable trade data that allow intra and crosscountry analysis of narrowly defined industries over an extended period of time.181
However, the last time that Ghana reported both imports and exports to the UN was
in 1984. Since then, the statistics for Ghana are compiled based on the information
given by all other reporting nations (i.e. exports of Ghana are reported as imports in
another country), but not published in the UN trade statistics yearbook.182 It is
hence not possible to directly calculate Ghana’s World share of exports based on UN
data.
For Ghana, two institutions publish statistics on the country’s export: (1) The
Ministry of Trade and Industry, which provides export statistics based on the
Harmonized System (HS); and (2) the Ghana Export Promotion Council, which
provides export statistics for the so-called non-traditional products (all exports
excluding cocoa, minerals, and timber in their raw forms). The two institutions use
slightly different data from the Ghana Customs, Excise and Preventive Service and
180 For a complete picture on an industry’s competitiveness, Porter used also information on its
foreign direct investments. However, using foreign direct investment activities as an indicator
of competitive advantage is a bit more difficult, as foreign investments could have been driven
by import restrictions. Data on foreign direct investments is difficult to get in a disaggregated
form, and hard to compare across countries. In the case of Ghana, this problem is not relevant
because there are limited outward foreign direct investment activities, largely confined to one
company in the gold mining industry.
181 van der Linde (1991) p. 26
182 According to UN statistics personnel, the number of countries reporting trade with Ghana has
varied between 80 and 95 in the last 4 years, which makes the UN trade statistics not a reliable
source to measure Ghana’s export performance (Telephone Interview).
65
compile this information in different, not comparable statistics that contain
significant deviations in some areas.
For the years prior to 1996, the information on exports provided by the Ministry of
Trade and Industry is only given at the 2-digit HS level, and cannot be compared
with UN trade data. In 1995, an export data information system was installed which
allows to capture all exports of Ghana in a consistent form, and first results are
available for 1996 exports.183 The Ghana Export Promotion Council provides
information going back as far as 1986, but only for non-traditional exports.
Therefore, adjustments have to be made to measure the development of comparative
advantage – which is equal to the presence of competitive advantage – over time.
To achieve an understanding of the competitiveness of Ghana’s industry with
comparable data available for one year, both statistics have to be used in
conjunction. Significant deviations are mentioned in the text, and the analysis is
based on the most reasonable number.184
9.2.2 Most exports from gold and cocoa
In 1997, 70% of Ghana’s total export value came from cocoa products and gold. If
in any year Porter’s cut-off rate would be applied (all industries whose share of
World exports was larger than Ghana’s average share of exports), hardly any
industry except gold and cocoa would reveal a competitive advantage.185 In the past
years, other exports mainly from the non-traditional sector have been growing
significantly, but compared to gold and cocoa their share of Ghana’s total exports is
negligible. To evaluate the development of their competitiveness, their export share
is compared against Ghana’s total export share excluding cocoa and gold exports.186
183 Used for the Ghana Export Bulletin, Annual Report 1996 & 1997
184 Information from interview results, other sources, and the consistency with other years was
used to determine the reasonability of a number.
185 If the country’s World market share including gold and cocoa had been used, the following
products had not revealed a comparative advantage in 1996: fish salted, preserved fruit, fresh
vegetables, tobacco, wood charcoal, diamonds, and furniture. The cluster chart for
uncompetitive industries was built from the remaining export goods. Export categories where
total exports were below USD 100’000 in that year were not included.
186 To adjust for the large share of natural resource products, one could also have analyzed the
country’s exports of non-traditional products only. However, the reconciliation of both data
sources into traditional and non-traditional products was not possible because the definition of
non-traditional products is not based on the same categories as provided by the HS.
66
9.3 Revised methodology to measure the competitiveness of
Ghana’s industry
To achieve similar results as used in ‘Competitive Advantage of Nations’ and
accounting for the specific situation of Ghana, two adjustments to the methodology
described above were made:
¶ Ghana’s total World market share in exports is measured based on all
exports excluding cocoa and gold. The World market share of an industry’s
export is determined based on 1996 data for UN total export figures and
Ghana’s official export statistics.
¶ A Ghanaian industry is determined to have a competitive advantage if it
has revealed a comparative advantage in 1996, and if its export growth
between 1990 and 1996 has been higher than the World export growth of
that industry. Industries that had a comparative advantage in 1996 but had
slower growing exports than their respective World market exports are
loosing comparative advantage. Industries that had no comparative
advantage in 1996 but faster growing exports than World market exports
are building competitive advantage.
To measure the world export share of Ghana’s industry in 1996, all Ghanaian
exports were compared against the total World exports. The source for Ghanaian
exports was the Ghana Export Promotion Bulletin 1996, published by the Ministry
of Trade and Industry. The source for World exports was the 1996 International
Trade Statistics Yearbook published by the UN. The exports from Ghana and World
exports were compared on the 3-digit SITC level, the lowest level available in the
International Trade Statistics Yearbook. SITC product descriptions were used to
identify comparable products under the HS code. On the cluster charts for
competitive industries, products are shown on the 4-digit HS level to better illustrate
the individual products. The cluster chart for uncompetitive industries is based on
the 2-digit HS code level.
Complete information on Ghana’s exports at the 5-digit HS level has only been
published starting 1996, after a new data collection system had been implemented
across the country. The Ghana Export Promotion Council collected data on nontraditional exports going back to 1986, based on the individual exports of companies
as reported by Ghana Customs. As no consistent and comparable data on the total
level of Ghana’s exports is available, competitive advantage is measured based on
67
the gain of World market share between 1990 and 1996. Products that have a
comparative advantage in 1996 and have been growing equally or faster than their
respective World market exports are products with a competitive advantage as they
have managed to maintain or gain market share. Products that have a comparative
advantage in 1996 but have been growing slower are losing comparative advantage
because they are losing market share
To build these growth statistics, two data sources are used simultaneously as none
provides complete information on all of Ghana’s exports at a detailed level. The
growth of non-traditional exports from 1990 to 1996 is calculated based on the
Ghana Export Promotion Council Statistics. The growth of traditional exports from
1990 to 1996, gold, cocoa, timber, other minerals, and aluminum, is based on
aggregate export figures from IMF (1999a) Table 53, p. 135, cross-checked with
information provided by the UN 1994 trade statistics yearbook.
Adjustments for large import shares / negative balance of trade were not possible, as
import data was not available in a comparative format; adjustments were made
where other information indicated clearly a negative balance of trade. Adjustments
for foreign direct investments were only needed for one company in the gold mining
industry. Products that had a comparative advantage in 1996 and were not
considered to be competitive were:
HS Code Product
Reason
10
Cereals
Trade balance negative
25
Salt
Decreasing world market share
26
Manganese
Decreasing world market share
27
Petrol products
Trade balance negative
31
Fertilizer
Trade balance negative
39
Plastic articles
Trade balance negative
71
Diamonds
Decreasing world market share
72
Iron and steel
Trade balance negative
Products not included because they were identified as re-exports were:
HS Code
84
85
86
87
Product
Boilers, Machinery And Mechanica
Electrical Machinery And Equipment
Railway Or Tramway Locomotives, Rolling Stock
Vehicles, Other Than Railway
68
10 Methodology to explain impact of determinants of
competitive advantage
The ‘Diamond of national advantage’ framework is used with the objective to
explain how each of the different elements of the diamond – the determinants of
competitive advantage – individually and as a system have influenced the
development of competitive advantage of an industry. From the analysis of a
nation’s most important competitive industries we should then be able to synthesize
a picture of the overall ‘Diamond’.
In this study, the case study approach was chosen to explore how the elements of the
‘Diamond’ determine the competitive advantage of an industry.187 The case studies
examine in detail the history of each industry group selected to understand which
determinants were responsible for the development of competitive advantage. In
each case study, the industry group is systematically analyzed in the context of the
global industry, to understand what enabled these industries to gain a competitive
advantage over the best competitors.
In his 1990 book, Porter did not use quantitatively measured criteria to evaluate the
impact of the determinants on the competitiveness of a nation. However, in 1998,
Porter constructed a Microeconomic Competitiveness Index (MICI), which
measures the relationship between the microeconomic foundations of development
and the prosperity of a nation.188 A similar approach to evaluate the impact of each
determinant was chosen for this research. The individual elements of each
determinant of competitive advantage are based on a similar structure as used by
Porter (1998a), but are adapted to fit the structure of the ‘National Diamond’, and to
include elements that were not part of the MICI.
187 The approach of case studies was chosen as an approach because it allows to analyze in detail
the description and analysis of the research subject – the competitive industries of Ghana.
Based on these case studies, it was then possible to determine what factors are driving the
competitive advantages and disadvantages of Ghana’s industries. See also Kromrey (1990) p.
320
188 Survey data from questionnaires to senior business leaders and government officials in 52
nations were used to estimate the correlation between the microeconomic environment and the
GDP per capita of a nation. The questionnaires were sent out and evaluated together with the
questionnaires prepared for the World Economic Forum (1998) Global competitiveness report
69
Table 7: Overview of elements of competitive advantage reviewed
Determinant
Elements
Variables reviewed
Factor conditions
Raw material
Availability, and quality of raw material
Human resources
Quality of primary, secondary and tertiary
education (particularly scientists and
engineers); quality of on-the-job training and
learning
Specialized factors
Presence of public and private research and
development activities
Capital availability
Quality of capital markets, access to credit and
stock market
Physical infrastructure
Quality of basic infrastructure (roads, ports,
power) and advanced infrastructure
(telecommunications, storage, logistics)
Information
infrastructure
Availability of business and market information
Administrative
infrastructure
Quality and cost of administrative and
regulatory environment
Demand conditions
Size of home market
Quality of demand
Degree of buyer sophistication, quality of
regulatory standards, openness of public
sector contracts
Related and supporting
industries
Supporting industries
Quality and quantity of supporting industries
Related industries
Quality and quantity of related industries
Firm strategy, structure
and rivalry
Structure and rivalry
Competitive intensity; presence of barriers to
entry
Climate for
investments
Influence of Industry, trade, and labor policy;
economic and political uncertainty
Strategy
Strategic focus; value chain presence;
management practices and goals of individuals
Macroeconomic
stability
Interest rate level, volatility of exchange rate,
inflation
Microeconomic
environment
Influence on factor conditions; demand
conditions; related and supporting industries;
firm structure and rivalry; strategy
Development of
competitive advantage
Nature of current advantage; development of
advantage
Capacity for innovation
Possibilities for innovation
Government
Summary
Source: Based on Porter (1998b) Table 2, p. 60 with adaptations
70
In every industry, each element is ranked on an ordinal scale from 2 (very important
for competitive advantage) to – 2 (major obstacle to competitive advantage), with 0
defined as ‘not important for competitive advantage’. For the summary evaluation of
the development of competitive advantage and the capacity for innovation, an
ordinal ranking from 2 (high) to 0 (low) is used. The ranking of each element per
industry is based on a subjective evaluation of the element. The summary weights
for all factors are an unweighted average for all selected industries.
Six industry groups were analyzed in these case studies: five industries that have a
competitive advantage, and one industry with a competitive disadvantage. Selected
were those competitive industry groups that represented the most important clusters
in Ghana. The textile and garment industry group was chosen to understand the
determinants of its uncompetitiveness, as a basis to reinforce the understanding of
the status of Ghana’s ‘National Diamond’.
Most of the information for these case studies has been gained from structured
interviews with individual companies of each industry analyzed. Supporting
information comes from industry journals, and other literature sources. Interviews
were held in Ghana in two rounds, in the summer of 1995, and in the winter of 1999.
In total, 15 interviews were held with company representatives, and 19 interviews
were held with representatives from banks, industry associations, supporting
institutions, and government officials. At the time of this study, there was no reliable
primary data (e.g., company addresses, type of industry) available to extract
information with the help of a structured questionnaire.
Each case study starts with a description of the current industry structure in the
context of the international market place, with an analysis of global buyers, global
competitors and substitutes. The second part is an overview of the industry’s history,
its founding, its development over time, and the factors that have influenced the
current structure. On the basis of the industry’s structure and historic development,
the impact of each determinant of competitive advantage is analyzed along the
elements of Table 11. The results are then summarized to describe the determinants
of competitive advantage for Ghana’s industries. This allows assessing the overall
importance of each element – and on a more aggregate level the importance of each
determinant – on the competitive advantage of Ghana’s industries. The summary
evaluation of Ghana’s ‘National Diamond’ is then used to verify the working
hypotheses from Chapter 2.3.
71
IV ANALYSIS OF COMPETITIVENESS OF
GHANA’S INDUSTRIES
The objective of this part is to provide an analysis of Ghana’s competitive industries.
The first chapter provides an overview of all competitive industries based on the
methodology described in Chapter 9. The following chapters contain detailed
analyses of Ghana’s competitive industries and their nature of competitive
advantage. The last chapter reviews one uncompetitive industry and tries to
determine the reason for its competitive disadvantage.
11 Ghana’s competitive and uncompetitive industries
The overview of Ghana’s competitive and uncompetitive industries forms the basis
for the analysis of the determinants of competitive advantage of Ghana’s
competitive industries. In form of cluster charts, the structures of the competitive
and uncompetitive industries are shown. The degree of competitiveness is reflected
in the relative export share of each cluster: Very competitive industries have export
shares that are much higher than the nation’s export share. Less competitive
industries have export shares slightly above the nation’s export share. The different
levels of export shares – or degrees of competitiveness – are shown by different
typefaces. Grey shades indicate that industries are related.
11.1 Ghana’s competitive industries
The bulk of Ghana’s competitive industries are in natural resource extraction, and in
agriculture. Consequently, the country’s largest competitive cluster is in materials,
dominated by the gold mining, and the aluminum processing industries. The second
largest cluster is in foods, in particular in cocoa. The third largest cluster is the forest
cluster. The housing and personal sectors are quite small. There are no export
industries in the “industrial and supporting functions” clusters – neither in the
competitive, nor in the uncompetitive sector. Relative to its World market share, the
fastest growing cluster has been cocoa, followed by gold, aluminum, preserved fish,
oil, and fruits.
The relationships between the different clusters are only weakly developed. There
are some ties between the materials cluster (aluminum) and the housing cluster
72
(aluminum household goods); and the forest cluster and the housing cluster are also
related (furniture, special inputs). All other competitive clusters, however, have only
weak or no links at all to other competitive clusters. Even within clusters there are
only weak vertical links. There is a link between the food-special input (cocoa) and
primary food (chocolate), as well as within the primary food sector such as
pineapples and papayas, or fresh/frozen fish and canned fish. Yet, these links are not
strong, and the success in the fish canning industry has not spread to other sectors.
Table 8: Cluster chart for competitive upstream industries189
Upstream industries (HS-code, description)
Materials
Forest
Primary
2606 Aluminium ores
4001 Natural rubber and similar
gums in primary form
7108 Gold
4407 Wood sawn or chipped lengthwise sliced or
peeled > 6mm thick
4408 Veeer sheets and sheets for plywood (not
exceeding 6mm)
4412 Plywood, venered panels and other similar
laminated wood
7601 Aluminium, unwrought
7606 Aluminium, plates, sheets and
strips of thickness > 0.2mm
Machinery
Special
inputs
Legend
Between 0 and 0.01% above Ghana's total export share (excl. cocoa and gold)
Between 0.01 and 0.1% above Ghana's total export share (excl. cocoa and gold)
Above 0.1% of Ghana's total export share (excl. cocoa and gold)
Cocoa and gold
Related industries (clusters)
Note: Numbers indicate 4-digit HS code for product class; related clusters (also between upstream
and final consumption industries) are shaded in gray
189 To illustrate how the competitiveness of an industry was determined, I use the example of the
aluminum industry: In 1996, Ghana´s total export value made up 0.03 percent of total World
export value, based on the Ghana Export Bulletin (1996) and the UN trade statistics yearbook
(1997). In the same year, Ghana´s aluminum export value made up 0.6 percent of total World
aluminum export value, indicating that in 1996 aluminum had a comparative advantage in
Ghana (also based on the Ghana Export Bulletin and the UN trade statistics yearbook). For
1990, no complete export statistics for Ghana have been published. The information for 1990
is based on the Ghana Export Promotion Council statistics for non-traditional products, and
IMF export statistics for traditional exports (minerals, cocoa, aluminum). In 1990, Ghana´s
aluminum export value made up 0.03 percent of total World aluminum export value. The fact
that over six years Ghana´s aluminum exports have been growing gained market share in
World market exports and have therefore grown faster than total World aluminum exports
indicates that between 1990 and 1996, Ghana´s aluminum industry has developed a
competitive advantage.
This approach was applied systematically to all Ghanaian exports on the 4-digit HS level (to
identify also low volume competitive products). Uncompetitive industries were also analyzed
at the 4-digit level, and then summarized to the 2-digit HS level in the cluster charts.
73
Table 9: Cluster chart for competitive final consumption goods
Final consumption goods and services (HS-code, description)
Food & beverage
Housing
Personal
Textiles
Primary
Basic foods
304 Fish fillets and other
fish meat
305 Fish, dried, salted,
smoked
306 Shellfish
714 Roots and Tubers
with high starch
content,egl. Yams,
cocoyams etc.
803 Bananas - Plaintain
7615 Houshold
articles of
aluminium
9403 Furniture and
parts
2401 Unmanufactured
tobacco
804 Pineaples,
Mangoes,Avocados,
Guavas, Figs, Dates
807 Melons including
watermelons and
papayas
901 Coffee
904 Pepper
910 Ginger, saffron,
turmeric, thyme, bay
leaves, curry
Edible oils
1207 Other oil seeds and
oleaginous fruits
1511 Palm oil and its
fractions
Processed foods
1604 Prepared or
preserved fish
1806 Chocolate and
other food
preparations
containing cocoa
2009 Fruit juices (incl.
Grpe must) and
vegetable juices
Machinery
Special
inputs
Legend
1209 Seeds for sowing
4409 Parquet
flooring
1211 Parts of plants
4418 Builder's
joinery and
carpentry
1801 Cocoa beans
1802 Cocoa shells
1803 Cocoa paste
1804 Coco Butter
Between 0 and 0.01% above Ghana's total export share (excl. cocoa and gold)
Between 0.01 and 0.1% above Ghana's total export share (excl. cocoa and gold)
Above 0.1% of Ghana's total export share (excl. cocoa and gold)
Cocoa and gold
74
11.2 Ghana’s uncompetitive products
The list of Ghana’s uncompetitive industries is far longer than competitive
industries. On a very broad level, there is a distinction between processed goods
mainly for domestic consumption, industries dominated by state-owned enterprises,
and machinery and special inputs for competitive industries.
In the final consumption segment with the food, textile, housing, personal,
entertainment and health clusters, most products are made primarily for the domestic
market by foreign multinationals (e.g. milk products, soap, pharmaceuticals) and
domestic producers. Within these clusters there are some weak vertical relationships
relating to machinery and special inputs; the special inputs and machinery cluster
builds on imported components, and the export figures also probably contain a
significant part of re-exports of used equipment.
State-owned mining companies control the manganese and diamond industries, and
Ghana has lost significant market share in the past years. Other upstream industries
such as the paper, petroleum and chemical industries are mainly former SOEs,
whose performance has improved significantly in the past 15 years, but which are
still not internationally competitive as their processing of imported raw material
adds little value.
Related to competitive upstream industries are the uncompetitive primary forest
clusters, and the materials machinery cluster. The products in the forest sector have
lost competitive advantage as they were replaced with higher value added goods.
The machinery sector in the materials industry reflects mostly re-exports of mining
machinery. In the special inputs for materials is one industry that provides special
input to the competitive gold industry.
75
Table 10: Cluster Chart for uncompetitive upstream industries
Upstream industries (HS-code, description)
Materials
Primary
Machinery
Special
inputs
Legend
26 Manganese
71 Diamonds
72 Iron And Steel*
73 Articles Of Iron Or
Steel*
74 Copper Scrap*
79 Zinc And Articles
Thereof
82 Hand tools
84 Civil engineering
equipment
Rubber tyres
87 Lorries
86 Railway equipment
84 Mechanical handling
equipment
84 Sorting machinery
84 Centrifuges
25 Limestone
Forest
44 Rough wood, firewood
48 Paper And Paperboard;
Articles Of Paper Pulp
Petrol/chemicals
27 Petroleum oil and gases*
28 Inorganic Chemicals; Organic Or
Inorganic Compound
29 Organic Chemicals
38 Miscellaneous Chemical Products
Comparative advantage in 1996 lower than in 1990 (no competitive advantage)
Between 0 and -0.04% below Ghana's total export share (excl. Cocoa and gold)
Between -0.004% and -0.008% below Ghana's total export share (excl. Cocoa and gold)
Below -0.008% Ghana's total export share (excl. Cocoa and gold)
* Positive export share, but overall negative balance of trade
76
Table 11: Cluster chart for uncompetitive final consumption goods
Final consumption goods and services (HS-code, description)
Food & beverage
Textiles &
Footwear
Housing
Primary
Basic foods
Apparel
4 Milk products
42 Articles Of
Leather
10 Cereals*
Processed food
17 Sugars And
Confectionary
19 Preparations Of
Cereals
21 Miscellaneous
Food
Preparations
Beverages
22 Beer made from
malt
61 Apparel And
46 Manufactures
Clothing
of straw
Accessories,
Knitted
62 Apparel And
70 Glass And
Clothing
Glassware
Accessories, Not
knitted
63 Made-Up Textile 97 Works Of Art
Articles
64 Footwear
Entertainment
49 Printed Books, 30 Pharmace
Newspapers
utical
Products
34 Soap;
Lubricating
Products;
Waxes
24 Cigarettes
92 Musical
Instruments
68 Articles Of
Stone, Plaster,
Cement
84 Textile machines
Special
inputs
32 Tanning Or
Dyeing Extracts;
Tannins And
Derivative
31 Fertilizers*
52 Cotton, Including
Yarns And
Woven Fabrics
38 Insecticides
(Misc. chem.
Products)
56 Wadding, Felt
And Nonwovens;
Special Yarns
84 Printing
machines
Food processing
Legend
Health care
33 Essential Oils
And Resinoids;
Perfumery,
Cosmetic
Building material
Machinery
Agricultural
Houseware
39 Plastics
articles (table/
kitchenware)*
Personal
11 Milling Industry
Products; Malt;
Starches
27 Salt
Comparative advantage in 1996 lower than in 1990 (no competitive advantage)
Between 0 and -0.04% below Ghana's total export share (excl. Cocoa and gold)
Between -0.004% and -0.008% below Ghana's total export share (excl. Cocoa and gold)
Below -0.008% Ghana's total export share (excl. Cocoa and gold)
* Positive export share; but overall negative balance of trade
77
11.3 Selection criteria for industry analysis
As mentioned in chapter 9, the main selection criterion for competitive industry
groups was their importance for Ghana’s economy. The five competitive industry
groups selected are the aluminum, cocoa, gold, food, and timber industry. The
selection of industry groups rather than individual industries allows to see the
vertical relationship between industries, and provides also a more robust research
object as some industries are dominated by one company only. Together, these five
groups account for roughly 80 percent of all exports. The textile and garment
industry was chosen as an example of an industry that had been quite large in the
1970s, but is not competitive today.
78
12 The competitive advantage of the Aluminum industry
In 1997 bauxite and aluminum products worth USD 146 million accounted for 9
percent of Ghana’s exports. The main products were aluminum ingots (USD 130
million) and bauxite (USD 11 million) followed by aluminum products, mainly
household articles and aluminum sheets (USD 6 million). While Ghana’s aluminum
ingot exports have been stable over the past years, exports of aluminum goods have
grown 64 percent between 1996 and 1997, and bauxite exports have grown 43
percent. The main destination for Ghana’s aluminum ingots is the Netherlands. The
aluminum products are mainly going to neighboring West African countries, Cote
d’Ivoire, Togo, and Nigeria. Ghana’s bauxite is exported to Scotland and Canada.
12.1 Structure of Ghana’s Aluminum industry
Aluminum has one of the most complex processing chains of all metals, with four
major production steps leading from the raw material bauxite to raw aluminum
sheets and profiles. The major steps in aluminum processing are (1) bauxite mining,
(2) refining of bauxite into alumina, (3) smelting of alumina into raw aluminum
ingots, and (4) processing of aluminum ingots into sheets, coils, and profiles. The
processed aluminum is the input for aluminum goods ranging from packaging
material, automotive parts and construction elements to household goods.
Worldwide, 10 vertically integrated global companies dominate about 70 percent of
the global production capacity.190 The key success factor in the aluminum industry
is low cost production, which requires access to different sources of input material,
mainly bauxite and electricity across the globe. The complexity of the production
process and the importance of having access to the right resources are the main
reasons for persistent vertical integration across the industry.
As a country, Ghana is home of almost all major production steps in aluminum
processing, but not in an integrated form. While bauxite is exported to smelters in
Scotland and Canada, alumina is imported from Jamaica and the US for the local
smelter.
190 McKinsey (1997)
79
Figure 17: Ghana's Aluminum Industry, 1997
Hydro electric
power
Bauxite
mine
Export 500'000t (USD 11 million)
Smelter
(1)
Export 180'000t (USD 130 million)
20'000t
Rolling mill
(1)
Export 5'000t (USD 4.5 million)
4'000t
Fabricators
(8)
8'000t
Construction
industry
5'000t
Holloware
manfacture
(6)*
Export USD 1.4 million
* Excludes about 60 small scale manufacturers
Export values (USD) are from 1997; export volumes are based on maximum capacity
Source: Aluworks, Ministry of Trade and Industry, Ghana Export Bulletin (1997)
Bauxite
Ghana has four sites with Bauxite reserves, but only one site can be mined
economically. The Ghana Bauxite Mining Corporation, owned 80 percent by the
Canadian Alcan, operates its open cast mine in Awaso, with an annual capacity of
500’000 tons and about 540 employees. The bauxite is railed from the mine to the
port of Takoradi and then shipped to Alcan’s refineries in Scotland and Canada.
Aluminum
Unconnected to the bauxite mining, Ghana’s aluminum industry stretches from
primary aluminum to processed goods. At the core of Ghana’s aluminum industry is
Valco (Volta Aluminum Corporation), an aluminum smelter 90 percent owned by
US multinational Kaiser Aluminum, and 10 percent by US multinational Reynolds.
The Valco smelter in Tema employs about 1’600 workers, and has a production
capacity of 200’000 tons of aluminum per year, representing 35 percent of Kaiser’s
80
smelting capacity.191 Valco is Africa’s largest smelter, and Ghana’s second largest
company with a turnover of USD 169 million in 1997. The smelter processes
imported alumina into aluminum ingots, using around 270 MWh of electricity, 45
percent of the power produced by Volta River Authority’s Akosombo dam.192 The
bulk of the production, 180’000 tons, is exported, and 20’000 tons are sold to
Ghana’s local industry.
The raw aluminum produced by Valco is processed by Ghana’s rolling mill,
Aluworks, into coils, circles and flat sheets. The company has 430 employees, and
had a turnover of USD 39 million turnover in 1997. The processed aluminum is sold
both to the construction industry, and to hollowware manufacturers. Twenty percent
of the production is exported, mainly to regional markets.
In the local construction industry, aluminum is used for roofing sheets, window
frames, and panels. The hollowware manufacturing industry, about six medium
sized companies and numerous small-scale producers, processes aluminum circles
into cooking pots, washbasins and other household articles. The most important
companies in the hollowware industry are Domod, with 200 employees and a
turnover of USD 4.1 million in 1997, and Pioneer Aluminum with 170 employees
and a turnover of USD 4.6 million.193 Roughly 30 percent of their production is
exported through both formal and informal routes mainly to neighboring
countries.194 About 500 tons of processed aluminum per year goes into Ghana’s
informal (small-scale) sector, which manufactures casted and welded products for
the construction, fishing, agro-processing and livestock industry.
12.1.1 Buyers
Between 1984 and 1994, World consumption of aluminum has grown by 34 percent
chiefly because of the development of new aluminum application in the transport
sector, packaging and construction industry. For the next decade, worldwide demand
for primary aluminum is expected to follow GDP growth of about 2.5 percent per
year.195
191
192
193
194
195
McKinsey (1998) p. 82
IMF (1999a) Table 30, p. 109
Ghana Club 100 (1998)
Aluworks Interview
McKinsey (1997) p. 7
81
Bauxite
Bauxite is a generally available commodity input, but alumina refineries are usually
specified to handle only particular grades of bauxite from one or two sources. Ghana
produces chemical grade bauxite, which is used by Alcan for blending with bauxite
from other sources to achieve a specific grade for its refineries. Alcan currently
lacks access to quality bauxite reserves, and is keen on sourcing more bauxite from
Ghana.196
Primary aluminum
Primary aluminum is a pure commodity product, and secondary markets are
developing rapidly to replace integrated players. Valco produces aluminum based on
a tolling contract, where it charges a fee for the processing of alumina provided by
its customers.
Aluminum products
The buyers of aluminum products are the construction industry and private
households. In the construction industry, price is the main purchasing criteria for a
standard good like aluminum roofing sheets. For household goods, the main
purchasing criteria are price and quality, such as design, finish and non-stick
surfaces of cooking pans.
12.1.2 Competition
Compared to the total World market volume, Ghana plays no significant role in the
global aluminum industry.
Bauxite
Bauxite mining is highly concentrated, with five countries providing about 75
percent of the Western World consumption.197 A large part of bauxite is directly
processed into alumina at the mine, 198 leading to a weight reduction of about 50
196 McKinsey (1998) p. 22
197 Australia, Jamaica, Guinea, Brazil, Guyana. McKinsey (1997)p. 54
198 Out of the worldwide 18 lowest cost alumina refineries, 16 are geographically integrated with a
bauxite mine. McKinsey (1997) p. 61
82
percent.199 In 1996, worldwide bauxite exports amounted to USD 790 million, and
alumina exports to USD 5 billion.200 With exports of USD 11 million, Ghana’s
World market position in bauxite is close to invisible. Ghana’s mining operations
are currently not profitable, and will only become economical once more reliable
and cost-efficient transportation structures are in place.
Aluminum smelting
In the smelting process, alumina, the alumina oxide refined from bauxite, is reduced
to aluminum through electrolysis. Smelting is very energy intensive, with electricity
costs accounting for roughly 20 percent of the total costs of the final aluminum.201
The key factors of success for a smelter are access to cheap and reliable sources of
energy and low labor costs. Energy prices are the main determinant for the location
of electrolysis plants.202 The bulk of the world’s 22 million ton aluminum smelting
capacity is located in the US (4.1 million tons), Russia (3.8 million tons), Canada
(2.3 million tons) and Brazil (2.2 million tons), where energy prices range between
US cents 0.1/kWh (Russia) to US cents 2.4/kWh (US).203 To export cheap energy,
additional capacity for aluminum smelting is planned in the Middle East, Brazil,
Canada and Nigeria. With a capacity of 200’000 tons, Ghana does not have an
important World market position, and its current energy prices of US cents
3.9/kWh204 make it one of the most expensive countries.
Aluminum products
The main competitors for Ghana’s aluminum products are East Asian manufacturers.
In general, the types of household goods manufactured in Ghana are not produced in
developed countries. In the domestic market, closeness to the input material and low
transportation costs result in a very cost-competitive position for the local industry.
199 The minimum economic scale for a bauxite refinery is 1 million tons, which makes it
unfeasible for Ghana’s current production capacity. McKinsey (1997) p. 58
200 United Nations (1997), Table 3.1.1, p. 145
201 McKinsey (1997) p. 37
202 Across the globe, differences in transport costs lead to changes of maximum USD 60 per ton,
while differences in energy prices can lead to cost differences of up to USD 650 per ton, and
differences in labor costs can change costs by up to USD 380 per ton. McKinsey (1997) p. 70,
p. 77
203 McKinsey (1997) p. 70
204 Published industrial rate for 1998. The rates negotiated with Valco are not published.
83
Exports to neighboring countries however are in strong competition with goods from
East Asia and other African countries.
12.1.3 Substitutes
The main applications for aluminum are in transport (25%), building and
construction (22%), and packaging (20%). Aluminum is attractive because it is low
weight, good reusable, easy to reshape, highly corrosion- and weatherproof and has
no taste or smell. Due to the wide range of applications, it is not seriously threatened
by substitutes. In passenger cars and beverage cans, the main substitution threats
come from innovative steel solutions. In the packaging industry, plastic foils and
containers, and glass bottles are the main substitute for aluminum. In the
construction industry, aluminum can be substituted by timber for paneling
applications. For more expensive rooftops, aluminum-roofing sheets are often
replaced with tiles. In the household industry, stainless steel cooking pans are
competing in the more expensive segment of the market, while plastic products
compete in the low price container segments.
12.2 History of Ghana’s Aluminum industry
The first bauxite deposits in Ghana were discovered in 1920. Bauxite mining was
started in 1941 by British Aluminum in two mines, Ejuanema and Awaso, to supply
the Allied forces with aluminum for the aircraft industry. The Ejuanema mine was
closed after the war, while operations at the Awaso mine were continued. Initially,
the mine produced about 150’000 tons per year, increased to about 300’000 tons
until 1976, when the government nationalized all operations. From then on,
production declined rapidly until 1984, when annual output was at 50’000 tons. In
1986 the mine began to increase its production again, and has now reached a
capacity of 500’000 tons per year. In 1995, Alcan Aluminum bought 40 percent of
the mine, and increased its share to 80 percent in 1998, with plans to expand
production to 1 million tons per year, and to rehabilitate the railway track between
the mine and Takoradi harbor.205
The building of an aluminum smelter in Tema was a major part of Nkrumah’s postindependence industrialization strategy. Nkrumah wanted an integrated industry that
205 IAC Newsletter Database, March 23, 1998 “News in Brief: Alcan takes Control of Ghana
Bauxite”
84
would make use of Ghana’s bauxite reserves and the hydroelectric power from an
artificial lake. In his view, this industry was to be the seedling for a whole range of
related industries, such as aluminum-related manufacturing industries, irrigation for
agriculture, lake transport, inland fisheries, and tourist facilities, leading to a rapid
industrialization of Ghana.
The earliest feasibility studies on the production of hydroelectric power at the Volta
River had been initiated already in 1915, and were continued until independence.
After independence, Ghana constructed the Akosombo dam and a deep-sea harbor at
Tema between 1961 and 1965, with the financial help of the World Bank, the US
and the UK government. At the same time, the US-companies Kaiser and Reynolds
undertook the construction of the smelter.206 The smelter had an initial capacity of
145’000 tons/year, and was extended to today’s capacity of 200’000 tons in 1970
and in 1975.207 From 1965 until 1980, Valco supposedly enjoyed the cheapest
electricity rates in the World.208 The construction of a refinery in Ghana was never
undertaken, mainly because of the high investment costs, but also because investors
feared that an integrated industry would be immediately nationalized.209 Until the
opening of a rolling mill, the VALCO smelter remained largely an isolated part of
what should have been a completely integrated industry, and was basically used to
export Ghana’s electricity in form of aluminum. In 1982, the Ghanaian government
initiated the construction of the Aluworks cold rolling mill next to the smelter, to
provide the raw material for a local household good and construction material
industry. The company went public in 1996, and the government sold its share in
1997. Between 1989 and 1994, Valco underwent a massive renewal and
restructuring program,210 and is considered to be Kaiser’s lowest cost smelter at the
moment.211
Ghana’s first small-scale industries have been started in the 1960s and 1970s, often
as joint ventures with foreign owners who then left the country. Today’s largest
hollowware companies, DOMOD and Pioneer Aluminum, were founded in the late
1980s, when rolled aluminum had become directly available as input. The
206
207
208
209
Agbodeka (1992) pp. 143
North (1997) p. 124
See Diaw, Schmidt-Kallert (1994) p. 305 who point to several sources.
Agbodeka (1992) p.144. The building of an alumina processing plan has been a wish of
successive governments ever since. Tsikata (1997) p. 13
210 North (1997) p. 126-136
85
establishment of an aluminum rolling plant and larger processors was accompanied
by the start-up of many small-scale hollowware producers during the late 1980s and
early 1990s.
12.3 Aluminum’s Diamond of National Advantage
Table 12: Determinants of aluminum's competitive advantage
Determinant
Elements
Factor conditions
Raw material
2
2
1
Human resources
0
1
2
Specialized factors
0
1
2
Capital availability
0
0
2
Physical infrastructure
-2
-1
0
Information infrastructure
0
0
0
Administrative
infrastructure
0
0
-1
Size of home market
0
0
1
Quality of demand
0
0
2
Related and supporting
industries
Supporting industries
0
0
2
Related industries
0
0
2
Firm strategy, structure
and rivalry
Structure and rivalry
0
0
2
Climate for investments
1
-1
2
Strategy
0
1
2
Macroeconomic stability
0
0
1
Microeconomic
environment
-1
-1
0
Development of
competitive advantage
-1
-1
1
Capacity for innovation
0
0
1
Demand conditions
Government
Summary
2 = very
important
1 = important
211 McKinsey (1998) p.83
Bauxite
0 = not relevant
Primary
-1 = negative
Processed
-2= very
negative
86
12.3.1 Factor conditions
The factor conditions describe the mix of production factors – the inputs necessary
to compete – which a country has available. Two types of factors are considered in
the analysis of each industry: basic factor advantages, such as raw material and lowcost labor, and advanced factor advantages, mainly special skills and know-how that
are particular to this specific industry. The four broad categories considered here are
raw material, human resources, knowledge resources, capital resources, and the
country’s infrastructure.
Raw material:
Basic factor advantages in the form of high-grade bauxite and cheap electricity were
the main reason for the establishment of bauxite mining and primary aluminum
industry in Ghana. As such, they continue to be the main drivers of competitiveness
of Ghana’s bauxite and primary aluminum industry. However, while the quality of
the bauxite is still a competitive advantage, the advantage of cheap electricity is
vanishing. Primary aluminum is a commodity product where low costs determine
economic success. Electricity and labor, accounting for half of the total costs mainly
drive production costs.212 Between 1960 and 1980 Ghana’s electricity prices were
the lowest in the World, with the result that Valco was considered to be the lowestcost smelter within its group. In 1998, industrial rates for power were raised from
US cents 2.2 to 3.9 in 1998213, leading to a cost increase of at least USD 140/ton of
aluminum produced.214 Operational improvements at the smelter resulted in shortterm profit improvements. However, in the long run Ghana will not be able to
provide competitive energy prices to Valco.215 Worse, the unreliability of supply is
threatening the long-term viability of Ghana’s smelter even more. Severe droughts
have led to falling water levels in the Volta Lake, and electricity production was
212 McKinsey (1997)
213 EIU (1998a) p. 21
214 A cost increase of US cent 1/kWh leads to an increase of approximately USD 140/ton of
aluminum. McKinsey (1997). Although Valco’s electricity rates are not published, it is likely
that in the course of rising energy prices, their rates have increased by at least US cent 1 as
well.
215 The current operating costs of the Akosombo power plant are estimated to be around US cents
4.4/kWh, compared to the US cents 0.1/kWh for Russian power or the US cents 2.4/kWh for
US power. The new Aboadse thermal power plant is estimated to produce at about US cents
5.5/kWh. EIU (1998a) p. 21; McKinsey (1997) p. 70. Significant efforts are made to tap
alternative sources of energy, such as natural gas from Nigeria and electricity imports from
Cote d’Ivoire, but mainly for the benefit of the gold mining industry.
87
curtailed to 6’400 gWh in the best years.216 In 1998, Valco was operating only one
out of its five potlines, and aluminum for domestic consumption had to be imported.
For the aluminum processing industry, the availability of domestic aluminum
constitutes a modest advantage. The processing industry was founded because of
domestically produced aluminum, but there are hardly any price or quality
differences from imported aluminum.
Human resources, specialized factors
In the bauxite mining, human resources and specialized factors play no major role.
In the primary aluminum industry however, competitive advantage has been gained
through investments in staff training. Since the start of its operations in the late
1960s, Valco has been active in skill transfer and workers training, building up the
required skills and specialized know-how internally. In the beginning, about 60
expatriates worked at the smelter. Through continuous skill transfer that number has
been reduced to 13 expatriates. The availability of engineers and specialized workers
has significant benefits particularly for the processed aluminum industry. All major
companies are doing development work, and often benefit from the metallurgical
research work done at Valco. Companies like Aluworks also provide direct support
and advice mainly to their smaller customers, while workers from the larger
aluminum processors often move on to open their own small operation.
Both the bauxite mining and primary aluminum companies are managed by
multinationals, and have a significant share of foreign managers. In contrast, the
aluminum processing industry has been built-up by Ghanaians, and is also controlled
now by Ghanaian management.
Capital availability
Availability of capital has not been an issue for Ghana’s bauxite mining and primary
aluminum industry, which were both financed by their foreign parent companies.
Some aluminum processing companies were able to initially draw on government
investments (Aluworks); most have capitalized themselves either on Ghana’s stock
market or through private investors.
216 EIU (1998b) p. 19, IMF (1999a) Table 30, p. 109
88
Physical infrastructure
The poor state of Ghana’s infrastructure, in particular its decrepit power plant, are a
major problem for the country’s primary aluminum processor (see p. 86). For the
bauxite mining, the poor condition of the country’s railway system is the main factor
for its inability to grow its capacity and to return a profit. The bauxite is transported
over 240 km on a single-track railway, which is also used for manganese, timber,
and cocoa loads.217 As transport costs make up 45 percent of the total FOB price,
Ghana’s bauxite is currently not competitive on World markets.
Most of Ghana’s aluminum processing industry is located around Accra and Tema,
and except for utility problems does not suffer from the country’s poor physical
infrastructure.
Information infrastructure
Although the aluminum industry as a whole is a very important industry for Ghana,
there are no government or industry-sponsored research or training institutions
providing specific support for the industry.
Administrative infrastructure
Overall, the administrative infrastructure of Ghana does not support nor hinder the
development of competitive advantage of Ghana’s aluminum industry.218
12.3.2 Domestic demand conditions
Domestic demand conditions are important for the competitive advantage of an
industry because they shape how firms perceive, interpret and respond to buyers
needs. Firms focus on the demands of their home customers because they are much
closer, both geographically and culturally, and their needs can be felt much more
acutely. Domestic demand has two elements, the total market size, and the quality of
home demand. A large market allows firms to leverage economies of scale, while
small markets force companies to focus on exports early on. Sophisticated demand
217 With the tracks being in poor condition, derailments occur up to twice a month, blocking
shipments from the mine to the harbor for several days.
218 The processed aluminum industry complains about administrative hurdles for exports to
neighboring ECOWAS countries, on which Ghana’s government has only limited direct
impact.
89
and high quality standards force an industry to upgrade their products, and offer
insights into customer needs that are hard to gain in foreign markets.
Bauxite and primary aluminum are commodity products, and the quality and
quantity of home demand play basically no role for its cost-efficient production. For
household aluminum products, however, Ghana’s domestic demand has been quite
important. On the quality side, the country’s growing middle class has been
demanding reasonable-quality cooking pots and household goods. Domestic
customers are no longer happy with simple pots, but also demand special features
such as non-stick surfaces and special designs. The experience gained in their home
market allows Ghana’s hollowware manufacturers now to export successfully to
neighboring countries with similar demand patterns. In the hollowware industry, the
small size of Ghana’s home market and the low quantity of demand has been
favorable, as firms are forced to export if they want to grow.
The Standards Board checks most processed aluminum products. However, it does
not provide any technical advice, and it does not seem to be informed about
international standards.219
12.3.3 Related and supporting industries
A strong related and supporting industries gives companies access to sophisticated
input and partners. Ideally, the close relationship between sophisticated industries
leads to reinforcing advancements through innovation and productivity
improvements, allowing both partners to benefit from the success of the other.
Ghana’s open pit bauxite mine requires heavy equipment, which is all imported. The
company benefits from the contact to other mining companies through the Ghana
Chamber of Mines. Also in the primary aluminum industry all machinery and inputs
are imported. In the aluminum processing industry, all machinery and materials such
as master alloys and pot handles are imported. Nonetheless, the industry benefits
from the clustering of all aluminum processors around Accra and Tema. This
enables the rolling mill to draw on the expertise of its main supplier Valco. It allows
also small customers to ask for support from the rolling mill, starting with the
selection of the appropriate machinery to the preparation of the right material for the
production, and the resolution of technical problems. Furthermore, special expertise
219 Lall, Navaretti, Teitel, Wignaraja (1994) p. 238
90
and know-how on the technical level is easily transferred between firms through
skilled workers changing their employer.
12.3.4 Firm structure, strategy and rivalry
The rivalry within an industry determines how intensive companies compete, and
how strong the pressure is to innovate and upgrade their products. The competitive
environment is determined both by the structure of the industry and the climate for
investment, and the strategic choices taken by firms.
Structure and rivalry
In the bauxite, primary and aluminum rolling industry, there is only one player in
each segment. In the aluminum processing industry, the structure is more diverse
and rivalry is intensive. The easy access to raw material and machinery, and the
possibility to start at small scale results in very low entry barriers for the aluminum
hollowware and household industry. There is intense rivalry within the hollowware
industry, and many former employees of one of the big manufacturers have started
most small-scale companies. The high degree of rivalry has forced the industry to
compete not only on costs, but to upgrade in order to compete on quality, such as
non-stick surfaces and high-quality design.220
Climate for investments
Similar to other mining extraction industries, the bauxite industry benefits from the
country’s favorable regulatory environment, which supports the establishment of
new mines in Ghana. Also the processed aluminum industry has taken advantage of
more favorable investment conditions. Yet, the investment climate for Valco has not
always been friendly. The sheer size of the company, the history of its foundation
and its importance for the country made its dealing with the country’s government
sometimes difficult. This concerns in particular the current energy prices, which
were at a very low level when the company started out in 1960, and expanded during
220 For an analysis of Ghana’s small-scale aluminum industry see Yankson (1996). According to
the author, there are hardly any links between the small-scale and large-scale firms. The smallscale industry processes largely scrap aluminum, with only 4 percent of the material being
purchased from the formal primary aluminum sector. Only 2 percent of the operators had been
employed previously in larger aluminum processing firms. Interview results however indicate
that the skill-transfer from large-scale to small-scale companies is significant, and that
competition particularly in the low price segment is fierce.
91
the 1970s. Subsequent contract renegotiations have led to rising prices up to a level
where the profitability of the company is now seriously threatened.221
Strategy
The competitive success of Ghana’s bauxite mining industry does not rest on a
particular strategy, as the mine is mainly a producer of bauxite for export to its
foreign parent.
The success of Valco in Ghana depended to a significant extent on the two main
elements of its strategy: to maintain good relationships with Ghana’s government;
and to improve production efficiency in order to reach World class productivity and
cost competitiveness in the face of rising energy prices. Aside from that, however,
the company also operates mainly as a production outlet for its multinational parent.
The dominant strategy of small-scale players in the hollowware industry is to focus
on costs, and to sell in local markets. The larger companies however focus on
producing high quality, innovative products to beat their competitors. Their success
hinges not only on good production skills, but also on the presence of other parts of
the value chain such as research and development, and sales and marketing
activities.
12.3.5 Influence of Government Policy
The influence of the government on industry is extensive. Indirectly, the government
shapes an industry’s factor conditions through training and infrastructure, it
influences the sophistication of home demand through regulatory standards, and its
policies are usually reflected in a firm’s strategy. Directly, the government
influences the competitiveness of an industry through direct intervention and
regulation.
Except for the aluminum processing companies, Ghana’s government still influences
every part of Ghana’s aluminum industry. In the past, the nationalization of Ghana’s
bauxite industry resulted in a rapid deterioration of the mine, and only new foreign
investments made a return to profitability possible. Today, there is no direct
government influence on the bauxite mining industry, but the government still owns
a minority share of the mine and is responsible for the (lack of) investments in the
221 Although one could probably argue that prices had been initially low, and currently reflect the
true operating costs of Ghana’s power plants.
92
required transport infrastructure. Ghana’s primary aluminum industry is arguably the
only successful industry resulting from Nkrumah’s national economic policy of the
1960s. The industry buys its most important input factor, electricity, from a statemonopoly, the Volta River Authority. Both the current political atmosphere as well
as the operating efficiency of the monopoly influences the rates negotiated with the
Valco smelter. As a result, the economic viability of Ghana’s primary aluminum
industry is determined largely by the (in)efficiency of Ghana’s SOEs, and by
negotiations with the government. Similar to the foundation of the primary industry,
the forward integration into aluminum rolling is a result of a successful government
initiative, and the country’s economic recovery. Since then, however, the processed
aluminum industry has been growing largely independent of specific government
policies or regulations.
12.4 Summary and conclusion on Ghana’s Aluminum
industry
Nature and development of competitive advantage
The foundation of a competitive primary aluminum and processed aluminum
industry has been the result of targeted government intervention. The construction of
the hydroelectric dam, a deep-sea harbor and later a rolling mill has eventually led to
the foundation of a competitive aluminum industry cluster. The main reasons for
foreign direct investments were basic factor advantages in the form of cheap
electricity. Today, however, this basic factor advantage is about to disappear, and
makes the long-term future of a primary aluminum industry in Ghana uncertain. 222
As the cost of electricity is to a significant extent driven by political negotiations, the
long-term competitiveness of Ghana’s aluminum smelter depends on the ability of
Ghana’s government to improve the efficiency of its monopoly and on the will to
grant competitive (subsidized) rates to the aluminum industry.
Two elements are responsible for the success of Ghana’s processed aluminum
industry. One is the closeness of the Valco smelter, which not only delivers raw
material, but also provides specialist workers and targeted research. The second
element is the low entry barrier to the industry, resulting in intense rivalry between
large and small players. Competition forces companies to look for different ways to
compete than price, and to search for new markets outside Ghana. Even without a
222 EIU (1998c) p. 18
93
smelter close by, Ghana’s aluminum processing industry can remain competitive if
the domestic rivalry continues to force all players to upgrade and innovate. Primary
aluminum is available on the World market, and the aluminum processing industry
will not be severely affected if Ghana would loose its current smelter.
Capacity for innovation
Overall, the capacity for innovation in Ghana’s aluminum industry is limited. In the
bauxite mining and primary aluminum industry, there are very few opportunities to
improve productivity, to launch new products, or to extend into other services. The
main improvement potential in the bauxite mining is the establishment of a better
transport infrastructure, and possibly of additional processing facilities (i.e. alumina
plants). In the primary aluminum industry, innovation comes mainly from the
implementation of new production processes leading to lower costs because of lower
energy requirements or increased machine efficiency. Although there is significant
cost reduction pressure on Ghana’s smelter, this type of innovations is unlikely to be
devised in Ghana, but rather “imported” from other facilities abroad.
In the aluminum processing industry, there remains some capacity for innovation,
such as new product development and product improvements. As domestic demand
and pressure for innovative aluminum solutions is limited, further innovations could
be achieved by exporting to other West African markets.
94
13 The competitive advantage of the Cocoa industry
In 1997, cocoa product exports from Ghana amounted to USD 470 million, down
from USD 559 million in 1996. While exports of cocoa butter and cocoa liquor
had increased from USD 62.5 million in 1996 to USD 89.5 million in 1997,
exports of raw cocoa beans had fallen from USD 495 million to USD 378 million
in 1997 due to less favorable weather conditions223. Chocolate exports in 1997
amounted to USD 700’000, going primarily to neighboring Togo.224
13.1 Structure of Ghana’s Cocoa industry
Ghana is the world’s second largest exporter of cocoa with a World market share
of 13.7 percent,225 behind Cote d’Ivoire (45.1 percent), and ahead of
Malaysia/Singapore (9.2 percent) and Indonesia (9.1 percent). Ghana’s entire
cocoa production is exported through the Cocoa Marketing Board (Cocobod), the
government marketing monopoly. The original objective of the Cocobod had been
to provide farmers with a buffer against fluctuating World market prices, but today
it operates primarily as a marketing, quality control, and tax collection institution.
In Ghana, around 1.6 million smallholder farmers grow cocoa, each cultivating no
more than 3 hectares in mixed culture, together with oil palms, yams and
bananas.226 Cocoa is grown on cocoa trees, which start to produce pods after three
to five years, and achieve their highest yields during their 10th and 20th year.
Farmers ferment and dry the cocoa beans, and sell them to the Cocobod, or to one
of its 17 licensed buyers. In general, high quality cocoa beans are exported
directly, as the country can fetch a price premium for them. Substandard beans are
processed and exported as intermediate products.
223 The 1995/96 crop was a bumper harvest, the best since the 1960s. The 1996/97 harvest was
more representative of an average harvest. EIU (1997b) p. 27
224 Based on Ghana Export Promotion Council Statistics. The Ghana Export Bulletin shows
chocolate exports of USD 9.5 million in 1996 – probably a data entry or classification error
when compared against USD 880’000 exports in 1996 from other sources.
225 Based on 1996 world exports, UN Trade Statistics Yearbook (1996)
226 La Verle (1995) p. 160 indicates that while production is scattered, the trade of cocoa seems
to be in the hands of a small number of farmers, with 25 percent of all farmers receiving 50
percent of the total cocoa income.
95
In the grinding process, cocoa is ground to produce cocoa liquor. In hydraulic
presses, cocoa liquor is split into cocoa butter and cocoa powder. For the
manufacturing of chocolate, cocoa liquor and cocoa butter are mixed, kneaded,
and then conched227; cocoa powder is used in cocoa-flavored products. Two
major cocoa mills operate in Ghana to process those beans that cannot fetch a
price premium. The West African Mills in Takoradi is majority-owned by the
German Schröder/Hosta group, has 450 employees and a processing capacity of
60’000 tons,228 and produces mainly cocoa butter and cocoa cake. The stateowned Cocoa Processing Company has one mill in Takoradi, and one in Tema
with an annual capacity of 25’000 tons, manufacturing cocoa liquor, cocoa butter,
and cocoa powder. It also produces chocolate in its confectionery subsidiary in
Tema. Nestle and Cadbury, two of the world’s largest chocolate confectionery
producers, have smaller operations in Ghana, producing cocoa products primarily
for domestic consumption
Figure 18: Structure of Ghana's cocoa industry, 1997
Cocoa
farming
(1.6 million)
Cocoa Buyer
(17+1)
Export USD 378.4 million
Cocoa
processing
(2)
Export USD 89.5 million
Chocolate
manufacture
(1)
Export USD 0.7 million
Source: Ghana Export Bulletin (1997), own research
227 In the conching process, the chocolate mass is constantly agitated under the application of
heat
228 EIU (1998c), p. 19
96
13.1.1 Buyers
The buyers of cocoa beans are cocoa grinders and chocolate manufacturers. The
cocoa and chocolate industry is heavily concentrated, with five to six players
dominating around 75 percent of the World market in each production step. Five
trading companies dominate the main futures markets for cocoa in New York and
London. The World’s largest cocoa processors are in the US, the Netherlands,
Germany and the UK (Table 13).
Table 13: Market leadership in World cocoa industry
Activity
Number of leading countries/
companies
World market share
(estimate)
Production
4
77%
Trade
5
80%
Processing
4
70%
Chocolate
6
80%
Source: Rabobank (1995) Table 9.1, p. 59, own calculations
In general, there is very little vertical integration between the cocoa bean
production, cocoa processing, and chocolate manufacturing. Large scale cocoa
processing requires significant investments and is a highly specialized business.
The combined marketing of cocoa butter and cocoa powder is tricky, as the
chocolate industry requires more butter than powder, resulting in a surplus of
powder. From a processor perspective, more or less efficient market conditions
make backward integration from the processor to the production level not really
necessary. Seventy percent of cocoa processing is still concentrated in the
consuming countries, as it enables manufacturers to mix suppliers from different
countries, and the ease of raw material storage in temperate climate allows for
efficient year-round production.229 Apparently, cocoa processing in producing
countries is only profitable if beans are of lower-than-average quality, and could
only be sold at a discount.230 However, several leading cocoa growing countries
have moved towards cocoa processing, as this step provides additional valueadded from a pure agricultural commodity product (Figure 19).
229 Rabobank (1995) p. 41
230 Rabobank (1995) p. 41
97
Figure 19: Exports of raw and processed cocoa for major exporters, 1990
100%
80%
Cocoa butter
60%
Cocoa paste
Cocoa powder
40%
Cocoa beans
20%
Ec
ua
do
M
r
al
In
ay
do
si
ne
a
si
(S
a
in
ga
po
re
)
az
il
Br
G
ha
na
N
ig
er
ia
C
ot
e
D
'Iv
oi
re
C
am
er
oo
n
0%
Source: UN Trade Statistics Yearbook (1991)
Ghana’s cocoa is supposedly the world’s best, 231 and is therefore exported mostly
in raw form. High quality Ghanaian cocoa can achieve a price premium of up to
USD 120 per ton as chocolate manufacturers use it for blending.232
13.1.2 Competition
Between 1987 and 1997, World cocoa production has grown about 4 percent a
year. During that time, Cote d’Ivoire increased its markets share from 21 percent
in 1987 to 45 percent in 1997, and Indonesia increased its share from 2 percent to
11 percent.233 Ghana’s growth has been barely in line with World production, just
enabling it to maintain its market share at 13 percent. The market share of
Malaysia and Brazil decreased because of plant diseases, and because falling
World market prices made cocoa unattractive relative to other opportunities. The
success of Cote d’Ivoire is driven by large increases in planted areas, and an
231 Rabobank (1995) p. 15; EIU (1998a) p. 17
232 Relative to cocoa prices from Cote d’Ivoire (Interview Cocobod). However, according to
IMF (1999a) p. 72, average prices for Ghanaian cocoa have been lower than the average
price of cocoa from Cote d’Ivoire. This result raises doubts about the cost-effectiveness of
Ghana’s stringent quality controls.
233 IMF (1999a) p. 66
98
increase in the share of hybrid cocoa trees,234 while Indonesia is able to maintain
relatively low production costs (Table 14).
Table 14: Overview of cocoa producer country characteristics
Africa
Latin America
Asia
Cote
d’Ivoire
Cameroon
Ghana
Nigeria
Brazil
Ecuador
Indonesia
Malaysia/
Singapore
World export
share, 1996
45.1%
4.5%
13.7%
5.2%
4.3%
3.9%
9.1%
9.2%
Production
structure
Mainly small holdings in combination with food
crops
Mainly large, monoculture plantations
Yield (kg/ha)
1997
550
352
453
322
404
244
1074
609
Percent of
trees older
than 30 years
20%
46%
39%
59%
50%
N/A
1%
3%
Production
costs
(USD/kg)
0.40
0.45
N/A235
0.45
> 1.00
N/A
0.30 –
0.80
0.70 –
1.30
Source: Rabobank (1995) pp. 14 – 21, p. 40; UN International Trade Statistics Yearbook (1996);
FAO FAOSTAT (Database download)
In Africa, cocoa is grown predominantly in smallholdings in conjunction with
food crops. In Latin America and South East Asia, cocoa is grown mainly on large
plantations. In general, small holders achieve significantly lower yields than largescale plantations, as these are able to use professional management, and leverage
the latest development in cultivation and planting material. On the other hand,
production costs on small holding farms are significantly lower than on
plantations, and during low price cycles farmers can shift their resources to other
food crops.
Compared to Cote d’Ivoire and Malaysia, Ghana’s cocoa yields are relatively
low,236 as it had only 12 percent hybrid trees, while in Cote d’Ivoire one-third the
tree stock consisted of hybrids.237
234 Rabobank (1995) p. 14
235 Ghana’s production costs are most likely slightly higher than Cote d’Ivoire’s production
costs because of higher quality standards
236 Ghana’s low official productivity is partially distorted by smuggling of cocoa to Togo and
Cote d’Ivoire.
99
While yields in Ghana are low, production costs in Ghana and Cote d’Ivoire are
also the worlds lowest. This is a major advantage particularly in light of the fact
that both countries produce high quality beans. At the same time, however, the
high marketing costs of the state-owned purchasing monopolies and taxes in both
countries largely eliminate this advantage. In 1997, producers in both Ghana and
Cote d’Ivoire received about 55 percent of the total cocoa revenue, with marketing
activities and taxes swallowing the rest.238 For the 1997/98 harvest, cocoa farmers
were paid 54 percent of the export price, while 28 percent went to the finance
ministry, and 18 percent were used to run the Cocobod operations (Table 15).
Table 15: Percentage share in cocoa export revenues, 1995
Country
Producer revenue
Marketing and financing costs
Taxes
Ghana
45
21
34
Cote d’Ivoire
43
23
34
Indonesia
78
12
10
Malaysia
91
9
0
Brazil
72
10
17
Source: IMF (1999) Table 16, p. 70
13.1.3 Substitutes
The most imminent threat to the cocoa industry is the substitution of cocoa butter
with other vegetable fats in chocolate manufacturing. Vegetable fat is cheaper than
cocoa butter, and it allows chocolate manufacturers to tailor the softness of
chocolate to the ultimate use, such as ice-cream coating or non-melting chocolate.
In the US, the use of cocoa butter substitutes is prohibited for products using the
name “chocolate”. In Switzerland and recently in the EU, 5 percent of the total
product weight can be replaced with substitutes. It is estimated that this regulatory
237 The main determinants of productivity are the type of tree used, and the amount of pesticides
applied to fight diseases. Hybrid cocoa trees are productive earlier on, are more resistant to
diseases, and achieve higher yields.
238 IMF (1999a) p. 68. Starting October 1999, Cote d’Ivoire plans to abolish state-controlled
marketing. Economist, September 11, 1999, p. 128
100
change of the EU could reduce worldwide cocoa demand by about 120’000 to
300’000 tons per year (around 12 percent of total World production).239
13.2 History of Ghana’s Cocoa industry
Cocoa was first brought to the Gold Coast by the Dutch in 1815, and the Basle
Missionaries in the mid 19th century. The colonial government supported cocoa
research in its Aburi Botanical Gardens, and started to distribute imported
seedlings to farmers. With the end of slave trade during that time, a great number
of resources were released for agriculture, and cocoa cultivation started booming
in Ghana.240 In 1903, a railway line was constructed between Kumasi and the port
of Takoradi, allowing to ship large volumes of cocoa from the Ashanti forest
region to the coast.
The cultivation of cocoa in Ghana was always in the hands of small-scale farmers,
and European planters never established themselves in the country. Large
companies like Cadburys and United Africa brothers bought cocoa from farmers,
and supplied them with imported manufactured goods in return.241 By 1925,
Ghana was exporting about 250’000 tons of cocoa, and commanded a World
market share of about 44 percent242. Soon after, the global recession, World War
II and the spread of swollen shoot disease reduced annual production to about
200’000 tons until 1950.243 From then onwards, production continued to raise a
record harvest of 575’000 tons in 1964. After this peak, harvests declined rapidly,
Ghana lost its market leadership to Cote d’Ivoire in 1977 and reached its lowest
point in 1983 with an annual harvest of 158’000 tons.
The rise and fall of Ghana’s cocoa has been closely linked to the economic
infrastructure and development programs of the post-colonial government. Taxes
on cocoa financed Ghana’s industrialization strategy, resulting in a resource
transfer from the highly profitable agricultural sector to the poorly performing
industrial sector. The Cocoa Marketing Board was badly run and abused for
239 Rabobank (1995) p. 50 (lower limit); Interview Cocobod (upper limit)
240 Agbodeka (1992) p. 57
241 The involvement of private companies in cocoa purchasing ended in 1947, with the
establishment of the Cocoa Marketing Board.
242 Agbodeka (1992) p. 58
243 von Gnielinski (1986) p. 162
101
political cronyism.244 Adding to the poor internal management, rapidly declining
prices for cocoa lead to a further reduction of cocoa revenues. While farmers had
received 50 percent of the export revenues in the early 1960s and only 40 percent
in the 1970s, the decline in real international prices resulted in even lower
revenues in the 1980s, when they received 60 percent of the export revenues.245
As a consequence, in the short run farmers shifted towards other food crops that
had suffered much smaller real price deterioration. The long run consequence was
a decline in new tree planting, resulting in overaged trees after about 10 years. In
1983, most cocoa trees were aged fifty years and older, way beyond their prime
time, 246 and about 30 percent of the production was smuggled to Cote d’Ivoire
and Togo.247
After 1983, the new government undertook several measures to rehabilitate one of
the country’s most important sectors. These measures included an increase of
producer prices from as low as 25 percent in 1986 to 56 percent in 1997,248 and a
cost-cutting program and slimming of Cocobod from 140’000 employees in 1980
to 10’500 employees in 1998.249 The main cost-cutting measure was the
liberalization of the internal marketing system in 1992, allowing licensed traders
to purchase cocoa from the producers. Additional measures included the
construction of additional feeder roads to ease transportation bottlenecks, and the
elimination of subsidies for agrochemicals and equipment, leading to improved
availability. Since 1987, Ghana’s cocoa production has been growing slowly from
about 280’000 tons to roughly 390’000 tons in 1997, and yields have been rising
from about 200kg/ha to 450kg/ha.250 In April 2000, the state-owned buying
monopoly was privatized under the name of Produce Buying Company.251
244 In 1980, when Ghana produced 200’000 tons of cocoa, the Cocobod employed 105’000
employees, or 0.5 workers per ton.
245 Bulír (1998) p. 9
246 von Gnielinski (1986) p. 162
247 Bulír (1998)
248 IMF (1999a) p. 75
249 Financial Times, June 22, 1998 (Database download) “Survey – Ghana 1998: Cocobod
monopoly under pressure”
250 IMF (1999a) Figure 16, p. 71; Figure 13, p. 65. Part of the yield increase can be attributed to
the reduced smuggling of cocoa.
251 EIU ViewsWire, June 28, 2000 (Database download): “Africa industry: Agribusiness sector
update
102
Foundation of important companies
The international commodity merchant Gill & Duffus founded Ghana’s largest
cocoa processors West African Mills in 1947. The company was nationalized
during the 1970s, and privatized again in 1992. Today, 60 percent of the company
is owned by the German Hosta group, one of the world’s largest cocoa processors,
which invested DM 30 million to “salvage it from immediate collapse”252,
increasing its annual cocoa processing from 10,000 tons to over 50’000 tons. The
second largest cocoa processor in Tema was built by the German Drevici Group in
1965, and taken over by the government in 1972. Attempts to privatize it have
been unsuccessful, but there are plans to double its processing capacity to 50’000
tons per year in 1999.253
252 Divestiture Implementation Committee, Web page (April 1999)
253 EIU (1998c) p. 19
103
13.3 Cocoa’s Diamond of National Advantage
Table 16: Determinants of cocoa's competitive advantage
Determinant
Elements
Primary
Processed
Factor conditions
Raw material
2
1
Human resources
-1
0
Specialized factors
-1
1
Capital availability
-1
1
Physical infrastructure
0
0
Information
infrastructure
0
1
Administrative
infrastructure
-2
0
Size of home market
0
0
Quality of demand
0
0
Related and supporting
industries
Supporting industries
-1
0
Related industries
-1
0
Firm strategy, structure
and rivalry
Structure and rivalry
0
0
Climate for investments
1
1
Strategy
1
0
Macroeconomic
stability
0
0
Microeconomic
environment
-1
0
Development of
competitive advantage
1
0
Capacity for innovation
2
0
Demand conditions
Government
Summary
13.3.1 Factor conditions
Raw material
The quality of the raw material is one of the major determinants of Ghana’s
competitive advantage in cocoa. Ghana is renowned for producing the best quality
104
cocoa in the World,254 and its entire marketing system, starting from stringent
quality controls to an export monopoly, is geared towards maintaining this quality.
However, compared to all competing countries, Ghana’s productivity is very low.
To increase Ghana’s current production level and to grow its yield over the next
years, Ghana’s farmers would need to invest aggressively in new hybrid trees.
This is particularly critical as only 13 percent of all trees are within their peak
producing range of 16 to 23 years, and more than a quarter is over 30 years old.255
Today, they can barely afford more fertilizer and insecticides to increase
production.
Human resources and specialized factors
Cocoa is grown by smallholders who have typically no special skills or knowhow. Although simple cocoa processing is not very technology intensive, the low
skill levels make it difficult for farmers to capture the benefits from new tree
varieties and improved production methods. The highest skill level is required for
cocoa marketing, where Ghana has built up expertise starting in the 1920s.
Although the Cocobod was abused for political favourism during the 1960s and
1970s, it developed into a reasonably efficient administration since 1983. Today, it
continues to sell Ghana’s entire cocoa harvest, and a large part of its processed
products. The Cocobod claims to have a lot of experience about foreign markets,
which it attempts to use in evaluating the profitability-tradeoff between high
quality beans and intermediary products.
Capital availability
The lack of capital is probably the most important factor for the low productivity
of Ghana’s cocoa farmer. As the rural credit system is only poorly developed, it is
very difficult for farmers to finance the purchasing of fertilizer and herbicides for
current production, or to invest in new, higher-yielding trees. To increase yields
and production volumes, Ghana’s Cocobod has initiated several efforts for both
knowledge dissemination as well as producer credits. At the moment, private
cocoa buyers grant producer credits, and there are attempts to build up funds to
provide capital for investments into high-yield varieties, and agrochemicals
financed by a share of export revenues.
254 EIU (1998a) p. 17
255 EIU (1999) p. 19
105
Physical infrastructure
Ghana’s cocoa sector suffers from poor transport infrastructure, mainly the lack of
feeder roads. While this increases the cost of cocoa transport and marketing, it
does not lead to serious quality deterioration since cocoa is not highly perishable.
Information infrastructure
Ghana’s Cocobod has a good understanding of the World markets for cocoa, in
particular about price movements, qualities, and products. This knowledge
however is not widely spread among farmers, but rather utilized to improve the
operations of the Cocobod’s marketing monopoly.
The impact of Ghana’s research infrastructure on the competitiveness of cocoa is
difficult to judge. Ghana is home of the West African Cocoa Research Institute at
Tafo, and has additional research institutes at the University of Science and
Technology in Kumasi, and at the University of Ghana in Legon.256 The work of
these institutions is focused on issues around pest control and yield improvements
through the use of fertilizers and new hybrid varieties. The result of this research
is transferred to the cocoa farmers through the Cocoa service division, an
extension service operated mainly by the West African Research Institute, and
through the Ministry of Agriculture. While the research institutes are participating
at the forefront of scientific research on cocoa, it is unclear how the results of this
work are actually put to work in cocoa farming as farmers in Ghana continue to
use very little agrochemicals, and grow a very low share of high-yield hybrids.
Over the last years the Cocoa Service Division has suffered from cost cuts, and
farmers complain that it has made little contribution to cocoa production.257 There
are plans to merge the extension services of the Cocoa Research Institute and the
Ministry of Agriculture, which should lead to lower service costs and improved
efficiency.
Administrative infrastructure
For primary cocoa, Ghana’s export monopoly and the restrictive buying licenses
impose a heavy burden on its competitiveness. The benefits of the Cocobod
mainly rest in its knowledge about World cocoa markets, its international
reputation for good quality and reliability, and its financing power. The costs
256 von Gnielinski (1986) p. 161
106
however are high: to provide this service, the Cocobod consumes roughly one fifth
of all cocoa export revenues, at least double the marketing costs of other leading
producer countries (see Table 15: Percentage share in cocoa export revenues,
1995).
13.3.2 Domestic demand conditions
Cocoa is a pure export crop, and there is hardly any domestic demand for cocoa.
13.3.3 Related and supporting industries
Despite the size and importance of the cocoa sector, hardly any related or
supporting industries have developed around it. All agrochemicals are imported or
assembled from imported material.
13.3.4 Firm structure, strategy and rivalry
Structure
Small-scale farmers dominate Ghana’s cocoa sector, particularly because land
ownership rights make it difficult to start large plantations, and because the
country lacks skilled plantation managers. However, according to the Cocobod,
the profitability of small-scale farming is higher than in large plantations, as
production costs are lower, and the average quality produced is higher. Rivalry
among farmers is not intense, as every quantity produced is cleared by the buying
monopoly. The Cocobod plans to increase the area under cultivation from 850’000
ha to 1 million by relying on small-scale farmers who will get more technical
support and access to planting credits.
Climate for investments
In both the primary and processed cocoa industry, the climate for investments is
improving. Ghana’s government has recognized the importance of cocoa growing
for wealth creation amongst the rural population. Efforts are made to reduce the
operating costs of the Cocobod and to liberalize internal marketing, and more
emphasis is now being put on financing farmers’ investments in agrochemicals
257 EIU (1998a) p. 19
107
and high-yield trees. Yet, there are no plans to abolish the marketing monopoly of
the Cocobod.
Strategy
The Cocobod’s strategy is to export high quality beans for a premium price, and to
process sub-standard beans within the country. The reasoning behind this strategy
is the fact that the premium on high quality beans should lead to higher profits for
cocoa farmers. The quality of cocoa is a result of the fermentation and drying
process at the farm, and of stringent quality controls by the Cocobod. While
premium beans are supposed to achieve a price premium, substandard beans are
sold to processors below World market prices.258 The country’s largest mill, West
African Mills, is owned by one of the world’s largest operators and has therefore
full access to global marketing channels. The state-owned mills however are
probably producing at above World-market costs if profits are calculated based on
World market costs of beans.259
On a limited scale, Ghana’s state-owned cocoa processor is attempting to enter
foreign markets with Ghana-made chocolate, focusing in parts on the “ethnic”
consumer markets in the US and Scandinavia.
13.3.5 Influence of Government Policy
Government involvement and government regulations have been the main
responsible for the fall and low level of Ghana’s cocoa sector. The instrument of
government intervention is the Ghana Cocobod, in its double function as
marketing monopoly and tax authority. Cocoa is the country’s most important
source of revenue, accounting for roughly 10 percent of all revenues in 1997.
Because of high taxes and the Cocobod’s high operating costs, the revenues of
Ghana’s farmers were the lowest worldwide until 1995. Although the government
has privatized the loss-making Produce Buying Company, it remains reluctant to
fully liberalize external marketing, arguing that it is the only way to maintain high
258 With the argument that this way the cost-savings from reduced marketing costs for these
beans are transferred to the processors.
259 Profitability figures were not obtainable on a comparable basis. Profitability of the stateowned cocoa processor is only measured in form of value-added above cocoa bean price,
which does not allow to calculate the opportunity costs of local processing.
108
quality standards.260 The benefits of these structures are hard to see: Although
both the government and the Cocobod seem to provide intensive know-how to
farmers, productivity levels remain low. There are little incentives to increase
production when taxes eat up a significant part of the profits. Reforms and further
liberalization of internal and external marketing have been started, but are moving
slowly. At the moment, private buyers have a market share of 40 percent in
internal marketing, and there are plans to allow them to export up to 30 percent of
their domestic purchases starting in 2001. For the year 2000, the Cocobod plans to
increase producer prices to 70 percent, at the expense of government revenues,
which will drop from 25 to 15 percent.261 Further reductions in taxation are not
planned, as they would have a significant impact on the country’s budget balance.
13.4 Summary and conclusion on Ghana’s Cocoa
industry
Nature and development of competitive advantage
The advantage of Ghana’s cocoa is based on one basic factor advantage, the
country’s favorable climate. While Ghana was the world’s leading cocoa producer
up until the 1950s, countries with similar climate but less greedy governments
have eroded this comparative advantage during the 1960s and 1970s. Since the
inception of the ERC, the cocoa industry has started to recover – but production
levels have not yet reached the levels of the 1960s. Between 1987 and 1997,
Ghana has just about managed to keep its World market share of roughly 13
percent, while countries like Cote d’Ivoire and Indonesia were able to significantly
increase their production. Unlike Ghana, these countries were able to grow their
productivity with the use of new hybrid trees, through better extension service, and
most of all because of high economic incentives, i.e. low production costs and
high producer revenues. The main problems for Ghana’s cocoa industry are the
low prices paid to farmers. As a result, they have neither the incentive nor the
money to invest into new, high yield trees to increase their low productivity. This
means that the tax transfers to the government continue to deteriorate the
competitiveness of Ghana’s cocoa industry. Also, Ghana’s strategy of producing
260 Financial Times, July 9, 1996 (Database download) “Survey – Ghana 1996: Bumper bean
crop expected” As examples it cites the cases of Nigeria and Togo, where privatization has
led to low quality and a loss of reputation in world markets.
109
only high quality cocoa beans is becoming increasingly questionable. The
Cocobod claims to be able to achieve a price premium for high quality cocoa that
more than justifies higher producer and marketing costs resulting from stringent
quality controls. However, the results of the last ten years do not support this, and
by no means justify the high operating costs of the Cocobod. Today, most large
buyers do no longer rely on certificates, but do their own testing. In addition, the
average price obtained by Cote d’Ivoire has often been higher than that of Ghana
in the last decade.262 Better prices, which are possibly the result of better timing
and higher purchasing power, mean that farmers’ profits per ton are higher in Cote
d’Ivoire than in Ghana. But more important, high quality cocoa is losing
importance for chocolate producers, as they have found ways to better use lowquality cocoa.263
Capacity for innovation
Ghana’s primary cocoa industry still has significant capacity for innovation, in
particular by increasing productivity. In farming, the introduction of high-yield
hybrid trees, improvements in husbandry, and increased use of agrochemicals
could lead to significant productivity increases. To do this successfully,
improvements in Ghana’s cocoa extension service are required to build up the
farmers’ know-how, supported by additional credit facilities to finance the
planting of new trees and the use of agrochemicals. A first step for all programs is
an increase in producer prices as basis for further investments. On the marketing
side, further privatization of the internal marketing would result in reduced
marketing costs and higher producer revenues. On top of all, marketing costs
could be significantly reduced if Ghana would privatize its external marketing. To
do this successfully, however, the entire sector must be prepared for further
reforms, such as the foundation of professional associations dealing with cocoa
trade, and institutionalized knowledge dissemination about World cocoa markets
and best practice cocoa farming.
An unresolved question is the potential value-added from cocoa processing.
Ghana’s cocoa processing industry seems to have less capacity for innovation
other than general productivity enhancement programs. The privatized Takoradi
261 Interview Cocobod
262 See IMF (1999a) p. 73
263 IMF (1999a) p. 81
110
mill is part of one of the large cocoa multinationals, and well integrated into their
production network. While processing in Ghana is probably not ideal for the cocoa
processors, it would allow Ghana to extract additional revenues from its
commodity products.264
264 Although this would only be the case if bean prices to cocoa processors reflect the
opportunity costs of direct exports.
111
14 The competitive advantage of the Food industry
Roughly one third of Ghana’s non-traditional exports265 stem from the sale of
fresh and processed food. In 1997, Ghana exported USD 19.2 million of fresh
fruits and vegetables, and USD 66.7 million of prepared foods. The most
important export items were pineapples (USD 9.6 million), bananas (USD 1.9
million), yams (USD 4.5 million), and canned tuna fish (USD 64.8 million).266
14.1 Structure of the Ghana’s Food industry
With a combined share of 30 percent in 1997’s GDP, agriculture and fishing are
Ghana’s most important sectors, employing roughly 80 percent of the country’s
population. However, the export-oriented fresh produce and processed food
industry is almost completely separated from the rest of the country’s agricultural
sector. Almost all companies producing for exports are focusing entirely on export
markets and do not supply local markets, nor is there significant sourcing from
small-scale farmers.
Ghana’s most prominent fresh food export products are pineapples. Pineapples are
farmed on small and medium-sized plantations around Accra, and are shipped to
Europe by air and sea. With proper irrigation and fertilization, pineapples can be
grown all year round, and on professionally managed farms their ripening point
can be timed to be in line with the peak demand seasons in Europe. About six
large farms, and around 40 smaller farms and exporters dominate the pineapple
export industry. Between 1994 and 1997, the largest six farms have increased their
exports from USD 2.3 million to USD 5.2 million, and accounted together for 54
percent of all pineapple exports in 1997. The country’s largest pineapple farm, Jei
River Farms, is majority-owned by Ashanti Goldfields, and had roughly a 25
percent export share in 1997.267 The country’s main banana exporter is Volta
265 Excluding cocoa products and sawn wood
266 Export figures for bananas, pineapples and yam are based on Ghana Export Promotion
Council Statistics, all others on Ghana Export Bulletin (1996 & 1997)
267 Ghana Export Promotion Council data. The company grows pineapple and papaya on 1,500
ha, and employs 26 workers. Conafric (1996) pp. 132
112
River Estates, a Dutch-owned banana plantation.268 Yam production for exports is
small scale, with the largest farm, Baafour, accounting for roughly 10 percent of
all exports.
Ghana has one of the highest per capita fish consumption in Africa, and its fishery
ranks 35th in world’s fish catches.269 Total landings are estimated at around
250’000 to 330’000 tons.270 Exports of fresh and frozen fish were USD 30.7
million in 1997, and the industry delivers more than 50’000 tons of tuna fish to the
food canning industry. The fishing industry is very small-scale, more than 80
percent of the landings come from the artisanal fishing sector.271 Pioneer Food
Cannery (PFC), Ghana’s 11th largest company, owned by US food company
Heinz, dominates the food processing industry of Ghana. In 1997, PFC employed
1’500 workers, and exported tuna worth USD 42.2 million, making it one of the
largest tuna fish canneries within Heinz’s seven worldwide canneries. The second
largest food processor is Ghana Agro Food Processing Company (GAFCO) with
exports of USD 7.0 million of canned Tuna.272 Numerous smaller food processors
like Astek and Nkulenu export niche market products such as pineapple juice,
canned palm soup and spices.
268 The farm produces about 6000 tons of bananas on 350 ha irrigated farmland, and employs
513 workers. Conafric (1996) p. 127
269 Ames, Bennet (1995) p. 375
270 World Bank (1993b) p. 41
271 The artisan fishing sector is estimated to be around 8’000 canoes, only half of them with
outboard motors. The rest of the landings come from about 80 commercial fishing vessels.
World Bank (1993b) p. 41
272 GAFCO, is owned by Swiss Industrie Bau Nord AG, employs 1’600 people, and produces
canned fish, baking flour, and cooking oil. Divestiture Implementation Committee, Web
page (April 1999)
113
Figure 20: Structure of Ghana's food industry, 1997
Export USD 30.7 million
Fresh/frozen fish
(30)*
Export USD 66.7 million
Fresh produce
Export USD 19.2 million
Prepared food*
(5)
Containers
(7)**
Packaging
material
(4)**
* Exporters only, excluding small scale fishers and food processors
** Based on own research of medium and large companies in Accra and Tema
Source: Ghana Export Bulletin (1997), own research
Grey shades indicate that industries are related.
14.1.1 Buyers
The main markets for Ghanaian tropical fruit are the European Union and
Switzerland. Overall market trends indicate increasing demand for fresh tropical
fruit, partially at the expense of temperate domestic fruit. Imports of fresh fruit
into the EU increased from 14’449 tons in 1993 to 16’332 tons in 1995. At the
same time, fresh fruit production in the EU declined from 30’800t in 1993 to
29’300t in 1995.273
The buyers of Ghana’s fresh and processed food are wholesalers and supermarket
chains, as well as the distribution arms of large multinationals. The buyers of
Ghana’s niche products from smaller food processors, such as yam and palm soup,
are mostly ethnic food stores in the UK and the US.
273 COLECAB, CBI, Protrade (1997) pp. 16-18
114
14.1.2 Competition
Due to technical progress in both transportation and storage techniques274, fresh
fruits and vegetables can be shipped at competitive prices from almost anywhere
on the globe to the large markets of the US and Europe. As a consequence, Latin
American producers are now also serving the European tropical fruit market,
traditionally the home turf of African exporters. The fastest production growth in
tropical fruits has taken place in Asia, which is about to become the most
important exporter in many categories.
In the pineapple export market, Cote d’Ivoire is the current market leader,
followed by Costa Rica, Dominican Republic and Ghana.275 Unlike Ghana, the
leading three countries operate with large farms managed by US and French
multinationals. Using modern production methods and genetically modified
species, these plantations have lower production costs and produce fruits with
longer shelf life. Ghanaian producers claim to export higher quality pineapples
than Cote d’Ivoire, but wholesale price comparisons do not confirm this statement
(Table 17).
Table 17: Wholesale prices for pineapples, 1997
Import destination
per kg, ECU (1997)
Ghana (Air)
Ghana (Sea)
Cote d'Ivoire (Air)
Costa Rica (Sea)
South Africa (Victoria)
France
Germany
Netherlands
1.56
0.69
1.64
1.33
2.13
0.95
0.75
1.14
Source: COLECAB, CBI, Protrade (1997) Table 3.11, p. 29
In the banana market with an import volume of 5 million tons in the EU alone,
Ghana is a small niche player. Exports of banana are constrained by EU quota
requirements, forcing exporters to buy quotas at around Euro 200/ton.276
274 Genetic engineering, low temperature and controlled atmosphere environments prolong the
storage capability of fruits, and the increased capacity and speed of refrigerated ships makes
cheap and fast sea transport possible. OECD (1996a) p. 13
275 COLECAB, CBI, Protrade (1997) p. 3
276 As a former British colony, Ghana falls under the preferential banana import regime of the
EU. However, as the country has historically not been a banana exporter, its export quota is
115
With USD 65 million of exports, Ghana is Africa’s leading producer for canned
tuna fish and the second largest source of tuna in the UK. However, measured on
World market volumes Ghana is a still a small player when compared with
Thailand’s exports of USD 1.6 billion of processed fish in 1996, followed by
China with USD 1.1 billion.
14.2 History of Ghana’s Food industry
Ghana’s agricultural tradition is largely based on small-scale farming and fishing.
The Gold Coast was never chosen to be a settler colony with large-scale plantation
farming as Cote d’Ivoire, and up until independence only few commercial
plantations were established. The first major agricultural activity after the end of
slavery was the production of oil palm products, to satisfy the growing demands of
the soap and margarine industry in Great Britain. In 1884, the Gold Coast exported
about 20’000 tons of palm oil, and 40’000 tons of palm kernels. Only very few
palm trees were cultivated in plantations, most fruits were picked from wild
groves. After World War I, Ghanaian oil palm exports were replaced with
products from Malaysia, where large plantations had evolved.277 The first rubber
plantations in the Gold Coast were established at the end of the 19th century, and
by 1892 the colony had become the world’s third largest rubber exporter.278
However, wide price fluctuations on the English rubber market brought the rubber
industry in Ghana to a halt. The Basle missionaries in the middle of the 19th
century had introduced coffee, but unlike in Cote d’Ivoire, it never really took off
in Ghana.
After independence, the new government founded state-owned farms to grow
cotton, rice, palm oil and rubber, with the goal to establish modern large-scale
mechanized farming in the country. By 1966, Ghana counted 105 State Farms
cultivating about 14’000 ha of oil palm, coconut, kola and rubber, and about 8’600
ha of food crops, employing 20’000 people.279 However, the idea of capitalintensive development of agricultural complexes proved to be a failure. After
1983, most farms were abandoned.
very small. For planned changes see also Neue Zürcher Zeitung, November 11, 1999 p. 21
“Vorschlag für eine neue Bananen-Ordnung der EU”
277 Agbodeka (1992) p. 41
278 Agbodeka (1992) p. 44
279 Asamoa (1996) p. 82
116
Modern fishing started in 1961, with the founding of the State Fisheries
Corporation. The company was equipped with a fleet of deep-sea vessels,280
making Ghana the owner of the largest and most modern fishing fleet of Africa.281
Twenty-seven fish markets with cold storage facilities were constructed across the
country, as well as deep freezing facilities in major harbors. Fishing yields
doubled from 1967 until 1971, from 105’100 tons of marine fish to 230’100
tons.282 As most industries in Ghana, the fishing industry started suffering from
fuel shortages and inadequate storage facilities, and production sled to 199’100
tons of marine fish in 1982. With the arrival of the ERP and support from external
donors, fishing output rose to 302’900 tons in 1989.283 Between 1990 and 1997,
total exports of fish products rose from about USD 41 million to USD 84 million.
Foundation of important companies
The large-scale production of fresh produce for export is of much newer date. In
1986, Ghana’s pineapple exports were worth less than USD 500’000. With the
establishment of larger farms, the export of pineapples grew tenfold to USD 5.1
million in 1991, and doubled to about USD 10 million in 1997. The first largescale plantations were established in the early 1990s, and continue to expand their
area under cultivation. Ghana’s banana farm, Volta River, had already been
planned in 1957,284 but was only established in 1988. The pineapple farm Jei
River was founded by Ashanti Goldfields in 1992.
Parallel to the establishment of a fishing industry in 1960 was the foundation of
the Tema Food Complex Corporation and Pioneer Food Cannery. The Tema Food
Corporation was integrated with a mill and a fishmeal plant, and produced frozen
fish, canned sardines and tuna fish integrated fish canning of sardines and tuna,
smoking and freezing. The company was sold to the Swiss company Industrie Bau
280 Ames, Bennet (1995) p. 387
281 The success of the State Fisheries Corporation was limited. Agbodeka (1992) p. 95 mentions
however that none of the vessels proved seaworthy and were abandoned, and that in 1970 the
company was producing at 20 percent of capacity.
282 La Verle (1995) p. 167
283 La Verle (1995) p. 167
284 Asamoa (1996) p. 55
117
Nord in 1996. Since then, it has doubled its tuna production, and tripled its
workforce to 1’600 employees.285
In 1977, Pioneer Food Cannery entered into a joint venture with US-based StarKist to produce frozen tuna loins for canning in the UK. During the 1980s, StarKist withdrew from Ghana and returned only in 1990 to restart production. Soon
after, Star-Kist was taken over by US-based Heinz, which decided to turn Pioneer
Food Cannery into one of its five worldwide sites for tuna fish canning. After
significant investments into canning equipment, Pioneer Food Cannery increased
its production five fold between 1993 and 1995.
285 IMF (2000a) p. 33
118
14.3 The Food industry’s Diamond of National
Advantage
Table 18: Determinants of food's competitive advantage
Determinant
Elements
Factor conditions
Raw material
2
2
Human resources
1
-1
Specialized factors
-1
-1
Capital availability
-1
0
Physical infrastructure
-1
-1
Information infrastructure
0
0
Administrative
infrastructure
-2
0
Size of home market
0
0
Quality of demand
0
0
Related and supporting
industries
Supporting industries
0
-1
Related industries
0
0
Firm strategy, structure
and rivalry
Structure and rivalry
1
0
Climate for investments
2
2
Strategy
0
0
Demand conditions
Government
Summary
Fresh
Macroeconomic stability
Processed
0
Microeconomic
environment
1
1
Development of
competitive advantage
2
1
Capacity for innovation
2
1
14.3.1 Factor conditions
Raw material
The most important determinants of success of Ghana’s food export industry are
the good farming conditions and rich fishing grounds. Ghana’s humid climate and
rich soil allow the cultivation of most tropical agricultural products, although
mostly on a small-scale level only. Ghana’s location off the Gulf of Guinea gives
it access to rich fishing grounds, in particular tuna fish, the main processed export
119
product. While there are no indications that the farming conditions will worsen,
overfishing is threatening Ghana’s fishing resources.286
Human resources and specialized factors
Overall, the availability of know-how and special skills for the food industry is
limited. There is hardly any know-how or management skill for large plantations
available. Even University-educated farm managers have difficulties to organize
the day-to-day operations of a larger pineapple plantation. As a consequence,
expatriates from Europe and neighboring countries manage most large plantations.
In the food processing industry, the human resource situation is comparable.
Ghanaian students get no real training in the technical aspects of food production
and lack exposure to practical work like new product development or processing
machines. In general, small and medium sized food processors employ mostly
unskilled workers, and only a few of them have personnel with overseas
education.287 In the large-scale food processing industry, sophisticated production
know-how has to be transferred by the parent company.
Capital availability
In the fresh fruit and medium-scale processed food industry, capital comes
primarily as equity capital. All larger food processors are subsidiaries of
multinationals, and most larger farms have foreign participation with adequate
access to capital. For smaller, domestic food producers – in particular farmers, the
current costs of capital, the poorly developed rural banking network, the lending
policies of banks (limited credits to agricultural sector), and the inability to use
land as a collateral (see below) make it almost impossible to take up credits. The
major source of capital is equity capital and reinvested profits. As there is no
capital available for large farms or investments into irrigation, the growth of
successful ventures is often hampered, and food processors cannot backward
integrate into farming to solve their chronic bottlenecks of agricultural supplies.
Physical infrastructure
Success in fresh fruit export depends on the speed and reliability of a country’s
transportation infrastructure. To avoid transport problems, Ghana’s fresh fruit and
286 As a consequence, the government banned the catching of specified shellfish, and all fishing
vessels were required to obtain licenses. La Verle (1995) p. 167
287 See also Boeh-Ocansey (1996) p. 224
120
also the processed food industry are forced to cluster around Accra, close to the
airport and harbor. In the north of the country, poor roads prevent the
establishment of large food plantations in an otherwise fertile environment.
During the 1960s, the government established refrigerated warehouses along the
coast, from which the country’s fishing industry benefits still today. For the fresh
fruit industry, however, there are no refrigerated storage facilities at the airport or
harbor available.
Information infrastructure
The Ghana Export Promotion Council, a government sponsored institution,
provides extensive support to the food exporting industry through export seminars,
export promotion events, and its internal library with market research data. In
some cases, the Export Promotion Council has also assumed an active role in
finding investors for industries that it identified to have significant market
potential. Other than that, Ghana’s agricultural education and research
infrastructure does not provide meaningful support to the fresh fruit and food
processing industry.
Administrative infrastructure
The most important factor limiting the growth of professional plantations is the
difficulty to acquire land. Most of the country’s land is under traditional
ownership structure, which does not allow outright land ownership, but only
provides usurpatory rights. Ghana does not have a central land registry, and it can
take several months to years to identify the rightful owner of a plot of land, and to
negotiate a sale with him.288 In traditional farming, the lack of full land ownership
reduces the willingness of farmers to make long-term investments in plantations,
and prevents the establishment of large commercial farms.289 Other than land
acquisition, there are no particular administrative hurdles. In general, exporting
procedures for food products are simple, and export-oriented food processors can
take advantage of Ghana’s Export Processing Zone.
288 In the case of Volta River Farms, disputes over land ownership delayed its establishment by
one year, leading to exhausting the loan facilities and the subsequent abandonment of the
farm for 2 years. Conafric (1996) p. 125
289 See Besley (1995) p. 936
121
14.3.2 Domestic demand conditions
The quality and quantity of Ghana’s domestic demand has no positive impact on
the competitiveness of the food industry, since the export oriented food industry is
almost completely disconnected from domestic demand. Smaller farmers and food
processors, and imported food satisfy domestic demand for fresh fruit and
processed food. Because of limited domestic demand and long payment delays
from local merchants, even smaller food processors tend to focus more on export
markets and neglect domestic demand.
Ghana’s food industry is controlled by Ghana’s Standards Board, which ensures
the adherence to basic quality standards. Relevant for exporters, however, are the
production standards of the importing countries. Export goods from Ghana are
produced to the requirements of the buyer with respect to quality, health, and
environmental standards. In the fresh produce segment, exporters have to provide
phytosanitary documentation regarding the chemical treatment and storage of their
products. Supermarket chains in the UK send their own inspectors to Pioneer Food
Cannery, and the company has to document that it produces according to the
hygienic and environmental regulations of the EU.
14.3.3 Related and supporting industries
Ghana’s food industry benefits from the presence of local packaging industries.
Packaging material and cans are produced domestically by about 10 firms in
Accra, Tema and Takoradi. However, these firms provide only basic material.
Rugged cartons for sea-transport of fresh pineapples must be imported; and some
non-standard packaging material is not available, forcing for instance small-scale
food processors to compromise on product quality because they cannot get glass
jars for their products. Agrochemicals such as fertilizers and pesticides are all
imported or assembled from imported inputs.
14.3.4 Firm structure, strategy and rivalry
Firm structure and rivalry
The barriers of entry in Ghana’s fresh food exporters are set by the requirements
of export markets. To survive in export markets, exporters must have a continuous
market presence and should be able to deliver large quantities at short notice. To
do so, exporters must either have medium to large plantations or they must be able
122
to draw on a large number of small-scale growers. Rivalry between large
plantations is limited, as there still seems to be excess demand for Ghanaian
pineapple; interactions are more cooperative and focused on overcoming common
difficulties, such as competing against the highly productive plantations of Cote
d’Ivoire and Central America. In the medium-scale food processing industry, the
founding families own most companies. Rivalry is not very intense, and domestic
competition comes mostly from import products or small market stands with
freshly cooked food. The large-scale food processing industry is dominated by
multinationals, which use Ghana only as production location.
Climate for investments
Ghana’s food industry benefits heavily from the government’s ambition to shift
the economy towards the production of non-traditional export products, coupled
with the desire to leverage knowledge gained in export production to increase the
productivity of the entire agriculture sector.
Strategy
The successful strategy in Ghana’s fresh produce and processed food industry is a
focus on export markets, and to backward integrate to reduce frictions with their
supplier industry. The dominant strategy in pineapple farming is to grow on own
plantations. In the past years, most exporters have moved away from small-scale
sourcing, as their production tends to be relatively unreliable in terms of quantity
and quality. In the agro food processing industry, the lack of capital forces most
companies to focus on production only, although most suffer from continuous
bottlenecks in supply. Large multinational companies with sufficient capital are
often vertically integrated, rather than building on a weak supplier industry.290
The largest value added to the product – shipping, distribution and marketing of
the product in the importing country – is managed directly by the buyer. In the
fresh food segment, orders are placed directly with the farmers, who have to ship
the goods within 2 days to one week to the airport or harbor from where the
wholesaler takes over the freight. In the processed food segment, manufacturers
produce either directly for their parent company, or on order of wholesalers. As a
consequence, the value-added from food exports remains small: in general, less
290 Pioneer Food Cannery produces 50 percent of its tuna input with its own fleet
123
than 10 percent of the retail sales revenues can be captured by the Ghanaian
producer.291
14.3.5 Influence of Government Policy
Only few companies of today’s fresh food and processed food industry in Ghana
were established during the industrialization program of the 1960s, and almost all
of them have been privatized or closed down. Most companies were founded after
1990, benefiting from the liberalized trade and investment environment.
Government support has played an important role particularly through the Ghana
Export Promotion Council, which is focused on the promotion of non-traditional
products, in particular food.
14.4 Summary and conclusion on Ghana’s Food industry
Nature and development of competitive advantage
The competitive advantage of Ghana’s food industry is mostly driven by basic
factor advantages – an optimal climate for agricultural products and fishing
grounds. In the past, these advantages were only leveraged in the cocoa industry,
and only after the ERC program were they transferred to other products. A
condition for export success, in particular in fresh products, is a minimum size.
Until today, only few companies have been able to achieve this size and to
compete successfully in foreign markets, mainly for two reasons: lack of capital
for investments in agriculture, but more important the lack of management
capacity to operate large scale plantations and food processing industries. The
absence of large professional plantations results in inadequate supply of
agricultural produce for small- and medium-scale food processors. Raw material,
such as palm hearts, has to be bought from small-scale farmers across the country,
who do not produce at regular intervals or at large scale. On the other hand, the
Ghanaian food industry has not managed to capture additional parts of the value
chain, with the result that only a very small part of the total value-added of a
product is captured in Ghana.
Capacity for innovation
291 For illustration, a pineapple sold for USD 0.34 FOB in Ghana is retailed at CHF 7.50 in
Switzerland
124
Ghana’s primary food industry still has a significant capacity for innovation.
Today’s production structures are predominantly traditional, i.e. no modern
production methods or high-tech varieties are used, and most farms operate on a
small-scale level, leaving significant potential for increased productivity. In the
processed food industry, capacity for innovation is limited. The most significant
increase in value added in Ghana’s food processing was the shift from producing
frozen tuna loins to canning them directly in Ghana. Given the nature of the
product, further steps in value-added will be difficult to achieve within production.
A great potential for improvements in Ghana’s food industry is to capture
additional parts of the value chain, and to create a distinctive position relative to
other countries. A distinctive position could be created for instance through the
certification of organic fruit. Additional parts of the value changing could be
captured with measures such as joint marketing organizations abroad, direct links
to supermarket chains to cut out middlemen, and the preprocessing of food for
higher convenience.
125
15 The competitive advantage of the Gold industry
In 1997, Gold accounted for 34 percent of Ghana’s exports, worth USD 543
million. Although the volume of gold exports had risen by 9 percent from 52 tons
to 57 tons, the drop in gold prices from USD 442/ounce in 1996 to USD
331/ounce in 1997 caused a 7 percent reduction in export value.292
15.1 Structure of Ghana’s Gold mining industry
Ghana is Africa’s second largest gold producer behind South Africa, and
accounted for 2.3 percent of the World gold mining output in 1997.293 In 1997, 12
major gold mining corporations were operating in Ghana, providing employment
for about 17’000 workers.294 The country’s largest gold mining company (and the
country’s largest company) is Ashanti Goldfields. Outside Ghana, Ashanti has
operations in 12 other African countries, with major mines in Zimbabwe, Guinea
and Tanzania. Except for Ghana Consolidated Diamonds295, all other major gold
mines in Ghana are owned by US, South African, Canadian and Australian gold
mining corporations
Success in gold mining is determined by the ability to find rich ores in the
exploration process, and the ability to extract these ores with low cost
processes.296 Today, most exploration work is done by smaller “junior” ventures,
which raise risk capital for explorations, and then try to sell their most prospective
projects to larger gold mining corporations. By the end of 1996, 126 local and 77
foreign companies had been granted gold reconnaissance and prospecting
292
293
294
295
Ghana Export Bulletin (1996 & 1997)
Based on total volume as reported in Neue Zürcher Zeitung, April 22, 1999, p. 33
Ghana Chamber of Mines (1996) p. 33 and 35
Ghana Consolidated Diamonds – still State-owned – produces gold as a byproduct of its
diamond mining
296 In the past years, creative financing has become a key factor of success in gold mining.
Sophisticated financial instruments are used by mining companies to gain access to
promising projects and to share both the risks and potential rewards with investors. Modern
hedging tools allow companies to survive through periods of low gold prices as in 1997 and
1998, when World gold prices were close to the costs of Ghana’s gold mines. However,
mistakes in its risk management brought Ashanti near bankruptcy in September 1999, when
gold prices rose faster than the company had expected.
126
licenses.297 However, most of Ghana’s currently exploited gold mines were
already discovered at the turn of the century. Ghana has both surface and
underground mining.298 Surface mining is done with large machines and vehicles,
while underground mining is more labor intensive. Gold extraction requires
sophisticated chemical treatment plants.
15.1.1 Buyers
Gold is standardized commodity, making price the only determinant of buyers.
Traditionally, gold has been used for jewelry production and as a savings
instrument. The main buyer of gold is the jewelry industry, in particular in Italy,
Hong Kong, India, and Japan. Government bonds have increasingly replaced gold
as safe haven, in particular in Europe and North America.299
15.1.2 Competition
Competition for Ghana’s gold mining industry comes from the attractiveness of
other mines. In Africa, several countries with rich ores have adapted and improved
the Ghanaian mining code, and are trying to capture new investors by providing a
stable political environment coupled with regulatory incentives. However, with the
low gold price levels, few mining corporations are starting new mining
engagements.
297 The Mining Journal, January 30, 1998, p. 67 “Investing in Africa”
298 Ghana’s gold comes either as lode ore in quartz reefs (Birrimian) or banket reefs (Tarkwain).
The richer quartz reefs are mainly at Obuasi, and the banket is concentrated at Tarkwa. A
third source of gold is alluvial deposits. Agbodeka (1992) p. 10. Quartz and banket reef
deposits are exploited with surface and underground mining. Surface mining produces both
sulfide and oxide ores, while underground mining produces mainly sulfide ores and some
quartz ores. Sulfide ores are crushed and ground, and then subjected to froth flotation to
concentrate the sulfide mineral that contains the gold. Oxide ores are typically of lower
grade. High-grade oxide ores are treated in oxide plants, while low-grade oxide ores (heap
leach) are merely shattered by explosives, and piled into huge heaps for extraction by
cyanidation.
299 Neue Zürcher Zeitung, April 22, 1999, p. 33 “Wenig glänzende Aussichten für das Gold”
127
15.1.3 Substitutes
Substitutes to gold mining are non-mining suppliers of gold, in particular central
banks liquidating their gold holdings.300 As a result, the World gold price has
been falling during the last 2 years to a level of USD 260/ounce, the lowest level
of the past 20 years. The consequences are lower mining profits, leading to
reduced exploration activities and more mergers and acquisitions to realize cost
synergies.
15.2 History of Ghana’s Gold mining industry
The first records of gold trade in Ghana date back to the 13th and 14th century,
when open pit gold mining and gold smithery were one of the core activities in the
Ashante kingdom. Between the 15th and the 17th century, the Gold Coast was the
world’s most important gold producer, hence the name “guinea” for British gold
coins.301 During peak production in 1700, some 40’000 workers were operating in
the Ashanti mines.302 Travel reports from the 18th and 19th century point to the
enormous riches of the Ashante kings, and the versatility of their gold smiths.
With the beginning of the slave trade, the traditional pool of workers from Benin
dried up, and gold mining activities in Ghana were stopped.
Modern mining started with the rediscovery of gold at Tarkwa in 1878, and later at
Obuasi (with the foundation of Ashanti Goldfields in 1897), Prestea and Dunkwa.
At that time, mining was completely in the hands of Europeans.303 At the
beginning of the century 450 mining corporations were founded, 3’500
exploration licenses were issued, and a railway line was constructed between
Obuasi and Takoradi harbor.304 The boom did not last very long. A large number
of companies were forced to close down or to merge, and gold production
300 The central banks of Argentina, Australia, Belgium, the Netherlands, and Canada have
reduced their gold holdings, while the IMF, Switzerland and the UK have recently
announced gold liquidations for the coming years. Neue Zürcher Zeitung, June 15, 1999 p.
33 “Der Goldpreis unter anhaltendem Druck”
301 von Gnielinski (1986) p. 202
302 Asamoa (1996) p. 5
303 Ghanaians were excluded from the mining sector through the colonial Mercury Ordinance
Act, which prohibited the import of mercury needed for mining without license. Such
licenses were rarely if ever granted to the natives of the Gold Coast, and possession of gold
was illegal. Anyemedu (1991) p. 214; La Verle (1995) p. 169
128
remained at around 200’000 ounces until 1930. Only when the sterling value of
gold was increased in 1931, dormant mines were reopened, and gold production
soared to 818’000 ounces in 1940.305 Until independence in 1957, the mines
relied on cheap migrant labor from the North and saw no need for increasing labor
productivity through education and training. In 1952 the Technical Training
Institute at Tarkwa was established for apprenticeship training. In 1961, after
independence, the Institute was changed into the School of Mines, offering a
three-year diploma course in Mining Engineering. Specific mining apprenticeship
courses for mine mechanics were introduced in 1962. In 1976 School of Mines
became part of the University of Science and Technology, offering degree courses
in mining engineering.306
In 1965, the government founded the State Gold Mining Corporation. The
company took over five mines that had been left behind by foreign mining
corporations. The mines had hit poorer gold reefs, and the owners were not willing
to invest in the production in new reefs.307 From then onwards, a combination of
poor management, low productivity, lack of qualified and experienced staff, and
rising production costs resulted in a continuous decline of gold output. In 1972,
the government took ownership in all natural resource-based industries in the
country, in particular a 55 percent share in the country’s largest gold mine,
Ashanti Goldfields.308 Technical management was left to the minority owner,
UK-based Lonrho. Nevertheless, the inability to get foreign exchange for
equipment and supply purchases led to a decline of gold production from 533’000
ounces in 1972 to 232’000 ounces in 1982.309
One of the main measures in Ghana’s economic reform program was the
rehabilitation of the important mining sector. In 1986, the government of Ghana
304 von Gnielinski (1986) p. 202
305 Agbodeka (1992) points out that very little of the revenues generated by gold mining
actually remained in the country. In 1949, total gold sales amounted to UKP 7.4 million, of
which only UKP 2.6 million (35 percent) remained in the country in form of salaries and
royalties.
306 Agbodeka (1992) p. 110
307 Schmidt-Kallert (1994) p. 153; La Verle (1995) p. 169
308 von Gnielinski (1986) p. 203. The London-based ACG was transformed into a Ghanaian
company, after which the government increased its initial share of 20 percent (acquired in
1969) to 55 percent. Tsikata (1997) p. 11
309 Arthur, Doverspike, Kuthy (1996) p. 177
129
passed a new Minerals and Mining with the purpose of restoring current mines and
to attract foreign investors. Specific actions included the provision of foreign
exchange for the purchase of machinery and equipment, a new fiscal regime, and
the foundation of the Minerals Commission. The World Bank provided finance
and consulting assistance for the rehabilitation of the State Mining Corporation,
and for the upgrading and expansion of Ashanti Goldfields.310 The first foreign
entrant, Southern Cross, came in 1988, followed by Teberebie and Bogosu in
1991, Gold Field Ghana in 1993,311 and Barnex and Dunkwa in 1995.312 Since
then, gold production has soared (Figure 21).
Figure 21: Gold production 1901 - 1995
2 ,0 0 0 ,0 0 0
Ounces
1 ,5 0 0 ,0 0 0
1 ,0 0 0 ,0 0 0
5 0 0 ,0 0 0
95
19
90
19
85
19
80
19
70
19
60
19
50
19
40
19
30
19
20
19
10
19
19
01
-
Source: Ghana Chamber of Mines (1996), App. 2A, p. 17
By the end of 1995, all subsidiaries of the State Gold Mining Corporation had
been divested. In 1994 the government reduced its share in Ashanti Goldfields
from 55 percent to 20 percent, and the company was subsequently listed on the
London and Accra stock exchange, and later on in New York and Toronto.
310 Ashanti alone received an USD 105 million loan from the IFC. Anyemedu (1991) p. 217
311 Anyemedu (1991) p. 216
312 Ghana Chambers of Mine (1996) p. 6
130
15.3 Gold mining’s Diamond of National Advantage
Table 19: Determinants of gold mining’s competitive advantage
Determinant
Elements
Factor conditions
Raw material
2
Human resources
1
Specialized factors
2
Capital availability
1
Physical infrastructure
0
Information
infrastructure
0
Administrative
infrastructure
2
Size of home market
0
Quality of demand
0
Related and supporting
industries
Supporting industries
0
Related industries
0
Firm strategy, structure
and rivalry
Structure and rivalry
1
Climate for investments
2
Strategy
2
Macroeconomic
stability
0
Microeconomic
environment
1
Development of
competitive advantage
2
Capacity for innovation
1
Demand conditions
Government
Summary
Gold
15.3.1 Factor conditions
Raw material
One of the major determinants of success of Ghana’s gold mining industry is the
basic factor advantage of high-grade ore. Historically, the Ashanti mine at Obuasi
131
had the world’s highest-grade ore, and today it puts Ashanti among the one-third
lowest cost mines of the World.313
A major factor disadvantage is the unreliable and expensive electricity supplies. In
1997 and 1998, Ghana’s gold mine performance has been hampered severely by
the country’s energy crises. Even though the mines had priority access to
electricity, increased energy prices led to a cost hike from USD 228/ounce to
260/ounce.314 Specific investments planned for the energy sector promise to
remove this obstacle,315 but energy problems almost nullify the natural cost
competitiveness of Ghana’s gold mining sector.
Human resources and specialized factors
Ghana has a long-standing mining tradition, grown in a World class mine (Obuasi)
over more than 100 years. Mining companies in Ghana can draw from a large
body of skilled mining engineers, many of them well traveled and with overseas
work experience. Most of the miners have been educated at the Tarkwa School of
Mines, which is part of the University of Science and Technology in Kumasi. In
addition to formal education, all mines provide extensive in-house training to their
workers and managers, including specific mining apprenticeship programs.
Graduates from the School of Mine have a good basic mining education, but
significant internal training is needed to familiarize them with modern gold mining
equipment and state-of-the-art processes. Modern mining techniques and cuttingedge know-how do not originate from Ghanaian operations, but have to be
imported.316 No gold mine in Ghana comes by without expatriate support at
different levels. The operational management of all Gold mines in Ghana is
handled by expatriates317, who do not only provide know-how on new
technology, but are also responsible for the productivity increases since 1986.
313 Financial Times, July 8, 1996 (Database download) “Survey – Ghana 1996: Predator may be
stalking Ashanti”. The EIU (1998a) p. 19 even claims Ashanti to be the world’s lowest-cost
producer.
314 Internet press reports, based on Ashanti Goldfields information
315 Ashanti Goldfields has commissioned a private power provider to build a 220-mw plant,
with half of the output guaranteed for ACG. EIU (1998d) p. 21
316 The exception is Ashanti gold mines, which is able to develop cutting-edge technology in its
large Ghanaian mining operations.
317 In 1996, more than 200 expatriates worked in Ghana’s gold mines. Chamber of Mines
(1996)
132
Today, some mines still comment on the poor attitude of their workers, which they
attribute to the management style of the former state-owned mining company.
Many foreign entrants did not bring in a lot of capital, but only removed some
bottlenecks and made the required ‘uncomfortable, sometimes tough decisions’ to
install discipline and high operating standards.318
Capital availability
Today’s mining companies in Ghana are all predominantly financed by foreign
funds, in particular from the US, Canada, and the UK. Starting in 1986, the World
Bank injected capital of USD 85 million and provided extensive consulting
services to the decrepit mining industry, in particular the State Gold Mining
Corporation.319 However, the country’s gold output stagnated around 400’000
ounces until 1991, when multinational mining companies took over.
Physical infrastructure
The mining corporations have mainly circumvented the absence of a well
functioning transport and communication infrastructure. Due to the large scale of
their operations, most mining companies have established their own infrastructure,
such as regular airlinks to Accra, fixed and mobile telephone systems, roads,
schools, hospitals, even farms and entertainment facilities for their workers.
Information infrastructure
Ghana’s mining industry does not benefit from the research of Ghana’s
Universities. Although companies cooperate with the School of Mines on the
students’ curriculum, there is no research done by the school that can be leveraged
in the mining operations. All modern processes and technologies are either
imported or developed in-house. The gold mines benefit to some extent from the
presence and experience of related mining ventures in bauxite, diamond and
manganese through the Ghana Chamber of Mines, which serves as a representative
for the country’s mining industry.
Administrative infrastructure
Gold mining requires long-term investments, and a stable judicial system. One of
the major determinants of success for Ghana’s gold mining industry was the
318 Interview results
133
introduction of a new mining code in 1986.320 The code provides protection by
regulating taxation, royalty payments, and ownership structures. The major
elements are reduced tax rates, generous capital and depreciation allowances,
exemption from duties on plant machinery, equipment and accessories, free
personal remittances for expatriates, retention of foreign exchange, and the
pegging of royalties on minerals between 3 and 12 percent of total value.321 The
government is entitled to a 10 percent free interest in all mineral operations; in
return shareholders in mining corporations are exempted from a dividend
withholding tax.322 Coupled to the introduction of the mining code was the
establishment of Ghana’s Minerals commission, whose objective is to attract
foreign investments by minimizing initial capital costs and by reducing the hassles
to set up a mining project. The commission consists of experienced miners who
understand the needs of the mining industry, and it has the direct backing of the
president. The task of the commission is to act as a facilitator and “one-stop-shop”
for the gold mining industry, mainly to prevent prospective investors from getting
tied up in bureaucratic tangles. The Minerals Commission evaluates the
investment needs, and settles everything else around it, such as visa needs, money
transfers, land acquisition, work permits and imports of mining equipment.
15.3.2 Domestic demand conditions
Domestic demand conditions play no role for the country’s gold industry. Ashanti
jewelry made for the royal court used to be famous, but the tradition of gold
smiting has largely vanished, and the income levels of the population do not allow
large jewelry investments.
15.3.3 Related and supporting industries
Even though there are nine large mines exploited in Ghana, the industry does not
benefit from a significant supporting industry. Most of the equipment and material
has to be imported, and foreign companies provide most of the services at the
mine (e.g., oil and lubricants, machine maintenance). Surface mining is highly
capital intensive, and the machinery for its operations is all imported.
319 Interview results
320 A similar code has been recently adopted by Tanzania
321 Anyemedu (1991) p. 213
134
Underground mining is labor intensive, yet even there most of the tools (shovels,
gloves, hardhats) and equipment are imported in large quantities. Equipment for
the further processing of gold, such as oxidation plants, agents and chemicals are
imported as well.
Because of the large quantities of limestone and explosives needed, Ashanti
Goldfields has established its own explosive and limestone producers to serve the
mining and quarrying industries in Ghana and in West Africa. Currently, the
limestone company supplies 12 other customers, among them other gold mines,
water treatment plants, and other manufactures and had exports of USD 1.1
million in 1997.323 There are plans by a Ghanaian investor to establish a second
limestone company to exploit domestic resources.
15.3.4 Firm structure, strategy and rivalry
Structure and rivalry
Success in gold mining is determined by two factors: high-grade ore, and low
production costs. In the past, gold mining companies competed fiercely for the
best high-grade ore sites, but would then share production know-how amongst
each other. Today, with cost control becoming a strong determinant of success,
companies have stopped to share information. Competition for skilled workers is
not very fierce, as most mines are quite far apart from each other.
Climate for investments
With the introduction of the new Mining Code in 1985, the explicit goal of
Ghana’s government was to attract foreign capital and expertise into the country’s
mining industry. As a result, the gold mining industry has grown into the country’s
most successful industry. This success, however, has also resulted in increasing
demands from several stakeholders, amongst them the government and workers. In
1999, several strikes hampered the production at some of the country’s largest
mines. More worrying than the strikes themselves was the lack of support from the
322 Tsikata (1997) p. 12
323 Ghana 40th Anniversary (1996) p. 84
135
government, which even started to openly attack the management of some
mines.324
Strategy
Gold mining is a global business, with Ghana being just one favorable location for
most foreign Gold mining corporations. Except for Ashanti, all mines are majority
owned by foreign companies, whose strategy is to find high-grade ore sites and to
keep operating costs as low as possible. The success of Ashanti Goldfields is
linked to its commitment to Ghana as the core of its operations, and by its focus on
being Africa’s prime mining company. In 1991, Ashanti moved its headquarters
from London to Ghana, and elected a Ghanaian national as CEO. Through its
focus on Africa, the company has built a network of relationships with various
heads of states and policy makers, and has a better understanding of the local
culture and environment. Its expansion strategy is to buy companies with high
quality reserves but weak management teams the across the African continent,325
and to use sophisticated financial engineering to pay for the acquisitions.326
15.3.5 Influence of Government Policy
Ghana’s government has had an enormous influence on the rise and fall of the
country’s gold mining industry. The productivity of the gold mining industry
dropped after the government had taken control of the industry in the 1960s, and
only started to recover when the mines were privatized again in the late 1980s,
coupled with the establishment of an advantageous mining code.
324 In June 1999, 9’000 miners at Ashanti went on strike for higher pay, despite falling gold
prices. EIU ViewsWire, June 11, 1999 (Database download) “Labor strife hits Ashanti
Goldfields”
325 When Ashanti acquired Australian Cluff, Canadian International Gold Resources and
Australian Golden Shamrock mines in 1996, the company only kept the African interests of
the acquired companies and sold off all other interests.
326 However, in September 1999, when World gold prices rose rapidly within a week, Ashanti’s
hedging problem led to heavy losses. Economist, November 13, 1999 p. 87 “The great black
hope”
136
15.4 Summary and conclusion on Ghana’s Gold mining
industry
Nature and development of competitive advantage
Success in gold mining is determined primarily by access to high-grade ore, and
by low cost mining processes. Ghana’s main determinants of competitive
advantage in gold mining are its high grade ore reserves, the availability of highly
skilled miners, and a stable and favorable regulatory environment that allows
mining companies to make large investments into state-of-the-art equipment and
processing plants, and to operate their mines profitable even during low gold
prices. Due to their size, mining corporations were able to circumvent the problem
of poor transport and communication infrastructure by building their own enclaves
around the mines, with own schools, airports, roads, and even power plants. As a
consequence, the mining industry does not have much linkage to the other sectors
of the economy.327
The main threats to Ghana’s competitive advantage in gold mining are volatile
gold prices, and changes in the country’s favorable regulatory environment. In
1998, gold prices averaged USD 294/ounce, and worldwide only 2 percent of all
mining companies were able to produce gold below this price. For the next years,
gold prices are expected to move between USD 265 and USD 305/ounce,328
threatening the profitability of current mines, and preventing further exploration
activities in the country. When introduced in 1986, Ghana’s mining code was the
most advanced mining code of the World. Its guarantees and benefits were the
main reason for foreign mining companies to undertake exploration activities in
the country. Since then, countries such as Guinea and Tanzania have established
new mining codes based on Ghana’s example, and are attracting an increasing
share of investments. Even more, Ghana’s favorable conditions are threatened by
government actions. Tempted by easy money, the government is reconsidering to
revise its incentive program, and to increase its participation in the gold mine’s
revenues.
327 Tsikata (1997) p. 13
328 Neue Zürcher Zeitung, April 22, 1999, p. 33 “Wenig glänzende Aussichten für das Gold”
137
Capacity for innovation
The capacity for innovation in Ghana’s gold mining industry lies chiefly in
productivity improvements in the current mines. The success of the industry in the
past years had been possible with the infusion of foreign production management,
with further improvement possibilities ahead. Other fields of improvement are
spillover effects into other parts of the Ghanaian economy. So far, they have been
limited to limestone and explosives, and the industry remains as an isolated
enclave with little skill transfer.329
329 In the US however, the mining industry had been one of the drivers for the rise of companies
like Caterpillar
138
16 The competitive advantage of the Timber and Furniture
Industry
In 1997, Ghana exported USD 170.8 million worth of timber and furniture, an
increase of 17 percent over the USD 145.6 million exports in 1996. The largest
export category in 1997 was sawn wood, followed by veneer sheets and plywood.
Furniture and bedding exports, worth USD 8.2 million, accounted for 4.8 percent
of the total timber exports.330
16.1 Structure of Ghana’s Timber and Furniture
industry
In Ghana’s timber and furniture industry, there are three major production steps.
Timber is cut in timber concessions, and then processed into sawn wood and
veneer, from which other products such as plywood and furniture are made.331
The country’s industry employs about 75’000 people and provides indirect
employment to close to 2 million people.
In 1997, Ghana’s Timber Export Development Board registered some 200 logging
firms, about 130 saw milling, veneering and plymilling companies, and more than
200 large and medium-scale furniture and wood-working enterprises.332 The four
largest exporters have annual revenues of around USD 5 to 6 million, and account
for roughly 40 percent of all processed wood exports. Aside from the government,
several families control a large part of the country’s timber industry.333
330 Ghana Export Bulletin (1996 & 1997)
331 Solid wood furniture is assembled from solid wooden parts, while veneered furniture is made
from plywood or veneer sheets.
332 Conafric (1996) p. 146
333 Friends of the Earth (1992) p. 15
139
Figure 22: Structure of Ghana's Timber and Furniture industry, 1997
(Number of companies/large exporters)
Concessions
193'000 m3
969'000 m3
Export: USD 34.8 million Veneer slicer
(17/12)
Export: USD 8.2 million
Plywood
(11/1)*
Saw mills
(100/4)
Flooring
production
(6)
Export: USD 112.8 million
Machined
timber
(40)
18'000 m3
Export: USD 1.1 million
Export: USD 1.3 million
424'000 m3
Door makers
(6)
Furniture &
components
(200/1)
Export: USD 6.8 million
* Includes one particel board mill, and several chip board manufactures (exact number not obtainable)
Source: Ghana Timber Export Development Board, IMF (1999a) Table 26, p. 105
MIM Timber is Ghana’s market leader with 12 percent market share in exports.
The state-owned company in the Brong-Ahafo region employs about 1’700
people. A neighbor of MIM Timber is Africa’s largest and Ghana’s only exporter
of furniture, Scanstyle Mim, with annual revenues of about USD 8 million. The
family-owned company employs about 650 people, and exports primarily
knockdown furniture and garden furniture.334
16.1.1 Buyers
Worldwide, the largest importers of tropical timber are Japan, Taiwan and South
Korea, mainly from South East Asia. In Europe, tropical timber accounts for
roughly 3 percent of consumption of industrial timber products. The majority of
European imports of tropical logs are imported from Africa, while sources of sawn
wood and plywood are more diversified. With large hard wood timber sources on
334 Knockdown furniture are furniture parts that are assembled, upholstered and painted by the
importer.
140
its own, the US and Canada import comparatively little tropical timber
products.335 Tropical timber is mainly used in certain niches where its chief
qualities – hardness, high density, weather resistance, coloring – are important. It
has high market shares in garden furniture, shipbuilding, parquet flooring, and
construction in wet environments. In Germany, tropical timber has a high market
share in window frames and outside doors because of its weather resistance
without chemical treatment. In Italy, tropical timber is heavily used in the furniture
industry because of its decorative coloring and texture.
Timber from Ghana is mostly exported as sawn wood and as veneer. Sawn wood
is used in interior and exterior joinery, such as doors, windows and staircases, in
the furniture, and in the construction industry. About 80 percent of veneer from
Ghana are sliced for decorative purposes, and are used in the furniture industry.336
Plywood exports are limited because of quality problems. Most of Ghana’s timber
and furniture exports are destined for Europe, in particular Germany, UK, Italy
and France. Furniture is exported primarily to the UK, sawn wood to Germany and
France, and veneer to Italy.
Table 20: Exports of Ghana´s timber products by destination, USD '000, 1996
Destination
Wood rough Wood sawn
Veneer
Flooring Plywood Furniture
Total
Germany
-
18,535
4,167
-
-
-
22,702
UK
-
10,144
5,378
-
1,876
4,412
21,810
Italy
-
5,179
14,356
1,551
-
-
21,086
France
-
12,734
1,111
-
-
-
13,845
US
-
4,941
3,796
-
-
-
8,737
Netherlands
-
5,626
974
-
-
-
6,600
Ireland
-
5,885
-
-
-
157
6,042
Spain
-
2,333
1,512
-
-
-
3,845
Belgium
-
1,603
1,917
-
-
-
3,520
Japan
-
1,106
-
-
-
-
1,106
Togo
804
149
-
-
123
-
1,076
Top eleven
804
68,235
33,211
1,551
1,999
4,569
110,369
% total exports
27%
77%
89%
87%
30%
89%
77%
Source: Ghana Export Bulletin (1996)
335 Barbier et al. (1994) p. 35
336 Friends of the Earth (1993) p. 48
141
Demand for tropical timber in the developed World is stable to decreasing, but not
expected to grow in the long term. Prices for tropical hardwood have been falling
by 35 percent between 1993 and 1996.337 Recent trends in Europe go towards a
reduction of log imports and a relative increase in processed timber products, with
an overall decline in total tropical timber consumption. These trends are expected
to continue, leading to a loss of market share and absolute reductions in quantities
of tropical timber products consumed.338 Yet, even though demand for timber is
growing rapidly in developing countries, developed countries will remain the
largest markets for high-priced tropical timber in the near future.
16.1.2 Competitors
Tropical timber plays only a minor role in World timber trade and processing,
accounting for about 5 percent of all exports in terms of volume, and 12 percent in
terms of value.339 The world’s largest tropical timber exporters are Indonesia with
USD 5.1 billion in 1996, Malaysia (USD 4.8 billion), and Brazil (USD 1.0
billion). Both Malaysia and Indonesia export primarily processed timber in form
of veneer and plywood, with Malaysia responsible for 44 percent of exports to the
EU. The largest timber exporters in Africa ahead of Ghana are Gabon (USD 399
million), Cote d’Ivoire (USD 389 million) and Cameroon (USD 272 million).340
African countries still export large shares of their timber in form of logs, capturing
99 percent of the EU tropical log market.341
The furniture market can be segmented into solid wood furniture and
plywood/veneered furniture. The veneered furniture segment is very technology
intensive, requiring sophisticated machinery and highly skilled operators. For
export, Ghana is only producing solid wood furniture, which require less
technology. Competition for solid wood furniture is intensive, mainly from lowprice manufacturers from Eastern Europe and the Far East.
337 Prices for Malaysian Hardwood Logs; IMF (1997) p. 163
338 Barbier et al. (1994) p. 37
339 The high relative value stems from the fact that tropical timber is used for specific
applications. Barbier et al. (1994) Table 2.3a and 2.3b, p. 10
340 Based on SITC 247, 248, 634, 635; UN International Trade Statistics Yearbook (1997)
341 Friends of the Earth (1993) p. 31
142
16.1.3 Substitutes
Almost all applications of tropical timber are threatened by substitutes, both by
cheaper temperate timber from Russia and New Zealand, and by other materials
such as plastic or aluminum. Limited anecdotal evidence suggests that substitution
of tropical timber with non-wood products is significant. Mainly in the building
industry, aluminum for window frames and outer wall panels is replacing tropical
timber, while chemically treated temperate timber is increasingly used for other
outdoor applications. In railway construction, wooden sleepers have been
completely substituted by concrete and steel.342
16.2 History of Ghana’s Timber and Furniture industry
The development of Ghana’s timber industry started in the 19th century with the
export of mahogany to the US. Significant timber exports to Europe started to
take-off in 1903 with the establishment of a railway line between Kumasi and
Takoradi.343 The establishment of a wood working industry at the village level
started during World War II, when carpenters across the country produced
furniture and wooden articles for the British Army and Air Force.344 After the
World War II, Ghana’s timber exports rose rapidly to about 236’000 cubic meters
of logs and about 60’000 cubic meters of sawn timber in 1950. In 1959, Ghana’s
industrial census counted already 89 timber processing companies, and 20 smallscale furniture workshops,345 and between 1963 and 1970, annual exports were
around 600’000 cubic meters per year.346 In 1970, Ghana’s government
implemented the first measures to get the exploitation of the country’s forest
resources under control. This included the banning of exports of trees that took
longer than 25 years to grow,347 the establishment of the Timber Marketing
Company as a buying monopoly, and limitation of the number of concessions. In
1974, the government also started to take controlling stakes in several sawmills
342 Brockmann, Hemmelskamp, Hohmeyer (1996) p. 53
343 Agbodeka (1992) p. 120
344 Agbodeka (1992) p. 136. Between 1941 and 1946, the Gold Coast was a staging posts for
British and American troops on their way to the Far East. Frimpong-Ansah (1991) p. 29
345 Asamoa (1996) p. 27
346 Based on Asamoa (1996) Appendix 7, p. 213
347 Brockmann, Hemmelskamp, Hohmeyer (1996) p. 70
143
and foreign controlled forest concessions. Soon after, managerial inefficiency and
lack of foreign exchange to buy new equipment led to a severe decline of Ghana’s
timber industry. In the mid 1980s, as part of Ghana’s economic reforms, the World
Bank and UK development agencies invested USD 53 million into timber
industry, primarily for purchasing of new equipment for logging and processing
companies.348 Aside from a financial revival, there were also organizational
changes, such as the replacement of Ghana’s highly inefficient Timber Marketing
Board with the Timber Export Development Board, responsible for marketing and
pricing, and the Forest Products’ Inspection Bureau, which monitors contracts,
maintains quality standards, and grades products.
Severe problems remained, such as failure to pay royalties, illegal trading, and
wild felling leading to accelerated deforestation.349 In 1990, international prices
for timber rose markedly, leading to a rapid export increase.350 In 1994, the
Ghana’s government started to take active measures to protect the country’s forest
resources by banning certain species for export.351 In late 1995, it suspended the
export of unprocessed logs altogether, with the objective to curtail felling and to
emphasize value added processing. As a result, the harvesting of logs decreased by
487’000 cubic meters in 1995, roughly equal to the amount of log exports in 1994.
Foundation of important companies
The country’s largest timber processing company, MIM Timber, was established
in 1947 by Hungarian investors and remained a family-owned business until 1977,
when the company was completely nationalized. Like most large timber
processors, the company has built its own infrastructure complete with power
supply, educational facilities for the children of its workers, and roads. The
foundation of the country’s main furniture exporter, Scanstyle Mim, dates back to
1968, when it was founded as a joint venture between MIM Timber and a
Norwegian businessman. Originally, the company produced parquet flooring and
furniture parts using cut-offs from the MIM sawmill, and moved then rapidly
towards the production of finished furniture. With the nationalization of MIM
348 Friends of the Earth (1992) p. 9; La Verle (1995) mentions USD 120 million of aid and
commercial credits being invested in the forestry sector between 1983 and 1993.
349 See Conafric (1996) and Friends of the Earth (1992)
350 IMF (2000a) p. 16
351 La Verle (1995) p. 166
144
timber in 1977, the government took over a large share in Scanstyle. In 1982, a
Ghanaian businessman started a massive investment and rehabilitation program.
16.3 Timber and Furniture’s Diamond of National
Advantage
Table 21: Determinants of timber’s competitive advantage
Determinant
Elements
Factor conditions
Raw material
2
2
Human resources
0
0
Specialized factors
1
1
Capital availability
1
1
Physical infrastructure
-1
-1
Information
infrastructure
1
2
Administrative
infrastructure
-1
-1
Size of home market
-1
-1
Quality of demand
-1
-2
Related and supporting
industries
Supporting industries
0
-1
Related industries
0
0
Firm strategy, structure
and rivalry
Structure and rivalry
0
0
Climate for investments
1
1
Strategy
0
2
Macroeconomic
stability
0
0
Microeconomic
environment
0
0
Development of
competitive advantage
1
1
Capacity for innovation
0
1
Demand conditions
Government
Summary
Timber
Furniture
145
16.3.1 Factor conditions
Raw material
The main factor driving the competitiveness of Ghana’s timber and furniture
industry is access to cheap raw material. However, the availability of timber is
threatened by excessive resource utilization. In 1946, Ghana had between 26’000
and 31’000 square kilometers of Tropical High Forest.352 Since then, more than
90 percent of Ghana’s forest reserves have been logged.353 Today, the country has
266 forest reserves of 1.2 million ha for timber production, on which it grows
about 680 different wood species. If these resources should be sustained, timber
production should not exceed 1 million cubic meters a year, a volume that is
slightly below of what has been officially produced in the last years.354
Human resources and specialized factors
Although the timber industry is one of the leading industries in the country, there
is a gap between the excellent artisan capabilities, and the skills required for
modern industrial production. Today, there are very few highly skilled indigenous
workers who can program and operate modern machinery. Expertise lacks both at
the technological and managerial levels.355 As a result, Ghana’s timber industry
employs a significant number of European and US expatriates to manage their
companies and to ensure proper utilization of imported machinery and equipment.
Capital availability
For most parts, Ghana’s timber and furniture industry has no particular problems
getting access to capital. Aside from the large capital injection of USD 53 million
in World Bank loans, most of the industry’s capital is equity capital raised by the
owners. Most of Ghana’s timber companies are owned by the government, or by
wealthy Ghanaian and Lebanese families. Because of its export orientation and its
352 Agbodeka (1992) p. 96
353 Friends of the Earth (1992) p. 4
354 Conafric (1996) p. 146. A UK consultancy advises that the annual exploitation of timber be
pegged at 300,000 cubic meters only, otherwise Ghana would be a net importer by the year
2010. African Business Issue 211, June 1996, p. 35
355 La Verle (1995) p. 167
146
well-connected owners, the industry has also access to letters of credit for working
capital, foreign loans, and equity participations.
Physical infrastructure
Poor transport infrastructure and inadequate utilities have been hampering the
performance of the industry. Roads are in bad conditions, the railway system is
unreliable, and most companies have to maintain their own road network in their
area. Until very recently, remote saw mills and factories were not connected to the
national grid and were required to operate their own generators. One company
relying on public power supply had to abandon the export business because power
cuts made it impossible to operate modern computer-controlled machinery,
leading to frequent shipment delays and loss of customers.
Information infrastructure
Even though the timber industry accounts for an enormous share of Ghana’s
economy, there is little direct support from public or private research institutions.
Interviewers mention the lack of success in research projects that were conducted
by local universities and the absence of help by other government institutions. The
Ghana Timber Export Development Board operates export promotion offices in
Ghana and London, but the success or importance of this support is not visible.
Administrative infrastructure
Ghana’s bureaucracy seem still to present a major obstacle – although its
performance has improved over the last years. In 1995, the export of one container
required 172 forms to be filled out, and due to restricted office hours containers
could only be shipped Tuesday through Thursday. Exporting companies have to
spend roughly USD 1’000 on annual registration fees for the Timber Board, Forest
Bureau and other industry organizations. Companies cited bureaucratic difficulties
as the main reason to stop exporting,356 as delays had the consequence that
contractual obligations could not be met.
356 However, one company mentioned that it was thinking to focus on exports only in order to
liberate itself from the need to compete for corrupt government orders where 10 percent of
the order sum was typically required as pay-back.
147
16.3.2 Domestic demand conditions
Ghana’s home market for timber products is relatively large. In 1997, roughly 40
percent of Ghana’s officially cut timber was consumed on the domestic market.357
Unsatisfied demand particularly in the furniture industry poses a disincentive for
furniture manufacturers and large carpenters to export. As for most articles, the
quality standards of Ghanaian customers are well below the requirements of
European importers. Ghanaian customers tend to accept poor work and late
delivery, simply because otherwise they would not get any products at all.
Ghanaian exporters cannot use their home markets as a learning basis for
successful exports. Adding to poor quality is the absence of furniture or building
material standards. Almost every piece of furniture, every door and every window
is custom made, preventing companies from running large batches of the same
product. In several cases, relatively minor faults that are nonetheless unacceptable
to foreign consumers have prevented companies from becoming successful
exporters. A driving factor for exports however is the frequent corruption in the
public purchasing process, which has forced companies to abandon the domestic
market in favor of export markets.
16.3.3 Related and supporting industries
The timber industry does not benefit from the presence of specialized suppliers or
other related industries. Basically all machinery and parts are imported, along with
supplies such as glue, paint, and material. While some companies are able to
maintain their complex computer-controlled machinery themselves with the help
of well-trained specialists and expatriates, others need to fly in specialists for
repairs and upgrades.
16.3.4 Firm structure, strategy and rivalry
Structure and rivalry
Even though Ghana counts a large number of timber and furniture producers,
rivalry and competition are not very intense because of excess demand and easy
export facilities. In the domestic market, demand outstrips supply, and exporting
firms are not competing for market share. In principle, barriers to entry are low.
148
However, only few companies manage to build up the required network of
relationships to operate their companies successfully.
Climate for investments
The climate for investments in the timber and furniture industry is good. In
general, the government supports value-added processing of the country’s raw
material. Also, there are no indications about labor unrests or strikes.
Strategy
The dominant strategy in the timber industry is to focus on exports only,
neglecting domestic markets. Exporting firms are able to specialize on certain
products and run large production batches. Their exports give them access to
foreign exchange for further machinery investments. Also, they are able to achieve
better prices in export markets in general, and there are fewer incidents of payment
problems or even corruption.358 However, except for Scanstyle, no firm has
started to upgrade and to move towards more innovative, higher value added
products. Scanstyle’s success is a good illustration of how a consistent strategy
can lead to success. Since its founding, the company has focused on producing
furniture parts and knockdown furniture. Most of the company’s production is sold
through its marketing agents in Europe, who form the link between the final
European customer and Scanstyle. The agent’s role is to transfer specific customer
requirements, complaints, and suggestions. The company produces only on orders,
and only to the design requirements of its customers. In its production, the
company focuses on two elements: high product quality, and reliable delivery
dates. When Scanstyle encountered supply problems, it started to backward
integrate and has now the complete value chain under its own control. To ensure
European quality standards, the company operates modern computer-controlled
equipment, which is supported by expatriates responsible for production planning
and quality control. With this strategy, Scanstyle has been able to circumvent
various disadvantages: Backward integration and own power supply make the
company independent from unreliable infrastructure and suppliers. The focus on
demand-driven production and design saves the company design costs and
eliminates the risk of not understanding European design requirements.
357 Based on IMF (1999a) Table 26, p. 105
358 See Bigsten et al. (1998b) p. 8
149
Competitors who have adopted individual elements of Scanstyle’s strategy have
mostly failed. Another company that had invested into computer controlled
machinery was forced to abandon exports because unreliable and fluctuating
power supply made regular production impossible, because it was unable to secure
a reliable source for raw material, and because its own designs were not in line
with the taste of their European customers.
16.3.5 Influence of Government Policy
The main influence of government policy on Ghana’s timber industry are its
felling and export regulations to ensure the sustainability of its forest reserves, and
to enforce the export of higher value-added goods. These regulations forced the
industry to upgrade and move towards processed products such as veneer and
sawn wood. As a result, the total value of timber products exported rose by 17
percent between 1996 and 1997, with the official log production remaining
constant.359
16.4 Summary and conclusion on Ghana’s Timber and
Furniture industry
Nature and development of competitive advantage
Although it has been in operation since World War II, the focus on raw material
exports have prevented the build-up of a strong diamond of national advantages
for the timber industry. Still today, the competitiveness of Ghana’s timber industry
is mostly limited to basic factor advantages, the access to cheap timber resources.
The basic advantages have not been translated into other, more advanced
advantages. The government’s efforts to force the industry towards higher valueadded products have been hampered by the absence of other key determinants
required for sustainable success, such as a functioning transport and utility
359 Based on Ghana Export Statistics Exports, and IMF (1999a) Table 26, p. 105. However,
evidence from Malaysia suggests that timber processing inside the country itself was less
efficient than in importing countries both from a resource utilization (raw logs) and cost
perspective.
150
infrastructure, technical know-how or export legislation.360 Overall, the
competitive advantage of Ghana’s timber industry is falling. Demand for tropical
timber has been falling over the past years, and deforestation erodes the country’s
basic factor advantages.
Capacity for innovation
Most timber companies are still successfully exporting semi-processed timber
products, but with Worldwide demand for tropical wood falling, they are about to
lose their competitive advantage. The main improvement potential lies in
increased productivity, and in moving towards higher value-added products. One
company, Scanstyle, has proven that Ghana’s basic factor advantage can be
leveraged, as basis to upgrade and move towards other activities along the value
chain of timber products. The company’s strategy was to build up the most critical
elements of infrastructure by itself, to integrate backwards, and to produce only
according to customer requirements. This strategy allowed it to circumvent the
country’s factor disadvantages, to avoid unreliable suppliers, and to make up for
its lack of design and marketing know-how.
360 The maximum yield of Ghanaian sawmills is between 40 to 55 percent of unprocessed
timber, and the rest is wasted in sawdust. Productivity improvements in this area could lead
to reduce the pressure from tighter felling limits. IMF (2000a) p. 35
151
17 The competitive disadvantage of the Textile and Garment
industry
Ghana’s textile and garment industry is an example of an industry that should be
quite successful in theory, but has performed poorly ever since the beginning of
the economic reform program. In 1997, Ghana’s textile and garment exports were
insignificant at USD 2.5 million, up from USD 1.9 million in 1996.361
17.1 Structure of Ghana’s Textile and Garment industry
Textile production and garment production are two different industries. The textile
industry is highly capital intensive, producing cloth and yarns for the garment
industry, which then knits or assembles clothing for final consumption. The
garment industry is typically highly labor intensive, with low capital and skill
requirements.
In 1999, five textile mills were in operation in Ghana. Their main products are
batik-type wax cloth, fancy printed cloth, and kente, a traditional woven cloth. The
major part of their output is used in small seamstress shops, which specialize on
tailor-made traditional clothing for the local market. Ghana’s garment products
can be separated into two distinct categories, “Afrocentric” and “standard”.
Afrocentric clothing is made to local design and fashion, and is produced in
several smaller companies, as well as in numerous seamstress-shops. These shops
process mainly local cloth, or similar-looking imported cloth. Companies
operating in the “standard” category assemble large volumes of one article, such
as shirts or pants, for export. The cloth used for these standard items is usually
imported. Three larger companies producing standard clothing for export in
1998.362
The raw material for the textile industry, cotton, is grown by about 7’500
farmers363 in Ghana’s Northern Region, and annual production is estimated to be
361 Ghana Export Bulletin 1996 and 1997
362 No reliable information could be obtained on the exact number of companies operating in
this segment. The largest company was closed down at the time of writing because of labor
relation problems, and it was not clear if it would open again.
363 Conafric (1996) p. 143
152
around 35’000 tons.364 In three ginneries, the cotton fibers are separated from the
seeds, and then shipped to the textile mills for yarn spinning and fabric weaving.
Figure 23: Structure of Ghana's Textile and Garment industry, 1997
Cotton
farming*
Cotton
ginnery
(3)
Textile mill
(5)
Export USD 912'000
Garment
manufacture
(10)**
Export USD 741'000
* 2 large plantations and numerous small-scale producers
** Excludes 179 small-scale exporters
Note: Number of textile mills and garment manufactures based on export information
Source: Ghana Export Bulletin (1997), Ghana Export Promotion Council
17.1.1 Buyers
The retail market for textile and clothing products in the US and Europe is
characterized by fierce competition and low margins. Competition is particularly
intensive in the market for standardized garments, where large international buyers
are constantly skimming the globe for optimal production conditions. Buyers of
standardized clothing compete in their home market predominantly on costs, with
fashion and design being less important.365 Consequently, mainly costs, product
quality, and supplier reliability drive their buying decisions. Product requirements
in the standard clothing category are very strict, with clearly defined size, quality,
packaging standards, and tight delivery schedules.
364 EIU (1998c) p. 19
365 See also Singleton (1997) p. 69
153
Afrocentric articles are sold in niche markets, in particular to African Americans
in the US, and in the “ethnic” market in Europe.366 In the US, African Americans
tend to spend more money on apparel than the general population, leading to
targeted efforts of department stores and specialty boutiques to serve them with
imported African products.367 In Europe, the ethnic clothing markets is relatively
small.368 Buyers for the afrocentric and ethnic markets are mostly working for
trading companies or department stores. Often, they are specialized in working
with small-scale, artisan producers in developing countries, but still they operate
with clear standards concerning product quality, size, delivery schedules and
payment methods.
17.1.2 Competition
On the World market, Ghana is competing with three major products: afrocentric
textiles, afrocentric garments, and standard garments. In the textile segment, the
main competitor is Nigeria, whose imported wax cloth in 1999 was 27 percent
cheaper than domestic wax cloth, and Pakistan, whose fancy prints were 44
percent cheaper than domestic prints. In the afrocentric garment sector,
competition is less intense, with countries like Zimbabwe, Uganda, Tanzania and
Kenya producing comparable products.
In standardized garment production, fabric – although the single largest input - can
be transported over long distances, without significant impact on unit costs, and
manufacturers can produce anywhere irrespective of whether there is local supply
of fabric. Hence, competition is driven by labor costs. The main competitors are in
East and South East Asia, as well as Africa. For a men’s shirt, Ghana’s total
production costs are lower than those of the world’s leading garment producers
China and India, but mainly because Ghana is able to provide quota-free access to
the US and European markets (Table 22).369
366 “Ethnic” goods can be described as products made in developing countries using traditional
methods and design
367 Biggs et al. (1994) p. 12
368 Biggs et al. (1996) p. 14
369 Garments manufactured outside Europe and the US have been subject to quota agreements
under the GATT’s Multi-Fibre Agreement. However, apart from Lesotho and Mauritius, no
African country is subject to quota agreements under the Multi-Fibre-Agreement. Biggs et
154
Table 22: Cost and productivity comparisons for shirt production, 1994
Cost comparison for standard Men's Casual Long-Sleeved Shirt
Cost items (USD)
Ghana
Kenya
India
China
Fabric
3.18
3.00
2.90
2.78
Misc. Material
0.52
0.65
0.65
0.65
Washing
0.11
0.14
0.12
0.16
Labels, Packaging
0.36
0.47
0.40
0.25
Dir./indir. Labor
1.22
1.68
1.22
1.83
Transport to Port
0.05
0.16
0.15
0.05
Subtotal
5.44
6.10
5.44
5.72
Tax and duty
0.67
0.75
0.58
0.61
Quota cost
0.00
0.00
1.00
2.00
Total costs
6.11
6.85
7.02
8.33
Source: based on Biggs et al. (1996) Table 5.5, p. 80
Manufacturing efficiency
Number of shirts produced per operator/ 8 hour day
Men's casual shirt
Ghana
Zimbabwe
Kenya
China
12
12.5
18
20-24
Source: based on Biggs et al. (1994) Table 4.5, p. 42
17.1.3 Substitutes
The main substitute for manufactured clothing in Ghana is used clothing imported
from the US and Europe. The used-clothing segment has taken a significant share
of Ghana’s textile market, to an extent that re-exports of used clothing were
already two to three times larger than exports of new clothing in 1996 and 1997.
17.2 History of Ghana’s Textile and Garment industry
Cotton in Ghana was already cultivated before the arrival of the Europeans in the
13th century. In the Ashanti kingdom, the art of cotton weaving was brought to
perfection with Kente products, colorful woven strips that are put together to one
piece of cloth. During the 19th century, Ghana was growing cotton under the
al. (1994) pp. 40-42. Chinese and Indian manufacturers however have to buy quotas on the
secondary market, ranging from USD 1 to 2 per shirt.
155
directions of the British Cotton Growing Association, and Mission Stations and
individual Europeans had also established a few cotton plantations. However,
insect pests and other plant diseases prevented a full take-off of cotton farming,
and most investments were soon abandoned.370 A second effort to start a cottagetype textile industry in Ghana was made in 1942, when the Achimota College
Textile Unit began to train apprentices in cloth weaving, and several looms and
spinning wheels were installed.371 During World War II, the industry exported
textiles to the UK and continued to grow until independence.372 The big push for
Ghana’s textile industry came after independence, when Nkrumah chose to build
up a textile industry as part of his overall industrialization strategy. In 1964, the
government established a state-owned farm in the north to grow about 660 ha of
cotton and built the country’s largest textile mill next to the Akosombo dam.
The textile industry was at its peak in the mid seventies. In 1974, Ghana had 8
major textile mills, with 25’000 employees, producing 121.3 million meters of
cloth. The decline started as soon as the supply of foreign exchange for machine
spare parts, dyes and chemicals dried up. In 1981, textile production had declined
to 30.5 million meters,373 and textile mills were operating at 10 percent of their
capacity.374 The most serious challenge however was the abolishment of trade
barriers in 1986, which exposed the already fledgling industry to full import
competition. Between 1987 and 1983, the number of large and medium size textile
and garment manufacturers declined from 117 to 43, and in 1995, only five mills
were operating in the country, employing 7’000 people, less than a third of the
1974 employment. The downturn in raw material production was similar: the
production of raw cotton had peaked at 24’000 tons in 1977, but fallen to 8’000
tons in 1989.375 The country’s largest textile mill, Akosombo textiles, was taken
over by the Swiss Cha group, which revamped its machinery and started Volta
Garments, a garment assembly factory for export-destined standard shirts. Because
370 Agbodeka (1992) p. 38
371 Agbodeka (1992) p. 138
372 Except for wartime needs, the development of a textile industry was not supported by the
Colonial Government. In 1946, the British banned exports of locally woven cloth from
Nigeria, indicating “that it was a West African policy to clamp down on manufacturing
industries that could compete effectively with British manufactures.” Agbodeka (1992) p.
143
373 Agbodeka (1992) p. 153
374 Asamoa (1996) Table 6.3, p. 106
156
of low labor productivity and strikes, Volta garments has discontinued production
in 1998.
17.3 Textile and Garment’s Diamond of National
Advantage
Table 23: Determinants of textile and garment's competitive advantage
Determinant
Elements
Factor conditions
Raw material
-2
0
Human resources
0
1
Specialized factors
0
0
Capital availability
-1
1
Physical infrastructure
-1
0
Information
infrastructure
0
1
Administrative
infrastructure
-1
1
Size of home market
0
0
Quality of demand
0
-1
Related and supporting
industries
Supporting industries
-2
0
Related industries
0
0
Firm strategy, structure
and rivalry
Structure and rivalry
0
-2
Climate for investments
0
1
Strategy
-1
0
Macroeconomic
stability
0
0
Microeconomic
environment
-1
0
Development of
competitive advantage
-1
1
Capacity for innovation
0
2
Demand conditions
Government
Summary
375 La Verle (1995) p. 162
Textile
Garment
157
17.3.1 Factor conditions
Raw material
Ghana’s textile and garment industry has no basic factor advantages. The main
cost element of a textile product is raw material, mostly cotton, making up
between 40 to 80 percent of the total costs. One major disadvantage for Ghana’s
textile industry is the high price of domestic cotton. Ghanaian textile mills are
required to process all local cotton before being allowed to import cotton.376 Yet,
as a result of low yields (775kg/ha, compared to the 1’200 kg/ha regional
average377) and high transportation costs, Ghanaian cotton prices are 40 percent
above World market prices.378 The textile for Ghana’s standardized garment
industry is all imported.
Human resources and specialized factors
Ghana’s textile sector operates with older, less automated equipment, where a high
level of worker and supervisory skills are needed to achieve World market
standards. Although wages are low, the low skill level makes Ghana an inefficient
textile producer: Labor productivity is only between 10 to 20 percent of that of
developed countries. The quality of textile output is very low, constituting a major
handicap for local downstream users like garment makers, and the production cost
of garment is almost twice as high as in East Asia.379 Ghana has quite a large pool
of local seamstresses and textile graduates from polytechnics that possess the
required skills for textile and garment manufacturing, with generally low wages.
However, labor productivity in the textile and garment sector is the lowest of all
sectors in Ghana; and the productivity declines with firm size in garment and
textile sector. Ghana’s garment sector uses by far the most labor-intensive
technology of any African country, as the capital per employee being one third of
that of Mauritius.380 The low level of productivity is mainly attributed to lack of
376 Interview results
377 EIU (1998c) p. 20
378 Interview results. There are plans to boost cotton output from today’s 20’000 tons to 50’000
tons with help of French development grant. EIU (1999) p. 19. FAO reports 46’000 tons of
seed cotton for 1998
379 Lall, Navaretti, Teitel, Wignaraja (1994) p. 202
380 This is mainly because small firms cannot realize any economies of scale. See Mengistae,
Teal (1998) p. 27
158
management skills for larger firms.381 Chinese, Indian, and European expatriates
manage all the larger textile and garment companies.
Capital availability
For the export-oriented part of the industry, working capital is not a major
problem, because standard orders also include a letter of credit. Typically, a buyer
places an order backed up with a letter of credit, which can be used by the
manufacturer as collateral for working loans from local banks. Only for small
companies with poor banking relationships, it is difficult to realize the benefits of
a letter of credit. Foreign investors make new investments into machinery and
equipment for textile industry; credits for domestic investors are hard to get.
Physical infrastructure
Ghana’s export focused textile and garment industry is located around Accra and
Tema, where transport and power infrastructure problems can be avoided. Two
garment manufacturers are located in Ghana’s Export Processing Zone, where
they benefit from reduced taxes and tariffs. Disregarding the occasional power
cuts and usual communication problems, the textile and garment industry is not
particularly affected by the country’s poor infrastructure.
Information infrastructure
The textile and garment industry does not benefit from research institutes in the
areas of marketing, design or product development.
Administrative infrastructure
Overall, administrative issues do not affect the competitiveness of the textile and
garment industry. Most garment manufacturers operate in the Export Processing
Zone, where import/export procedures are very simple.
17.3.2 Domestic demand conditions
The taste and design of traditional Ghanaian clothing have been the foundation of
the country’s afrocentric clothing industry. Traditional “tribal” clothing is usually
hand-woven and of highest quality. Ghanaian designers have transferred this into
export clothing and have achieved international success.
381 Mengistae, Teal (1998) p. 38, Teal (1998b) p. iii
159
One disadvantage for the garment manufacturing industry is the tradition of
demanding tailor-made clothing. With the absence of large production runs, there
have never been standardized sizes in Ghana. In particular in the afrocentric
segment, manufacturers struggle with the tight quality and size requirements of
overseas customers. However, foreign department stores and mail order
companies require precise sizes for all their orders, as their entire collection from
different sources must be comparable across one given size, allowing customers to
easily switch between products.
17.3.3 Related and supporting industries
The textile and garment industry does not benefit from related or supporting
industry. All machinery, spare parts and chemicals are imported. Even within the
industry, there are no relations: domestic textile is only rarely used for garment
production in Ghana.
17.3.4 Firm structure, strategy and rivalry
Structure and rivalry
The basic structure of today’s textile industry has been shaped by the
industrialization efforts in the 1960s and 70s. While some mills have been closed
since then, the mills still open have all been established by the government, with
no investments into new mills. In 1995 capacity utilization was 35 percent,382
indicating that the restructuring phase is not over yet. In the garment sector,
however, all current players are new entrants that were established after the
opening and stabilization of Ghana’s economy. In the garment industry there are
hardly any barriers to entry as the initial investment level is low, and workers can
be trained relatively easily. Rivalry in Ghana’s textile and garment market is
fierce, with competitive pressure coming from imported cloth and used clothing.
Climate for investments
One of the major challenges for Ghana’s textile industry is low labor productivity
and poor working morale. The textile and garment industry is the country’s only
industry with two labor unions competing for members. Interview partners
attributed the low productivity in the garment sector to the poor relationships
382 Ministry of Trade and Industry, Web page (January 2000)
160
between unionized employees and employers, and to the fact that hard workers are
ostracized by their working community. Volta garments for instance, a large
manufacturer of shirts, closed own after having failed to raise its workers
productivity from 5 shirts/day to the targeted 12 shirts/day.383
Strategy
Currently, three basic strategies are followed. Textile manufacturers try to satisfy
domestic demand by production for local tastes, and rather than improving quality
or reducing costs, they try to bully the government to introduce protective duties.
Smaller design boutiques focus on domestic customers as well, but try to produce
for small-scale exports. Typically they operate as family-owned businesses, and
lack management capacity for expansion or running large orders. Standard
garment producers focus on large volumes for exports, neglecting the demand
structure of the domestic market.
17.3.5 Influence of Government Policy
The most significant influence of government policy was the foundation of stateowned enterprises in the cotton and textile sectors. With import protection and
government subsidies, the textile sector thrived during the 1970s. Since then, the
textile industry has not benefited from any particular government policy or public
investments. The textile industry has probably been hit hardest by the economic
reform and rapid liberalization.384 Others blame the current government for lack
of support during strikes and argue that the country’s strict labor regulations and
minimum wages make it impossible to achieve World-class productivity
standards.
383 The problem of low productivity is confirmed by Teal (1999) who compared the
productivity of garment manufacturers in Ghana and Mauritius. He finds that in companies
with more than 100 employees (which he identified as the minimum size to enter export
markets), salaries in Mauritius are three times higher than in Ghana, but productivity is seven
times higher. This makes Mauritian firms 4 times more efficient than Ghanaian companies.
384 See Armstrong (1996)
161
17.4 Summary and conclusion on Ghana’s Textile and
Garment industry
Nature and development of competitive advantage
Ghana’s textile and garment industry does not benefit from basic factor
advantages. The capital-intensive textile industry has no other natural advantages,
and it has not been able to innovate and build up other determinants of advantage
while it still benefited from heavy government support. The garment industry
benefits from comparatively low production costs,385 but has not been able to
transform this into a competitive advantage. With an average size of 17
workers,386 companies are not able to build up economies of scale and produce
the large quantities as required for exportation.387 What is lacking is management
know-how to run large firms, and to increase the productivity of workers to
international levels.388 In sum, neither the textile nor the garment industry has
been able to overcome the disadvantages of its environment as a basis to upgrade
their weak comparative advantage, and to build a sustainable competitive
advantage.
385 Relative to other countries, Ghana’s labor costs are low, and African countries have
benefited to some extent from the absence of export quotas imposed by the multifibre
agreement. With the establishment of the World Trade Organization (WTO), this advantage
will be eliminated over the next few years. See Hughes (1993) p. 1006
386 In Mauritius, the most successful African exporter, average firm size is 181. Teal (1998b) p.
25
387 According to Mengistae, Teal (1998) p. vi, only 3 percent of all Ghanaian textile and
garment firms are exporting their products
388 Confirmed by Lall (1995) p. 2026
162
Capacity for innovation
In Ghana, capacity for innovation in the textile and clothing industry lies primarily
in increasing the productivity of its firms. Productivity improvements could be
realized by building up the management capabilities to run larger firms, and by
providing appropriate training and incentives to its workers.
163
V CONCLUSIONS
ON
DETERMINANTS
COMPETITIVE ADVANTAGE
OF
Based on the findings from the case studies above, this part describes the overall
determinants of competitive advantage along factor conditions, demand conditions,
related and supporting industries, strategy, structure and rivalry, and government.
The last chapter summarizes and concludes the challenges of Ghana’s ‘Diamond of
National Advantage’.
18 Factor conditions
Factor conditions can be split into two broad categories, basic factor advantages and
advanced factor advantages. Basic factor advantages such as natural resources,
favorable climate conditions and cheap labor, are inherited by a nation. In most
cases, they are very general and support more rudimentary types of advantages. To
sustain the competitive advantage of a nation, basic factor advantages are not
sufficient, since they can be easily copied and outcompeted by other nations.
However, they should form the basis upon which more advanced factors are created.
Advanced factor advantages like specialized labor and know-how are more focused
on a particular industry, and are required to develop a sustainable competitive
advantage.389 This chapter describes Ghana’s factor conditions along the structure
defined in the table below. Every chapter on Ghana’s determinants of competitive
advantage is supported by a table with the average rankings from all competitive
industries (i.e., textile and garment industry excluded).
389 See also Porter (1990a) p. 74
164
Table 24: Summary of factor conditions
Determinant
Elements
Average of rankings
Factor conditions
Raw material
1.8
Human resources
0.3
Specialized factors
0.5
Capital availability
0.4
Physical infrastructure
-0.9
Information infrastructure
0.4
Administrative infrastructure
-0.5
The development of competitive advantage has been mostly supported by the
availability of raw material. The availability of human resources, specialized factors
and capital has not supported the competitive advantage of Ghana. The poor
physical and administrative infrastructure however has been detrimental for the
development of competitive advantage.
18.1 Raw Material
The competitive advantage of Ghana’s industries rests primarily on basic factor
advantages, in particular natural resources. The location on the West Coast of
Africa, and its warm, humid tropical climate make Ghana a competitive place for
growing cocoa, tropical fruits and timber. Rich mineral resources such as gold ores,
bauxite, manganese and diamonds are the basis for a competitive mining industry.
Cheap hydroelectric power from the Volta Lake is the basis for the country’s
aluminum smelting industry.
18.2 Human resources
With average monthly earnings of USD 52, Ghana’s average wages are very low.390
However, when allowing for their low productivity, the country’s labor is not
390 Bigsten et al. (1998a) Table 1, p. 13; sample for Cameroon, Ghana, Kenya, Zambia, and
Zimbabwe. At the top was Cameroon with USD 283, at the bottom before Ghana was Kenya
with USD 88
165
cheap.391 For most industries, Ghana’s labor is four times less efficient than
Mauritius’ when productivity and wages are compared.392 One of the main drivers
of low productivity is the lack of well-educated employees: Only a small percentage
of Ghana’s workers have completed secondary or tertiary education. Poor primary
education and a high degree of illiteracy leads to a lack of skilled workers that would
have the know-how to operate complex machinery or upgrade production processes
and products, and it prevents farmers from learning new methods or growing
advanced type of products.393 As a result, “there seem to be serious deficiencies in
skill availability at practically all levels of industry, from the shop floor and
supervisory levels to the highest levels of technological and managerial
manpower.”394
18.2.1 Basic education level
In comparison to fast growing nations in Asia and Africa, Ghana’s basic education
level is low. School enrollment levels are the third highest in Sub-Saharan
Africa395(Table 25), but overall educational outcomes are poor. Functional illiteracy
is estimated to be around sixty percent.396 Basic tests scores show that only a small
percentage of the nation’s schools were able to provide their students with
acceptable education.397 In contrast, all the fast growing nations of Asia, including
Thailand and Malaysia, had achieved universal literacy when they began their
industrialization.398
391 Centre for the Studies of African Economies (1997) p. 44
392 “What exporting occurs within Ghana, there are virtually no labour intensive manufactures.”
“For those firms able to export wages are too high to enable the firms to compete given the
efficiency at which the firms operate.” Teal (1999) p. 9 & 11
393 See also The Wall Street Journal, Jan 26, 1994, p. 1, which attributes the lack of export
oriented manufacturing mostly to the country’s poor educational standards.
394 Lall, Navaretti, Teitel, Wignaraja (1994), p. 191
395 Lall, Navaretti, Teitel, Wignaraja (1994) p. 37
396 Chhibber, Leechor (1994) p. 88
397 In 1993, a National Criterion Test was conducted in a sample of public schools across the
nation. Only 5.5 percent of the students reached the literacy criterion score of 60 percent, and
only 1.8 percent of the students reached the numeracy criterion of 55 percent. UNDP (1997)
pp. 38
398 World Bank (1993a) p. 17
166
Table 25: Access to education in Ghana and Sub-Saharan Africa
Gross enrollment ratio
% of relevant age group
Ghana
Sub-Saharan Africa
1965
1980
1995
1965
1980
1995
Primary
69
79
76
41
78
75
Secondary
13
41
37
4
14
27
0
2
0
1
Tertiary
Source: World Bank (1998) pp. 76, Lall (1992) Table A4.5, p. 139
18.2.2 Secondary and tertiary education
A sound secondary and tertiary education system, in particular in technical fields, is
arguable one of the most critical inputs for upgrading and improving a country’s
industry. However, Ghana’s workforce consists mainly of primary school leavers,
and only 16 percent of workers have completed secondary education, which is very
low even for Sub-Saharan Africa. 399 In the tertiary sector, Ghana has a good
network of polytechnics and universities. However, the number of engineering and
science graduates is very low when compared to fast growing countries like South
Korea (Table 26).
Table 26: Tertiary students in technical fields (percent of population)
Country
Year General science
Engineering only
Ghana
1997
0.08
0.02
Kenya
1987
0.05
0.01
Cote d'Ivoire
1987
0.05
0.00
Nigeria
1987
0.04
0.01
South Korea
1987
1.45
0.54
Source: based on Lall, Navaretti, Teitel, Wignaraja (1994) Table 2.6, p. 34; Ministry of Education
Statistical Service, and own calculations
In the 1950s and 60s, Ghana’s Universities were well known, and their quality was
on par with developed country institutions. Today, their main problem is that they
remained typical “Oxford-type” institutions, with strictly discipline-oriented
teaching and research, and are not able to produce sufficiently high numbers of welltrained graduates in natural science, engineering, or business. Students are narrowly
trained in a single discipline, and – as complaints from companies indicate –do not
399 In comparison, the proportions for Cameroon are 40 percent, and for Kenya, Zambia and
Zimbabwe above 30 percent. Bigsten et al. (1997) p. 3
167
have the multidisciplinary breadth needed to tackle complex “real world” problems.
Upon graduation they have no practically applicable skills, and lack exposure to the
technology used in current production systems in Ghana.400 As a consequence, they
need a significant amount of training before they can be used in a factory.401
18.2.3 Internal training
Because of poor educational standards, firms have to invest significantly in internal
training to cover the skill gaps of their workers. Most large corporations like Ashanti
Goldfields and Valco have established extensive internal training facilities, where
they teach both basic and advanced skills to their workers. The need for intensive
internal training puts mainly smaller companies at a disadvantage. Not only are they
less capable of providing the same degree of training as large multinationals. Also,
they have less incentive to invest in their workers when they can leave anytime to
work for competitors – a threat that is less important for large companies that
practically dominate the labor market in particular areas.
The impact of internal training on productivity is significant, as it is more applied
and focused on the exact needs of the firm.402 In particular secondary school
graduates achieve a high return on experience, indicating that they are particularly
suitable and hence very important for the development of competitive industries
(Table 27). 403
400 This is also confirmed by Lall, Navaretti, Teitel, Wignaraja (1994) p. 191: “Some of the larger
and better-informed firms indicated that the content of the technical education curricula is
unsuited to modern industrial needs, and there is insufficient emphasis on practical, hands-on
experience.”
401 Interview results, Saint (1992) p. 89
402 Biggs, Srivastava (1996) p. 22, showed for a sample of firms from Zimbabwe, Kenya, and
Ghana that an increase of 1 percent of workers trained could increase the value added of the
firms by 60 percent.
403 Finding that returns to education increase at more advanced level in Ghana are confirmed by
Schultz (1994) p. 19
168
Table 27: Rates of Return (percent) to Human Capital in Ghana
Completed
Return on education
Return on work experience
Primary
3%
5%
Secondary
15%
8%
University
29%
n/a
Source: Bigsten et al. (1998a) Table 5, p. 17; based on a panel of firms within manufacturing
sectors of Cameroon, Ghana, Kenya, Zambia and Zimbabwe.
18.3 Specialized factors
18.3.1 Research and development
Most of the technology applied in Ghana is simple, based on imported machinery
and standard processes. The knowledge required to set-up production processes and
operate machinery is transferred mainly by expatriates or multinationals. Formal
R&D spendings have declined over the last ten years during the adjustment program,
and are miniscule, estimated to be around 0.3 percent to 0.5 percent of GDP.404 The
little research that is done in the country is practically all conducted by public
institutions rather than by private companies. The link between these research
institutes and competitive industries is very weak. None of the companies
interviewed had ever successfully utilized the services of the country’s Universities
and other research institutes (see also Chapter 18.6).
18.3.2 Management and entrepreneurship
The findings from the case studies clearly indicate that Ghana lacks management
talent particularly for small and medium sized enterprises.405 Historically, managers
of SOEs were not selected for their management capabilities, but for political
reasons, and limited management capabilities have been built up since. Those
Ghanaians that have returned from Europe and the US choose to work in more
404 Presidential Report to Parliament (1995) p. 17. According to World Bank data, only 42 patents
were filed in 1995, all of them by non-residents (World Bank (1999) Table 19, p. 226). R&D
expenditures in 1987 were 0.3 percent of GDP. Lall, Navaretti, Teitel, Wignaraja (1994) Table
2.9, p. 42
405 Gugerty, Steel (1996) also find that in Ghana the lack of qualified skilled labor and middle
management is a major constraint for non-traditional exports.
169
attractive positions in banking and professional services. Today, most of Ghana’s
competitive industries are managed by foreign multinationals,406 or by foreign
managers.
18.4 Capital availability
Lack of credit, or the difficult access to capital, is the most frequently cited problem
of Ghanaian companies across surveys and interviews.407 Three factors are
responsible for this problem: High cost of capital, a poorly developed financial
sector with restrictive credit policies, a lack of internal management capabilities
leading to the rejection of loans.408 The most important factor determining the cost
of capital is the high risk and uncertainty for investments. Several studies have
found that even though profits across industries are high, very little investments are
made, and they conclude that the reason for slow investment is high capital cost, not
the availability of finance to firms.409 However, a macroeconomic policy
environment with high rates of inflation, volatile exchange rates and high budget
deficits has led to very high interest rate levels, and a crowding out of private credit
by government lending. With riskless Treasury bills yielding more than risky loans
until 1997 (Table 28), banks had limited appetite to lend to small and medium-sized
406 Among the top 20 companies in Ghana, there is only one private indigenous company. Ghana
Club 100 (1998) p. 12
407 In the survey of Biggs, Srivastava (1997) p. 37, lack of credit was the most important obstacle
to firm expansion in Ghana. Aryeetey, Baah-Nuakoh, Duggleby, Hettige, Steel (1994) p. 11
found that 22 percent of small and medium enterprises found that lack of credit for working
capital and capital investment was the greatest obstacle to firm expansion, and 40 percent
included it among their top four constraints.
408 Lack of access to capital has been cited as a major problem of African enterprises already in
the 1950s and 1960s. At that time, several studies showed that capital was actually available,
but either proper investment opportunities were missing, or companies did not fulfill the loan
requirements (i.e. systematic management approach, reasonably documented accounts). See
Kennedy (1988) p. 152
409 Bigsten et al. (1998b) p. 19: “The most important factor adversely affecting investment is the
high capital costs facing the firms, which are reflected in their high profit rates. High capital
costs, associated with uncertainty and high risk, constrain investment, not the availability of
finance to the firms.” The propensity to invest (effect on investment of a USD 1 increase in
profit) is about one third of that of Europe and India (See Bigsten et al. (1998a) Table 8, p. 17).
Also Teal (1998b) p. iii, and Bigsten et al. (1997) p. 10 & 16 for four African countries. “Rates
of return on capital are significantly higher than return on human capital, at very low
investment level… High returns at low investment level must imply high capital costs facing
the firms. This finding suggests that the failure of Africa to develop a successful manufacturing
170
local businesses.410 Today, loans continue to account for only small part of the
assets on the banks’ balance sheets, and the bulk are relatively risk-free government
instruments.
Table 28: Financial market rates, 1991-1997
1991
Treasury Bill (91-day)
Saving deposits
1992
1993
18.0% 25.4%
32.0%
1994
1995
1996
1997
1998
29.5% 40.5% 42.8% 42.8% 26.7%
18.3% 25.8% 27.3% 27.7% 16.5%
Lending rates
Agriculture
29.5% 38.7% 40.7% 42.2% 36.0%
Manufacturing
31.5% 40.3% 43.6% 44.2% 38.5%
Mining and quarrying
32.7% 41.0% 43.3% 44.4% 39.0%
Stock market performance
3.6% 113.7% 124.3%
6.3% 13.8% 41.9% 69.0%
Notes: Rates at end December
Source: IMF (2000) Table 32, p. 42; EIU (1997a); Bank of Ghana (1993)
The structure of Ghana’s financial sector has improved significantly in recent years
with the introduction of a stock market, the privatization of the largest commercial
banks, and the establishment of new financial institutions (see also p.28). As a part
of the ERP, the government removed ceilings on interest-rates and sectoral credit
limits,411 cleaned-up the balance-sheets of the commercial banks,412 and established
clear accounting rules and minimum capital requirements. 413 However, the banking
reforms have not led to an increase in capital for the private sector. Banks were
badly shaken by past experience,414 and they continue to protect themselves through
conservative credit policies, either by looking for a collateral, or by focusing on
short-term loans to traders. In particular smaller banks have difficulties to undertake
feasibility studies, to do credit appraisal and loan supervision.415 An area still
largely uncovered is the rural sector, where farmers have difficulties to get access to
formal credits. Instead, they have to rely on informal credits and moneylenders.
410
411
412
413
414
415
sector may have its source not simply in the market for skills, but also in the costs of capital
faced by firms.”
See also Financial Times, June 22, 1998 (Database download): “Financial Sector: Success
comes on the back of reform”
Teal (1995) p. 3
Non-performing loans were exchanged for government loans
La Verle (1995) p. 152
With default rates for agricultural loans going as high as 70 percent. Aryeetey (1993) p. 200
Aryeetey (1993) p. 199. “Local banks are … excessively conservative and lacking in credit
appraisal skills.” European Roundtable (1993) p. 78
171
At the same time, however, most banks stress that a large part of loan rejections is
based on a pessimistic assessment of the applicants’ management capabilities.
Smaller businesses often depend fully on the management-owner, and it is unclear
how the business would continue after his exit. Banks are reluctant to lend to
companies because they don’t see the right management approach in there: no
systematic accounting system that gives updated information on business
performance; a reluctance of the management/owner to open the business to
outsiders, a lack of systematic business plans, and substantial underutilization of
their machinery. “The lack of credit may be overstated as a constraint because
entrepreneurs tend not to see their internal management constraints.”416
18.5 Physical infrastructure
One of Ghana’s weakest factors is its physical infrastructure, in particular poor
transportation and communication networks. Compared to other African countries,
Ghana has a poor road network, a poor telephone network, and a very thin
availability of computers (Table 29).
Table 29: Ghana's physical infrastructure compared to selected countries
Electricity
consumption
per capita,
kWh (1995)
Paved roads, Telephones
1996 (% of
per 1'000
total)
people
(1996)
Personal
computers per
1'000 people
(1996)
Internet hosts
per 10'000
people (1997)
Ghana
318
24%
4
1.2
0.15
Cote d'Ivoire
159
10%
9
1.4
0.17
93%
162
31.9
1.84
Mauritius
Zimbabwe
738
47%
15
6.7
0.24
Sub-Saharan Africa
437
42%
14
na
2.03
Source: World Bank (1999) Table 18 & 19, pp. 224-227
While the basic infrastructure around Accra is reasonably well developed, the
connection to the hinterland is in poor shape. Road transport accounts for around 98
percent of the freight moved, on a network of 35’000 km, of which only 6’000 km is
416 Aryeetey, Baah-Nuakoh, Duggleby, Hettige, Steel (1994) p. 1, also on p. 3: “We conclude that
survey data may exaggerate credit as a binding constraint in that many SMEs reveal high
growth rates – financed internally and through trade credits – despite lack of access to bank
finance, while stagnant ones with poor cash flows would make poor credit risks because other
constraints (particularly demand) are binding.”
172
paved.417 In the rainy season, a large number of the feeder roads become
impassable. The choked transport infrastructure and the poor quality of Ghana’s
roads slows down the delivery of goods and puts great wear and tear on the transport
equipment.418 A 1300 km long railway system links the main cities Accra, Kumasi
and Takoradi. Currently, the notoriously unreliable railway is mainly used for the
transportation of manganese, bauxite, cocoa and timber. Ghana has two major ports
with capability to handle large freight ships and tank ships. Takoradi is the export
port for natural resource products like timber, bauxite, and manganese. Tema is
Ghana’s main import port, and typically handles higher value added exports.
Following rehabilitation work in the late 1980s, turnaround time has been reduced
from 10 days to 2 – 3 days,419 making the ports now the quickest in West Africa.420
The Accra airport is served by major international airlines, and provides regular
connections to all major cities in Europe, US, and neighboring countries. The bulk
of the country’s electricity is hydroelectric power from the Volta Lake. Total
installed capacity is about 1’100 MW, yet in the past few years droughts have made
it unreliable, leading to frequent power cuts across the entire country. Currently,
there are plans to provide power from imported gas, adding between 300 to 600 MW
of capacity. In 1995, Ghana’s telephone capacity was 98’000 lines, putting
availability to around four telephones per 1000 households.421 The waiting time for
a new line can take up to 2.5 years. There are three independent cell phone networks
installed, and five Internet access providers offer their service in the main cities,
Accra (including Tema), Kumasi, and Sekondi-Takoradi.422
The country’s poor transport and communication infrastructure adds significant cost
of doing business in Ghana. The poor road network cuts off large parts of the
country from the industrialized part of Accra, and food-processing companies for
instance have difficulties to source raw material from far away. The road network
around Accra and Tema is well developed, but suffers already from congestion. To
compete in this environment, most industries are forced to build up their own
417
418
419
420
421
EIU (1998b) p. 18
Financial Times, June 22, 1998 (Database download)
Conafric (1996) p. 83
EIU (1998b) p. 18; European Roundtable of Industrialists (1993) p. 74
EIU (1998b) p. 19. In 1996, Ghana Telecom was partially privatized and sold to two
competitors, who are required to install 225’000 new lines by the year 2002.
422 EIU (1998b) p. 19
173
infrastructure such as road networks, telephone lines, power generation plants, and
even airstrips.
18.6 Information infrastructure
To disseminate knowledge and information about new production processes, or
consumer demands at home and abroad, a country needs a well-working information
infrastructure. This includes information from research institutes, from government
agencies, as well as from private providers.
In Ghana, the Universities and government-owned institutes have several research
programs, but none of the companies interviewed were able to utilize the results of
their work. Universities have the reputation of performing only basic research that is
not geared towards the needs of Ghana’s industries.423 The state research institutes
(supervised by the Council for Scientific and Industrial Research, which includes
members from the private sector) have limited means, and tend to focus on issues
that are typically relevant only for micro enterprises and small holding farmers.424
Better developed than the research institutions are Ghana’s marketing information
institutions, in particular the Ghana Export Promotion Council. The goal of the
Council is to create awareness for export opportunities among the Ghanaian business
community, and to promote Ghanaian products abroad. The council has been
successful mainly in promoting food exports from smaller producers, such as
pineapple, vegetables, and nuts. It regularly organizes export seminars and trade
fairs, and links producers with technical assistance from international
organizations.425
A problem particularly for small companies is the absence of information on the
credit worthiness and reliability of business partners.426 With slow and expensive
enforcement mechanisms, firms face high risks of contract default. As a
consequence, they have to incur significant information costs before entering into a
423 In company-sponsored projects, they tend to be unresponsive to the needs of the sponsor, and
prefer open-ended research to targeted problem-solving. Interview results
424 For instance, the significant achievements of the Institute for Industrial Research included the
development of circular saws and band saws (which are already easily available on the
market), cooking stoves, hand-operated rice seeders to facilitate sowing of rice, or a portable
cassava slicer. See Web page (January 1998)
425 Anyemedu (1991) p. 212; Interview results
426 See Fafchamps (1996)
174
relationship with unknown suppliers, and hence limit their interactions with other
firms.
18.7 Administrative infrastructure
A poorly functioning administrative infrastructure can lead to significant increases
in the costs of doing business. These costs include the time spent on paper work or
waiting for official approvals, money spent for bribes, and the costs of uncertainty
when legal protection of property rights is slow and expensive. In Ghana, efforts
were made to improve and overhaul the country’s administrative infrastructure to
facilitate the establishment and operation of private ventures. However, an
inefficient and corrupt bureaucracy still creates formal barriers to potential foreign
investment, and reduces competition among domestic firms.427 Interview partners
confirm difficulties with export formalities, incidents of corruption, and slow
processing of administrative requests. “Residual effects of a drastically
overregulated economy and the lack of transparency in government operations
create an element of risk for potential investors. Bureaucratic inertia is sometimes a
problem in government ministries, and administrative approvals often take longer
than they should.”428 Reports of corruption exist even at the level of ministers, who
are occasionally linked to favoritism of their clientele, and sometimes even drugrelated transactions. The police have an image as an unaccountable and corrupt
institution. Official inquiries found that they are ill equipped, ill trained, with low
morale and motivation.429
A major cost factor in doing business in Ghana is the uncertainty of property rights.
First, the police have no right to impound assets in case of payment defaults from
debtors.430 The current court system is perceived as being largely inaccessible and
expensive, frustratingly slow and possibly corrupt, favoring the rich and powerful.
Second, land acquisition is very difficult: “Property rights in Ghana, particularly
relating to landownership, are still governed by arcane regulations.”431 A central
427
428
429
430
Heritage Foundation (1997) p. 201
US Department of Commerce, Web page (June 2000)
UNDP (1997) p. 50
Fafchamps (1996) p. 446. According to Collier, Gunning (1999), 90 percent of all credit
defaulters are eventually forgiven.
431 Nowak et al. (1996) p. 38. Traditionally, land is either held by the “stool” (corresponding to the
clan or large family), or in public hand. Stool-land cannot be sold.
175
land registry does not exist, and land acquisitions can take up to one year, as it is
difficult to identify the legal owner or to negotiate rights over clan and stool land.
18.8 Conclusions on Ghana’s factor conditions
Ghana’s main factor advantage is the availability of natural resources. All other
areas, particularly more advanced factors, are in relatively poor shape. For
companies, this means high transaction costs and consequently low profitability.
Firms relating on slightly more complex production processes have to invest first in
workers education and training. Meaningful public research and development
activities are absent, and firm-internal knowledge building is limited. Most
managers are foreign expatriates or work for foreign corporations. The country’s
high cost of capital makes investment expensive and leads to the use of less efficient
technology.432 The bad road network and the lack of storage facilities limit fresh
fruit and vegetable growing to areas around Accra. A poor railway line makes
bauxite mining prohibitively expensive. The lack of rural credits, the difficulties to
acquire large areas of land, and unavailability of management talent prevent the
foundation of larger plantations that could provide the raw material for the food
processing industry. The poor education of farmers prevents them from introducing
modern varieties for cocoa growing and other crops, and the targeted usage of
fertilizer, pest control, and small-scale irrigation. The current legal system does not
provide for the easy enforcement of contracts, and as a consequence it prevents
banks from lending to industries with an unfavorable past. And last but not least, the
current bureaucracy imposes additional costs of doing business rather than
supporting the establishment of profitable firms
Ghana’s successful firms are those that are able to leverage the country’s basic
factor advantages, and to work around its factor disadvantages by substituting the
poor public infrastructure through private infrastructure investments. Small firms
that cannot afford to invest in power generators and that cannot train their workers
efficiently are significantly disadvantaged. Overall, the capital tied up in private
432 Technology in Ghana for instance is 30 percent less efficient then in Cameroon, Kenya and
Zimbabwe for the same type of company. Virtually all of it could be explained by differences
in physical capital endowment. Bigsten et al. (1998a) P. 9
176
infrastructure and large stocks cannot be used for investments in innovation and
upgrading of factor conditions, and hence reduces the country’s capital productivity.
177
19 Demand conditions
In most nations – particularly in highly sophisticated industries – demand conditions
are the most important determinant of competitive advantage because they shape
how firms perceive, interpret and respond to buyers needs. “Firms are in a better
position to monitor and interpret the needs of customers in their home region then
they are of the requirements of purchasers in distant places.”433 The home market of
a nation has a disproportionate impact on a firm’s ability to perceive and interpret
buyer needs because their attention is better, the understanding and communication
is less costly, and pressures from buyers is felt more acutely. Sophisticated
customers at home press firms to upgrade, and they reveal insights into what future
customer needs abroad could be.434
Two elements in a nation’s home demand structure are important: Size, and quality.
Size is important because the large home market segments receive much more
attention than the smaller segments. Quality is important because nations have an
advantage where home demand gives local firms a better or clearer picture of buyer
needs. The chapter first discusses the impact of the size of Ghana’s home market,
and then the impact of the quality of demand.
Table 30: Summary of demand conditions
Determinant
Elements
Average of rankings
Demand conditions
Size of home market
-0.1
Quality of demand
-0.1
Based on the findings from the case studies, Ghana’s demand conditions have not
promoted the development of competitive advantage, and have even been
detrimentous in some industries.
433 Singleton (1997) p. 53
434 Porter (1998a) p. 45
178
19.1 Size of Ghana’s home market
Ghana’s home market for all industries is quite small. With a population of 14
million people and a per capita GDP of USD 350, the nation’s purchasing power is
limited. About 70 percent of the population live in rural areas and have no access to
consumer goods. The largest part of the nation’s income is concentrated in Ghana’s
major cities Accra and Kumasi. These cities are the home of a relatively well to do
middle class with a high consumption of consumer goods and entertainment
services. However, the size of this segment is too small to drive a sustainable
industry with significant export activities. Except for the processed aluminum
industry and to a limited extent the processed food industry, no competitive industry
is selling significant volumes in the domestic market.
19.2 Quality of Ghana’s home market demand
Until 1983, Ghana’s consumers had basically no access to foreign goods. With the
downturn of the general economy the production of domestic firms started to be
reduced, and in the early 1980s almost no goods were available on the market. Low
incomes, little information and limited selection forced buyers to accept inferior
products at almost any quality. Only with the opening of Ghana’s trade system and
the economic reforms in the mid-1980s was the country again exposed to domestic
and foreign goods. Today, however, Ghana’s home market continues to be quite
unsophisticated, both because consumer’s purchasing power is limited, and because
certain products are still hard to get – forcing consumers to accept almost any
quality and long delivery delays. More sophisticated demand comes from
multinational companies producing in Ghana. Yet, only few multinationals are
sourcing critical inputs for their products directly in Ghana.435 Most multinationals
continue to import a very large part of their inputs, and buy only non-critical inputs
on the local market. The lack of high-quality products is also a result of Ghana’s
small-scale industry structure, where most goods are custom-made. Smaller
companies are not used to produce standard products with very tight quality
requirements. In the textile industry, foreign customers complain about the lack of
size standards – which are a key requirement for standardized clothing. Furniture
manufactures cannot grasp the need for completely identical pieces, since Ghanaian
435 Awuah (1994) p. 104 describes how the cooperation between Unilever, a Dutch multinational,
and a Ghanaian supplier of palm kernel oil led to significant quality improvements of the input
material.
179
customers are typically happy with their custom-made work. The Ghana Standards
Board, the country’s official testing authority, subscribes to accepted international
practices for testing of imports and locally produced goods. For large exporters,
however, these standards are largely irrelevant, as buyers of Ghanaian products
require adherence to their own standards. The Ghana Standards Board does provide
some technical assistance in areas like quality management and export packaging,
but has not yet been able to move to the establishment of quality labels or to
establish standards in other areas such as the country’s textile and furniture industry.
19.3 Conclusions on Ghana’s home demand
The small size and limited sophistication of Ghana’s home market demand has not
been a determinant for Ghana’s competitiveness. The quality of demand revealed by
Ghanaian customers is less sophisticated than the demand structure of Ghana’s
export markets, leading to a fundamental disconnect between home market demand
and foreign demand. Most companies are unaware of how far they lag behind
mature markets in terms of product quality, engineering, manufacturing
productivity, and quality control.436 Successful export companies completely
neglect their home market and focus on their export market. Their success depended
to a large extent on finding ways to quickly understand the needs of their far-away
customers through marketing agencies, trade-fairs, and wholesalers. In general, their
production systems are geared towards meeting all foreign market standards,
respecting quality requirements, delivery deadlines, and health and safety standards
as for instance required by the EU. To sustain a competitive advantage, selected
companies have moved towards new, and sometimes even more sophisticated
products, building up more advanced factor advantages. Those companies that took
the learning from their home market to foreign markets were often disappointed. The
limited availability of high quality products in the home market prevented them
from learning what kinds of standards were required for international markets.
Particularly in the textile and furniture industry, exporting companies had big
difficulties understanding why their goods were rejected by importers, when the
quality was reasonable from their point of view, and shipments had only been
436 Gugerty, Stern (1996) p. 24
180
delayed by a couple of weeks.437 Overall, the quality of Ghana’s home demand has
been a major inhibitor for gaining competitive advantage and moving to more
sophisticated products. Many companies abandoned exports in frustration and
continue to focus on unmet home market demand; others are asking for protection
against cheaper and better imports.
437 Asante, Baah-Nuakoh, Jebuni, Oduro (1996) p. 69 report that roughly 60 percent of the
exporters in their sample were forced to improve upon product quality based on buyer
information – their home market had not provided them this information.
181
20 Related and supporting industries
Related and supporting industries play an important role in the development of
competitiveness of an industry. The presence of a successful supplier industry
allows efficient, rapid and sometimes preferential access to the most cost-effective
inputs, enabling a close link between the different value chains. The presence of
other related industries lead to a faster development of the country’s “skills” and
know-how, it improves the availability of specialized infrastructure, and it enforces
the development of a competitive supplier industry. In the ideal case, related and
supporting industries form the basis for industry clusters, groups or networks of
industries with similar activities. They are able to draw on the strengths of all other
partners by sharing information and specialized factors such as highly skilled
employees or special research and training institutions. This chapter describes the
impact of Ghana’s supporting and related industries on the development of
competitive advantage.
Table 31: Summary of related and supporting industries
Determinant
Elements
Average of rankings
Related and supporting
industries
Supporting industries
-0.1
Related industries
0.1
Overall, Ghana’s related and supporting industry has not promoted the development
of competitive advantage.
20.1 Presence of supporting industries
Most of Ghana’s competitive industries do not rely on specialized domestic
suppliers for key inputs, either because they are not available in Ghana, or because
the price and quality of domestically manufactured inputs are not competitive. Two
factors are most likely responsible for this phenomenon: (1) the dominance of
inefficient state-owned enterprises in most supplier industries until recently, forcing
companies to import inputs even though they could have sourced them directly in
Ghana. (2) The difficulties in establishing solid supplier-customer relationships with
reliable deliveries and enforceable contracts, forcing companies to integrate
backwards. In the food industry, suppliers for basic packaging material are there, but
182
slightly more advanced materials such as packaging cartons for food containers must
be imported. Unreliable supplies from a next-door sawmill forced the country’s
leading furniture manufacturer into backward integration. In the mining industry, all
equipment is imported, starting from gloves and hardhats to expensive machinery;
maintenance services are provided by subsidiaries of other multinationals. Over the
last five years, a specialist supplier industry for the mining industry has started to
produce inputs like limestone and explosives, but most mines continue to import
even high volume inputs such as cement.438
20.2 Presence of related industries
Overall, there are very few industries related to Ghana’s competitive industries, and
in none of the case studies was the competitiveness of an industry improved by the
presence of other, related industries. In Ghana, networks among firms across
different industries are generally poor, and the exchange of productive information
is limited. This holds also true for international relationships: in general, Ghanaians
have less linkage than non-Ghanaians with business people in other countries and
the non-Ghanaian business community in Ghana.439 As a consequence,
multinational or foreign-dominated companies benefit more from relationships with
other countries rather than from companies within the country.
20.3 Conclusions on Ghana’s related and supporting
industry
Ghana’s competitive industries draw their competitive advantage primarily from
basic factor advantages, without relying or building on a cluster of related and
supporting industries.440 Ghana’s related and supporting industries are scarce, and
often uncompetitive. Most firms in Ghana, with the exception of multinationals and
a few large firms, are technologically isolated from the World, and have no access to
the modern technology that is required to supply internationally competitive
438 According to interviews, it is cheaper to import large amounts of cement than to source them
locally from the state-owned monopoly.
439 Barr (1995) p. 10
440 Barr (1995) has estimated the impact of a network of relationships on the productivity of
Ghanaian firms. His results indicate that an increase of a company’s relationships with
companies in other industries from 5 to 6 would lead to an average productivity improvement
of 12.5 percent.
183
industries.441 Therefore, most competitive firms are vertically integrated or rely on
imported inputs. For the industry as a whole, vertical integration leads to a waste of
resources relative to specialized supplier industries because of lower efficiency and
the lack of capital that could be invested in the core part of the company.
441 Biggs, Srivastava (1997) p. 23
184
21 Strategy, structure, and rivalry
The structure of an industry, the firms´ strategy and rivalry are the context in which
firms are created, organized and managed, and that determines how they compete
with each other. Upgrading and moving towards higher levels of competitive
advantage is driven by the need to compete against successful rivals, and
competitive intensity is a major determinant of competitive advantage. Even though
there might be a duplication of efforts and a certain waste of resources in the course
of competition, the balance will be positive in the end. Rivalry weeds out weak and
unproductive firms. It keeps firms away from relying on basic and generalized factor
advantages. Instead, they must seek more specialized advantages, and are forced to
review all activities in their value chain. Strong competition at home also forces
firms to export and to sell abroad if they want to expand, exposing them to new
customer demands and different, often more advanced competitors.442 The chapter
starts with a description of the current industry structure and the climate for
investments, and describes then the overall strategies of Ghana’s firms.
Table 32: Summary of firm structure, strategy, and rivalry
Determinant
Elements
Average of rankings
Firm structure,
strategy, and rivalry
Structure and rivalry
0.4
Climate for investments
1.2
Strategy
0.8
Overall, the structure and rivalry of Ghana’s firms has had no significant impact on
the development of competitive advantage. More important was the (improvement)
in Ghana’s climate for investments, and the strategies of Ghana’s firms.
21.1 Structure and rivalry
As a small economy, Ghana does not have a very well developed firm structure, and
rivalry among firms is limited. A few large corporations dominate competitive
industries like aluminum smelting, gold mining, food processing and furniture
442 Van der Linde (1991) p. 12; Porter (1990a) p.108
185
manufacturing. Many of these firms are focused on export only, and their relevant
competitors are other globally operating companies. Domestic rivalry is limited, and
competition comes primarily from imports. In the primary aluminum industry, there
is only one mining company and one smelter. Only in the aluminum hollowware
industry there is intensive domestic rivalry, where major companies are fighting for
market leadership and force each other to upgrade their products and production
processes. The gold mining industry is clearly a global industry, dominated by one
large company that competes with other global players. Rivalry for good sources
across the entire African continent is intense, but within Ghana there is little direct
competition. In the cocoa sector, the state monopoly Cocobod dominates the
industry, and domestic competition is virtually eliminated. The timber industry has a
large number of players, but competition is not very intense as most firms focus on
export markets, leaving the home market to small-scale mills and carpenters. The
situation is similar in the processed food industry, where the large players focus
almost completely on exports and domestic rivalry is only relevant at the small and
medium scale level. In the fresh fruit industry, the main rivals are in neighboring
countries, and there is also no rivalry in the home market. In the textile industry,
most firms consider their main rivals to be imported fabric, and direct competition
amongst them is limited.
Competition rules and barriers to entry
There are no legally established competition rules or barriers to entry. De facto,
however, the government continues to dominate large sectors of the economy. In
many industries, current or former SOEs are still the only major player, and the
government has decided to retain control over key sectors of the country’s economy,
in particular cocoa, energy provision, insurance and pension fund management.443
In the timber industry, most of the larger sawmills were taken away from their
owners in the late 1970s, and are still state-owned.
21.2 Climate for investments
In the recent past, Ghana’s government has undertaken a large number of steps to
regain the confidence of both domestic and foreign investors. In particular the
443 The State Insurance Company currently captures around 80 percent of the total premium
volume. A mandatory contribution of 17 percent of all wage bills goes to the state-owned
Social Security and National Investment Trust, the only pension fund in the country. Leechor
(1994) p. 182
186
encouragement of non-traditional exports, and the introduction of innovative
solutions to circumvent the country’s bureaucracy have promoted the development
of new and the growth of existing industries. However, both the regulatory reforms
and special incentives have not led to a significant surge of investments. There is
still a relatively high degree of uncertainty around the political and economic future
of the country.444 Many industries, in particular mining and aluminum, continue to
depend on good political relationships for their smooth operations. Government
contracts are often subject to the payment of bribes. Worse, however, are the
continuing direct political interventions in company affairs, such as in the case of
labor strikes or takeover threats.445
21.2.1 Investment and trade laws, taxes
Ghana’s investment code incorporates a broad range of incentives, ranging from
reduced tax rates446 to the full transferability of funds.447 Remaining legal
restrictions include a minimum investment requirement of USD 50’000 for a wholly
owned foreign subsidiary, and a government stake in all mining companies. The
impact of the new investment code on the investment behavior of both domestic and
foreign firms has been below expectations. The preferential taxes granted to foreign
investors do not necessarily attract investments, as they are only a way to make up
for the poor infrastructure of the country.448 From a regulatory perspective more
important are other barriers, such as the difficulty to acquire land (see also p. 174),
and cumbersome labor regulations.
444 On an analysis on the relationship between high uncertainty and reduced investments in Ghana
see also Pattillo (1997) p. 27
445 Examples are the direct intervention of the President on behalf of striking miners at Ashanti
Goldfields, and the involvement of vice ministers in strikes in the textile industry.
446 Reduced corporate taxes on non-traditional exports (8%) and hotels (25%), tax holidays
ranging from 3 to 10 years in real estate, rural banking, and agricultural processing sector.
447 All investments require the approval of Ghana Investment Promotion Centre, although
essentially for statistical purposes. Investment incentives are awarded automatically. US
Department of Commerce, Web page (June 2000)
448 “Evidence suggests that fiscal incentives do not have a positive effect on FDI inflows. There is
a negative significant relationship which is the result of an ‘illusory compensating effect’ that
comes into play when host countries try to use incentives to make up for the lack of resources
and economic development”. McMillan (1995) p. 154
187
21.2.2 Labor market policies
Ghana’s labor is not cheap relative to its productivity, and the relationship between
companies and their employees are not always trouble-free. The Public sector still
accounts for a very large share of formal employment, and high public wages exert
pressure on the overall wage level.449 Collective bargaining in the public sector in
the past yielded more generous provisions for retirement, redundancy and non-wage
benefits than in the private sector; and the levels of wage increases typically
exceeded the average productivity growth. Labor unions have a very powerful
presence in the formal and public sector, and enjoy government support in many
cases.450 In 1999, two companies well known for their “excellent” labor relations
were surprised by strikes, with support for the striking workers coming as high as
from the President. These factors restrict labor mobility, and limit flexibility to
adjust wages to reflect changing market conditions.
21.2.3 Political and economic uncertainty
Many Ghanaian and foreign investors are still hesitant to invest in Ghana because of
political and economic uncertainty. While the new investment regulations have
granted protection mainly for foreign investors, Ghanaian investors are to a
significant extent still at the mercy of the government.451 “… the private sector in
Ghana received mixed signals during the ERP (1983-1992) as liberalization policies
were not fully complemented by an institutional framework conducive to promote
free competition.”452 In the 1990s, the mingling of the country’s top leaders in
business affairs, the incomplete divestiture of SOEs, and the continuing presence of
corruption in the civil service indicate the ambivalent attitude of the government
towards a free market economy and private entrepreneurs.453 ‘Greedy’ private
449 Nowak et al. (1996) p. 44
450 On average unionized firms pay 32-34 percent more than non-unionized firms. Teal (1998b) p.
ii
451 “Today, Ghanaians still believe that doing business entails major political risks.” “…
convincing sings of a new approach and a new partnership with private businesses have not
been forthcoming from the government. The divestiture of government commercial
undertakings has been slow and faltering.” Leechor (1994) p. 153 & 178
452 Nowak et al. (1996) p. 38
453 Leith, Lofchie (1993) p. 280. “Ghanaian investors have gone through experiences in the last 13
years that make them uncertain about government’s long-term philosophy and ideology in
relation to the ownership of capital and its employment. They saw some investors lose all their
188
investors continue to be considered as necessary evil rather than a benefit for the
country’s development. With secondary markets for capital goods not well
developed, large investments are de facto irreversible, and companies hesitate to
invest unless they are certain that their economic and political environment will
remain stable. As a consequence, most Ghanaian business people focus their energy
on business with low investment costs and short turnover periods such as trading,
rather than being stuck with large investments that would be ‘sunk’ should the
economic framework be reversed.454
21.3 Strategy
21.3.1 Strategic focus
Competitive advantage in any industry is the result of its ability to deliver greater
value to customer, or to create comparable value at a lower cost, or do both. To
sustain this ability, companies cannot just rely on operational effectiveness. In the
long run, companies need to have a solid strategy. Strategy is about creating a
sustainable difference by deliberately choosing a different set of activities to deliver
a unique mix of value. In dynamic markets with rapidly changing technologies,
rivals can quickly copy any operational improvements, and competitive advantage
based on operational superiority is, at best, temporary. Following Porter, choosing a
strategy requires to make decisions on two generic variables: on narrow, clearly
defined customer segments or on a broad range of customers (‘competitive scope’),
and on the focus purely on lower costs or on differentiated products and services
(‘competitive advantage’). Based on these decisions, a company has then to find its
strategic position, defining if it will either perform activities different activities from
rivals’ or perform similar activities in different ways.455 The preferred strategic
position of the majority of Ghana’s competitive industries is a narrow focus on low
cost, natural resource-based commodity products. For roughly 25 years, Ghana’s
primary aluminum industry had thrived on the world’s lowest electricity costs.
Ghana’s gold mines benefited from high-grade ore, which allowed them to produce
gold at low costs. Ghana’s food industry lives on cheap inputs, both fish and
investments to government in 1979, and also in 1982, following arbitrary decisions by the
government.” Aryeetey (1994) p. 1219
454 Aryeetey (1994) p. 1218
455 Porter (1996) p. 62
189
agricultural produce. Only few companies, such as Ghana’s only major furniture
exporter, have a competitive advantage combining cheap resources as well as costefficient production.
21.3.2 Value chain presence
Picking the right strategy is in most cases a decision on making the right trade-off
about which activities are core to a company’s success. Ghana’s competitive
industries are characterized by a very narrow focus on a limited set of activities
within an industry’s value chain. In almost all cases, companies focus on the parts of
the value chain that can be handled easily in Ghana: the transformation of raw
material (natural resources) into basic products in relatively simple production
processes. Activities such as research and development, marketing, and trade are
either handled by the parent of a multinational subsidiary, or by agents and buyers
outside Ghana. There are two main reasons for this focus. (1) The management
capacity of Ghana’s companies is fully absorbed with its work due to backward
integration, poor infrastructure, and availability of low-skill labor only. (2)
Companies have no foothold in developed markets, and are too far away from their
customers to manage higher value-added activities.
21.3.3 Management practices and goals of individuals
The management style and organizational structures in most of Ghana’s companies
reflect to a large extent Ghana’s social structure.456 Ghana’s companies are typically
managed with an authoritarian leadership style, and workers often show a surprising
degree of disinterest in the well-being of their company. Many African
entrepreneurs are almost as unwilling to delegate authority to supervisors and
456 In Ghana, the extended family is the primary social unit. In this kind of structure, all purposes,
actions, gains and ideals of individual members are evaluated by their contribution to the wellbeing of the family. All major decisions in the live of an individual are collectively discussed
and agreed upon. Children are not encouraged to take individual initiatives over and above
those required for doing daily routine tasks, as the family is the overall responsible unit. The
importance of the family influences the Ghanaian organizational life with two important
elements: First, by establishing strict rules of command in an organization. Seniors, either in
age or position and status, are generally expected to give direction and guidance to their
juniors, who in turn are expected to respect the wisdom underlying such guidance and to follow
instructions given to them dutifully. Second, Ghanaians have to accept a moral obligation to
help less advantaged family members, be it through job fixing, advancing their careers within a
company, or intra-family redistribution of resources. See also Kuada (1994) p. 73
190
managers as they are to share ownership.457 These sole proprietors see the company
as their personal asset, and manage it as a “one man show”. To establish
professional management teams is difficult, because management skills at lower
levels are not being developed and authority is never delegated.458 Since the
structure to manage larger firms is not in place, most companies have difficulties in
growing. In this context, the development of longer-term strategies and the
recognition of market needs are not possible. Often, the behavior of management
and workers reinforce each other in a vicious circle. Because of the dominant role of
the family in securing people’s livelihood, most workers develop an instrumental
relationship to their work, which means that their personal goals have priority over
organizational goals.459 The absence of sense of ownership leads to lethargy and a
lack of commitment to a common goal, up to the abuse of office for personal
gains.460 Good leadership is equated with toughness, and effectiveness requires that
a leader sets rigid work standards, organizes tasks down to the last detail, prescribes
work methods to be followed and closely supervises subordinates’ work.
Subordinates are likely to avoid the risks associated with personal initiatives by
referring all essential matter to their superiors. Subordinates tend to believe that their
superiors are likely to value personal loyalty and goodwill over and above
competence. 461
While strong family cultures played a positive role in East Asian development,
Africa’s family structures have been more a drag than a benefit. Owners of
companies are under enormous social pressure to hire family members. However,
once employed, the family members are then not interested in the well-being of the
organization, but rather take their jobs for secure and granted. This “suggests that the
collectivism of African family life is hardly translated into collective responsibility
to work diligently under the leadership of a family member in order to build a viable
enterprise. Family business is seen more as a source of refuge for family members
than a source of collective growth and prosperity.”462 Family members, it is said,
are unwilling to respond to the same discipline as other employees. They tend to
demand special treatment and this provokes discontent among the work force.
457
458
459
460
461
462
Kennedy (1988) p. 167
Interviews with banks and consultants
Kuada (1994) p. 76
Woode (1997) pp. 33
See also Kuada (1994) p. 131
Kuada (1994) p. 171
191
Jealous of the owner’s success and resentful of his authority, they are also prone to
dishonest and unreliable behavior. Kinship obligations are not only difficult for the
establishment of a work organization, but they also prevent the accumulation of
wealth as a basis for further investments. Whatever profit has been accumulated is
expected to be distributed among family members, or invested in status symbols like
cars and houses. 463
21.4 Conclusion on strategy and structure of Ghana’s
industry
The structure and strategies of Ghana’s competitive companies are well adapted to
the uncertainties of their environment, and the poor factor conditions of the country.
The perception of a continuing economic and political uncertainty is responsible for
the continuously low investment inflows in the country, and the limited appetite of
entrepreneurs to invest in fix-cost intensive ventures. The focus on cost-based
production in a small part of the value chain is the result of the country’s poor factor
conditions that make innovations and product upgrades difficult, and that require full
management attention to work around the shortcomings of the Ghana’s
infrastructure.
Although this strategy works well in the context of Ghana’s current environment, it
leads to a vicious cycle of decreasing competitiveness. A competitive advantage
based on low costs and on focusing on a small part of the industry value chain leads
to low profitability. That means that little money is available for investments in
innovation and product upgrading to enhance again the industry’s competitiveness
through more advanced products.
463 Kennedy (1988) p. 169
192
22 Government
A nation’s welfare, the prosperity of a its citizens, is at heart a function of its
political and macroeconomic context, of its microeconomic environment, and of the
strategy and operations of its companies.464 The role of the government is to
promote the well being of its citizens, by establishing a stable macroeconomic
environment through sound fiscal and monetary policy, and by ensuring a favorable
microeconomic environment. Every government can significantly influence a
country’s microeconomic environment through its regulatory framework and
through direct activities and intervention. What a government cannot do is to create
competitive advantage itself. Only in partnership with a nation’s companies can
competitive advantage be created and strengthened. Working together with them, a
government can hasten the gaining of competitive advantage of industries by
influencing a nation’s factor conditions, demand conditions, its industrial structure,
and companies’ strategy. The next sub-chapter briefly outlines the elements of sound
macroeconomic policies and an enabling microeconomic environment. After that
follows an analysis of Ghana’s track record in establishing macroeconomic stability
and an enabling microeconomic environment.
22.1 The role of government in promoting competitive
advantage
22.1.1 Ensure macroeconomic stability
The role of sound macroeconomic policies is to provide a stable, predictable
environment for firms to operate, in particular undistorted prices and exchange rates.
To operate profitably in a free market environment, companies need access to capital
at reasonable costs, exchange rates that allow them to compete on World markets,
and stable prices to minimize the uncertainty of their long-term planning. In terms of
policy variables this translates into low rates of inflation, stable and appropriate
exchange rates, and positive real interest rates that are not too high.465 This requires
a mutually consistent and reinforcing fiscal, monetary, and exchange rate policy.
464 See Porter (1998a) p. 41
465 See Aryeetey (1994) p. 1212, CEPA (1998) p. 1
193
The monetary policy should limit the growth of money supply to a rate in
accordance with growth of real output, the fiscal policy must constrain spending to a
level close to revenues to keep a sustainable balance of payment position,466 and the
exchange rate regime should provide undistorted import and export prices.
22.1.2 Provide enabling microeconomic environment
Aside from stable macroeconomics and institutions, companies need an enabling
microeconomic environment in which to operate and thrive. For the government of
Ghana, an enabling microeconomic environment entails:467 (1) The possibility for
free enterprise foundation and free competition, (2) an attractive venue for domestic
and foreign investments, (3) a legal and administrative systems that promotes private
investment and initiative, and is equitable to all participants, (4) an efficient,
reliable, and cost-effective economic infrastructure, and (5) a “Science &
Technology” culture at all levels of society and in all types of production to
accelerate economic growth and to improve quality of life in the population. These
five elements are a recognition that growth will be driven by private investments.
The role of the government is to provide favorable conditions for private sector
initiative, and to ensure that the public sector promotes and/or does not hinder
private sector operations.
22.2 Ghana’s macroeconomic and microeconomic track
record
The following sections of this chapter describe the macro and microeconomic
environment of Ghana.
Table 33: Summary of government determinants
Determinant
Elements
Average of rankings
Government
Macroeconomic
stability
0.1
Microeconomic
environment
0.0
466 In successful nations in East Asia, the public sector has been a net saver, rarely crowding out
the private sector. Chhibber, Leechor (1994) p. 90
467 See the Presidential Report to Parliament (1995) p. 34
194
Even though Ghana’s government has undertaken significant efforts to stabilize its
macroeconomy and to establish an investor-friendly legal framework (see also
Chapter 3.2.1) the country’s macroeconomic and microeconomic environment have
enabled but not really supported the development of competitive advantage.
The key action of the government was to shift from direct intervention to the
reliance on market forces, to restore fiscal and monetary discipline, to rehabilitate
the country’s social and economic infrastructure, and to implement structural and
institutional reforms, aimed at improving the efficiency of the economy. In this
phase, the government was able to rapidly correct the largest distortions such as
rampant inflation and fixed exchange rates. The country’s regulatory environment
was adjusted quickly in the areas of trade policy, but investment policies were
adjusted only after 1990. Public sector reforms like the privatization of SOEs and
civil service reforms have not been completed yet (see Table 34).
Table 34: World Bank evaluation of Ghana’s economic reforms - overview
Reform measures
Performance
Description
Exchange rates
Excellent
Fully liberalized, no black market
Fiscal discipline
Fair
Recurrent slippage in meeting fiscal targets
Financial
liberalization
Fair
Interest rates liberalized, but high spreads and low
service level remaining due to bank oligopoly
Tax reform
Good
Broadened tax base, reduced marginal tax, and
rationalization of indirect tax regime
Macroeconomic
Regulatory environment
Trade liberalization
Mixed
Abolishment of import licensing system and rapid
rationalization of tariffs (between 0 to 25 percent), resulting
in widespread bankruptcies in private sector (not enough
time to adjust)
Deregulation
Fair-Good
New investment act with automatic approval of all
investments, anecdotal reports of “informal” regulation and
rent-seeking behavior
Fair
Barriers to investment largely abolished, but inflows so far
limited
Foreign
investment
direct
195
Public Sector Reforms
Public
expenditure
priorities
Fair
Inefficient subsidies reduced, and expenditures directed
towards primary education and infrastructure rehabilitation;
but huge government sector not yet reduced
Privatization
Slow
Slow divestiture of state-owned enterprises because of
insufficient political support
Civil service reform
Very slow
Demotivated,
oversized,
and
bureaucracy, with rent-seeking prevalent
underproductive
Source: Armstrong (1996) pp. 96-101
22.3 Ghana’s macroeconomic environment
Ghana’s macroeconomic reforms during the ERP were focused on stabilizing the
country’s inflation, and implementing sound fiscal policies. In the first years, the
government was quite successful in its exchange rate liberalization and fiscal
policies, establishing the basis for rapid economic growth. However, since 1992, the
country’s macroeconomic environment has not been conducive to sustainable
economic growth. On the fiscal side, strong socio-political pressures468 led to
increasingly large budget deficits and the resulting upward pressure on interest rates
led to a crowding out of private sector investments. The country took on a
significant amount of debt to make up for the lack of domestic savings, with the
consequence that current interest payments are higher than the public wage bill.469
Since 1993, the country’s inflation has remained high and volatile by international
standards (see Figure 24).470 The steady issuing of high yielding treasury bills to
finance government expenditures and government-owned enterprises has led to a
crowding out of private investments. For the country’s commodity exports, the
468 Public sector salary increases of 80 percent before the elections in 1992, high levels of
infrastructure investments and social service costs such as education and health. CEPA (1998)
p. 22
469 With accumulated external public debts of USD 6.3 billion (end 1997), Ghana is classified as a
highly indebted country. CEPA (1998) p. 21
470 The main challenge in controlling the Ghana’s inflation is to manage the two main drivers, a
very small monetary base and volatile food prices. In 1996 for instance, the money supply
grew by 30 percent as a result of the unplanned expansion of credit to the public sector and an
unexpected drop in fiscal revenue after a poor cocoa harvest. Euromoney, April 1998, p. 214
196
situation was worsened further by a real exchange rate appreciation of 2 percent
since 1995, resulting from increased trade and current account deficits.471
Figure 24: Inflation, exchange rate and interest rates in Ghana, 1992 - 1997
Exchange Rate
70%
60%
2,000
50%
1,500
40%
1,000
30%
20%
500
10%
0
Inflation and interest rate
Exchange rate (cedi/USD)
2,500
Average Inflation
T-Bill interest rate
0%
1992
1993
1994
1995
1996
1997
Source: IMF (1999a) Table 50, p. 132; CEPA (1998) Table 5.1, p. 56
Ghana’s macroeconomic policy in the past years has been criticized as being
focused on short-term measures only. Particularly on the fiscal side, policy actions
have been inconsistent with the overall reform goal,472 and required frequent
countermeasures because the economy did not react in the expected way.473 For
instance, corporate taxes were revised downwards to attract foreign investments, but
no countermeasures were taken to correct for the reduced revenue. Only in 1999,
serious measures were undertaken to improve the government’s revenues with the
introduction of new value-added taxes.474 With 70 percent of the government’s
471 A large part of economists consider depreciating exchange rates to have a positive impact on
the exports of a country. However, others (Porter 1990) strongly favor stable or appreciating
exchange rates. Porter argues that devaluation discounts a nation’s products in foreign markets
and leads firms towards a dependency on price competition. In such a situation they have little
incentive to upgrade their competitive advantage from competing primarily on costs.
472 In particular the wage increases for public sector employees in 1992 and 1996
473 CEPA, an independent economic think tank, even accuses the government of having cheated
on the country’s inflation figures at one point in time.
474 The first attempt to introduce VAT had been made in 1995, but the scheme was withdrawn
after an upheaval of the population. The main reasons for its failure were (1) at an inception
rate of 17.5% it had fuelled inflation, (2) inter-agency rivalries, particularly from other revenue
institutions, and (3) insufficient education of the affected buyers and sellers about provisions
and implementation. See Tskikata (1997) p. 34
197
development expenditure being foreign-financed, holdbacks or delays of help flows
translate quickly into domestic debt and lead to significant increases in inflation.475
22.4 Ghana’s microeconomic environment
A government influences the determinants of competitive advantage through policy
levers such as its spending priorities, the legal and regulatory framework, the public
sector involvement in the production process, and the structure and capabilities of
the civil service. Its regulatory framework defines where and how profitable
business transaction can take place. The structure and behavior of its bureaucracy
can be an important cost element in doing business. Its spending priorities determine
the status of a nation’s infrastructure and educational standards. And the active
involvement for instance in the areas of research or information dissemination can
help firms to identify profitable business opportunities. A nation’s companies
become competitive when all elements of the “Diamond” are supporting and
reinforcing each other, i.e., when the government through its policy levers and the
private sector together work on improving and strengthening a country’s factor
conditions, demand conditions, related and supporting industries, and firm structure,
rivalry, and strategy.
22.4.1 Government influence on factor conditions
Ghana’s spending priorities on education, health, and economic services are a good
indicator for the development priorities of its factor conditions. Over the past 10
years, Ghana’s spending on education and economic services made up between 34
and 45 percent of the total recurrent government expenditure (Table 35). Since 1995,
however, spending for education, health and infrastructure building (roads)
decreased in favor of direct expenditure for agricultural services.
475 CEPA (1998) p. 38
198
Table 35: Government spending on education and economic services
Recurrent expenditure, % of total
1991
1993
1994
1995
1996
1997
1998
23.2%
22.0%
18.0%
20.1%
19.9%
18.0%
18.2%
8.4%
7.0%
5.1%
5.7%
5.5%
4.6%
3.9%
Agriculture
3.6%
3.5%
2.3%
1.4%
1.8%
3.4%
3.3%
Mining & manufacturing
0.9%
1.4%
1.6%
1.9%
1.6%
1.7%
1.6%
Electricity, gas, water
0.3%
0.9%
1.1%
1.7%
1.4%
1.5%
1.5%
Roads
8.3%
8.9%
6.5%
9.1%
6.4%
6.0%
5.4%
44.8%
43.6%
34.6%
40.0%
36.7%
35.2%
33.9%
6.3%
9.6%
8.0%
6.6%
6.5%
7.2%
6.6%
Education
Health
Economic services
Total
% of GDP
Source: IMF (2000b) p. 29, Table 22, own calculations
Education
To improve Ghana’s poor educational standards, an education reform was started in
1987 to enhance the country’s primary and secondary education. Ghana’s old
education system was modeled according to the British system, with an elitist focus
on academic careers.476 A large part of the financial resources was directed towards
Universities and secondary schools, leading to a highly educated but underemployed
workforce. During the economic decline until 1983, the quality of Ghana’s
education system declined rapidly as well. In 1983, nearly 50 percent of all primary
school teachers were unqualified, as were about 30 percent of middle school
teachers (see Table 36). All available money was spent on salaries, yet teachers were
significantly underpaid, and the maintenance of school buildings and teaching
material was completely neglected.477 In 1987, major educational reforms were
introduced with the aim to increase school enrollment, and to raise the quality of the
general education. The reforms shortened pre-university education from 17 years478
to 12 years. Financial resources were focused on strengthening primary education, in
particular practical education with a lesser focus on subsequent University
education. However, the outcome of these reforms has not been as high as expected.
Enrollment in primary school rose from 1.5 million in 1985 to 2 million in 1995,
476 Schmidt-Kallert (1994) p. 176
477 Cobbe (1991) p. 105; Armstrong (1996) p. 85
478 Pre-university education in Ghana, consisting of primary school, middle school, junior
secondary and senior secondary school, took four years longer than the equivalent degree in
Britain. However, private junior secondary schools prepared their students to bypass the four
years of middle school entirely. Cobbe (1991) p. 104
199
with 100 new primary schools and 200 new secondary schools opened in 1996.479
Nonetheless, overall enrollment rates have been falling, as many children were
dropping out because of newly introduced school fees to cover the costs of books
and material.480 Classroom learning continues to be weak, as the relative class sizes
have increased, the training level of teachers is improving only slowly, and the
curricula are poorly developed (Table 36). 481 At the University level, students
continue to be trained for employment in public administration, and there is no
indication that the reforms have resulted in improved skills for the private sector.
Government technical schools do not cooperate with the private sector, and are not
an effective training channel because the training provided is not the training needed
by future employers.482
Table 36: Pupil/teacher ratios and percentage of trained teachers
1970-75
1988
1992
1997
Primary
30
23
28
33
Junior secondary
23
19
18
18
Pupil/teacher ratio
Trained teachers
Primary
n/a
56%
72%
76%
Junior secondary
n/a
65%
72%
79%
Source: Armstrong (1996) Table 4.2 (1970-1992); Information from the Ministry of Education
Statistical Service
Probably the main determinants of Ghana’s relatively poor education system are the
limited resources available, and the limited effectiveness of its education.483 Ghana
spends relatively little on education in comparison with similar low-income
countries, and since 1995 the relative spending on education had been reduced even
further. When compared with the fast growing economies of South East Asia that
479 EIU (1998b) p. 16
480 In primary schools, the ratio of children enrolled to those eligible fell from 79 percent to 75
percent between 1980 and 1995, and at the secondary level that ratio fell from 41 percent to 39
percent. EIU (1998b) p. 17
481 EIU (1998b) p. 16, Armstrong (1996) p. 87
482 See Gugerty, Stern (1996) p. 18
483 In total Africa, the spendings per tertiary student are 44 times more than the spendings on a
primary student, whereas in the rest of the world this relation is between 3 to 14. Collier,
Gunning (1999) p. 70
200
had all achieved nearly universal literacy already in the 1970s, Ghana’s public
expenditure on education is relatively low (Table 37).
Table 37: Public expenditure on education, selected countries
Percent of GNP
1980
1995
Ghana
3.1%
3.3%
Cote d'Ivoire
7.2%
Mauritius
5.3%
4.3%
Sub-Saharan Africa
4.1%
5.3%
Thailand
3.4%
4.2%
Malaysia
6.0%
5.3%
Middle income countries
4.1%
4.5%
Source: World Bank (1999) Table 6, p. 200
Research and development
Although the development of a “Science and Technology” culture is one of the key
elements on Ghana’s development agenda,484 it has had up until now limited impact
on the competitiveness of Ghana’s industries. The main problem preventing
effective research is the absence of cooperation between the public and private
sector in research and development efforts, making it not focused on promoting the
competitiveness of its industries.485 Ghana’s publicly funded research is taking
place at the Universities and in government research institutes. Officially, there
should be close involvement of the private sector in determining the public research
agenda,486 but this has had no effect on the research needed by Ghana’s competitive
industries. The priorities of state research institutes are still defined by the
government, which wants them to focus primarily on basic research to support the
country’s agricultural and simple industrial development. No research is done that
benefits the country’s competitive industries directly. As a result, Ghana’s research
is more backward oriented than forward looking, and not focused on the
development of competitiveness in key industries. At the University level, students
484 See the Presidential Report to Parliament (1995) p. 17
485 In addition, the different public research activities are also poorly coordinated. For instance,
both the Ministry of Agriculture and the Cocoa Board maintain extension services for the
cocoa sector.
486 By law, 40% of the members of the Ghana’s Council for Scientific and Industrial Research
must be drawn from the private sector
201
are missing the opportunity of being involved early on in applied science, and as a
consequence they are poorly prepared for their work in the private sector.
Capital availability
The availability of capital for Ghana’s private sector is constrained for several
reasons. First and foremost, the country’s fiscal policy has caused a crowding out of
private investments (Table 38, also Chapter 4.1).487
Table 38: Saving and Investment (percent of GDP)
1996
1997
Government investment
12.0%
12.5%
Government saving
Net government saving
5.7%
-6.3%
5.9%
-6.6%
Private investment
5.0%
6.0%
Private saving
Net private saving
7.4%
2.4%
9.4%
3.4%
National investment
17.0%
18.5%
National saving
Net foreign saving
13.1%
3.9%
15.3%
3.2%
Source: CEPA (1998) Table 2.4, p. 17
There are no systems in place to encourage private saving rates, and Ghana’s net
private savings ratio is well below the Sub-Saharan (13 percent) and Asian average
(28 percent).488 The country relies on significant foreign capital inflows to cover its
saving balance. Although the government has reformed the country’s financial
sector (see p.169), three large banks, the insurance and the pension industry are still
state-owned.
Physical infrastructure
The development of an appropriate physical infrastructure has been high on the
government’s agenda early on. The main focus has been the construction of roads to
connect the countryside to the larger cities, and the development of a national
electricity grid. Ghana’s telecommunication sector has been partially privatized (see
Chapter 18.5).
487 Informal and non-financial savings are not included in this analysis – but are not available for
the productive investments
488 Leechor (1994) p. 174
202
The main issues regarding the involvement of Ghana’s government in infrastructure
development is the right focus, and the degree of privatization of public utilities. In
the past few years, the relative spending on infrastructure have been decreased (see
Table 35), particularly road construction activities have slowed down since 1997
489. Also, Ghana’s government has not invested in specialized infrastructure (e.g.,
refrigerated warehouses for fresh produce) that would be beneficial for the country’s
competitive industries. On the other hand, the government plans to extend its
electricity grid to remote villages, and hesitates to divest poorly managed public
utilities such as the Ghana Oil Company and the Volta River Authority (Electricity
company), where mismanagement have caused severe energy shortages and power
cuts.
Information infrastructure
One strong achievement regarding the provision of information on markets,
technology and competition for Ghana’s companies has been the foundation of the
Ghana Export Promotion Council. The Export Promotion Council organizes tradefairs, customer visits and export seminars for Ghanaian companies, and its library
contains all major trade journals and handbooks.490 Other data however is hard to
get. Ghana is slow to publish key government statistics and decrees. Export statistics
for instance are up to one year late, and basic statistical information such as
employment data, and salary surveys are no longer published.
Administrative infrastructure
Ghana’s public service consumes roughly 5.8 percent of the nation’s GDP, and as a
percentage of total population is Africa’s 2nd largest.491 Between 1987 and 1994,
public service reform initiatives were started, reducing the number of (central) civil
servants from about 140’000 in 1987 to 90’000 in 1994. However, the reforms were
“introduced and implemented in an ad hoc manner, and have fallen short to intended
outcomes.”492 Ghana’s bureaucracy is still highly inefficient, and suffers from
incidents of corruption. One major reason for the poor performance of Ghana’s
bureaucracy is the wage differential between the public and the private sector, which
489
490
491
492
CEPA (1998) p. 35
However, only few companies seem to know or use this source of information
IMF (1999a) Table 2, p. 11
IMF (1999a) p. 9
203
suggests that the government has difficulties in recruiting and keeping competent
individuals.493
The difficulties in getting along with Ghana’s bureaucracy have been partially
removed by the creation of one-stop approval processes for foreign investors.
Investors in the mining industry and in the free-zone area can draw on the support of
dedicated centers that take care of all administrative work. Foreign investors that do
not operate in these areas are typically getting some support from the Ghana
Investment Centers. However, domestic investors continue to complain about the
difficulties in getting around a still corrupt bureaucracy.
22.4.2 Government influence on demand conditions
Ghana’s government has had little influence on improving the quality and quantity
of demand of Ghana’s customers. Regarding the quality of demand, the standards
required for export products are determined by the importers since Ghanaian
standards are either absent (e.g., no building codes) or too weak. Government
procurement is not relevant for competitive industries in terms of volume; however,
the lengthy bidding process, events of corruption, and slow payments have deterred
companies from becoming government contractors.
22.4.3 Government influence on related and supporting industries
Ghana’s largest industrialized areas are the cities of Accra and Tema, where most
industrial activities are taking place, and where suppliers and related industries are
naturally clustered. To the limited extent possible, this geographic proximity allows
firms to draw on a relatively large group of qualified employees.
To spread the industrialization to Ghana’s rural areas in the rainforest and savanna
zones, Ghana’s government is offering significant tax discounts to firms that are
willing to move. While understandable from a rural development perspective, this
effort would reduce the cluster of industries around Accra and Tema.
493 Harrold, Jayawickrama, Bhattasali (1996) p. 58. Median pay levels in the civil service range
from 28 percent to 41 percent of the private sector levels (for comparison: Korea: 57 to 69
percent, Taiwan 60 to 66 percent).
204
22.4.4 Government influence on firm strategy, structure, and rivalry
Industry structure and rivalry
The involvement of Ghana’s public sector in the economy continues to be high, and
the government continues to exert a significant influence on the country’s industry
structure in particular through its SOEs and the export monopoly on Cocoa.494 The
divestiture of SOEs was started in 1992, and has advanced only slowly. Between
1992 and 1995, a deterioration in the country’s fiscal position forced the government
to float the shares of some of its most profitable businesses on the stock exchange.
After 1997, however, the pace of divestitures has slowed down.495 By the end of
1998, 212 of the more than 300 SOEs had been divested.496 However, the emphasis
has been on the sale or liquidation of small and medium-sized enterprises; many
large enterprises like Ghana Airways, the Tema Oil Refinery, Ghana Commercial
Bank, and the Electricity Company continue to be state owned.497 Most SOEs
however continue to perform poorly and constitute a serious strain on government
resources.498
494 Export taxes on cocoa accounted for 11 percent of the government revenues in 1998. IMF
(2000b) Table 7, p. 13, and Table 20, p. 27
495 IMF (2000a) p. 90
496 Divestiture Implementation Committee, Web page (April 1998)
497 Several factors have prevented Ghana’s government from privatizing its SOEs more rapidly.
On the political side, there was widespread fear among the population that the government was
selling off “our nation’s heritage” to favored cronies in secretive transactions, and that
exploitative rich businessmen would take over and kick helpless workers into the street to face
unemployment. See also Gyimah-Boadi (1991) p. 202. He argues that the popular fear of neocolonialism through foreign multinationals was responsible for the fact that the government
provides incentives for foreign companies to take on joint-venture partners in order to have an
“African face” at the front. This “fear” and interference by officials led to the unwillingness to
divest certain enterprises for political and “strategic” reasons. The absence of a strong capital
market (Ghana’s stock exchange has only come to live in the past three years) made it difficult
to find the capital required for the complete privatization of the existing SOEs (see p. 28).
Inadequate transparency, a cumbersome legal and regulatory environment, and the need for
approval by the President’s Office also deterred potential investors (IMF (2000a) p. 95).
Finally, several SOEs are almost impossible to sell, because in many cases underfunded
liabilities for retirement benefits exceed the total value of the company, or provisions in
collective bargaining agreements are not sustainable (Nowak et al. (1996) p. 44).
498 In 1995, average capacity utilization of SOEs was between 25 percent to 40 percent, according
to the Ministry of Industry & Trade, Web page
205
Investment trade laws and taxes
In the past 15 years, Ghana’s government has worked on several regulatory
initiatives to improve the economic environment of the private sector. The most
important starter was the liberalization of the country’s trade regime,499 followed by
the establishment of a new mining code. A full commitment to private enterprise
came relatively late, with the full start of the SOE divestiture program and the
establishment of a liberalized investment code in 1992 and 1994 respectively (see
Table 39).
Table 39: Overview of business regulation changes
Regulation
Established
Main features
Mining Code
1986
Establishment of Minerals Commission, royalty
rates (max. 12% of revenues), income taxes and
depreciation allowances, duty free import of
equipment, free capital transfers
Liberalization of exchange
rate
1988
No capital import restrictions, no profit repatriation
restrictions, no capital transfer restrictions for
registered companies (as of 1994)
Establishment of Divestiture
Implementation Committee
1988 (1992)
Tasks: search of potential investors for SOEs
Restructuring of commercial
banking system
1990
Removal
of
nonperforming
loans
and
recapitalization of banks; new banking supervision
law
Forest and wildlife policy
1994
Export of raw logs prohibited to ensure
sustainable exploitation of forest resources and
encourage value-added production
Liberalized investment code
1994
Investment guarantees, tax incentives, duty
exemptions for machinery & equipment, minimum
capital requirements
Implementation of the Ghana Investment
Promotion Center as one-stop shop for economic,
commercial and investment information
499 Ghana is a member of the World Trade Organization (WTO); the Lome convention, a trade and
aid agreement between the European Union and 46 of Europe's former colonies (guarantees
duty free imports into EU for a number of products); and the Economic Community of West
African States (ECOWAS).
206
Establishment of Export
processing zones
1996
Duty-free export processing in dedicated zones;
tax holidays, contractual freedom, “one-stop”
approval service for completion of all formalities
Utility Regulatory
Commission
1999
Independent commission to determine appropriate
(i.e. cost recovering) tariff levels, mainly for water
and electricity
Introduction of VAT (Valueadded tax)
1998
10% VAT, to replace 15% sales tax
Source: European Roundtable of Industrialists (1993); Ghana Investment Promotion Center, Ghana Free
Zones Board
Government and private sector cooperation
One major concern of Ghanaian and foreign investors is the government’s attitude
towards private enterprise and protection of private ownership. In the view of private
investors, the Ghanaian government has not shown clear support for the country’s
industry, and continues to fall back into the habit of accusing large companies and
individual managers to be rent-seekers and profiteers. Examples include labor
unrests where the government took immediately the side of the striking workers, or
the seizing of private property by city or county authorities. Overall, the
communication between the government and private sector is not very well
established, and a culture of mutual blame and distrust is prevalent.500 In part, this
ineffective communication is driven by misperceptions about the relative position of
Ghana’s industries in World markets, and by assumptions about which industries
should be enhanced and supported.
22.5 Conclusions on Ghana’s government
Compared to other Sub-Saharan countries, Ghana’s government has been relatively
successful in achieving macroeconomic stability, and in providing the
microeconomic foundations for the development of competitive industries.
However, several elements have prevented the country to grow as fast as had been
hoped for. Frequent compromises like election promises have prevented the full
stabilization of the country’s macroeconomic environment. At the microeconomic
level, the government’s actions were guided more by overall development targets,
500 See also Chhibber, Leechor (1994) p. 85
207
rather than by the needs of its competitive industries for a cost-efficient and reliable
infrastructure.501 In general, the government’s attitude towards the private sector is
still ambiguous, and inconsistent messages and behavior have created a source for
uncertainty. Free competition is not fully established. The government has been
slow and reluctant in privatizing its SOEs, and was initially driven by the need to
improve government finances. A liberalized investment code has been introduced
relatively late. In several instances, the government continues to overstep its limits,
getting directly involved in company affairs. The legal and administrative system is
not fully equitable and fair. There are again accusations of corruption at the highest
level, which are replicated at all levels below.502 Until very recently, there was little
involvement of the private sector in policy formulation, which indicates a
paternalistic attitude of the government (we know what is good), and mistrust from
the private sector.503 Overall, Ghana’s reforms were not radical enough to allow the
country’s industry to compete successfully in international markets, and to build a
sustainable competitive advantage through upgrading and innovation.
501 This includes for instance the electrification of the entire country, rather than focusing on
providing a stable electricity supply to the country’s most important industries.
502 In March 2000, the World Bank and Britain’s Department for International Development
withdrew USD 100 million respectively USD 30 million of loan facilities for dubiously
awarded water projects. EIU ViewsWire, May 18, 2000 (Database download) “Ghana finance:
A scandal cools relationships with donors”
503 “The sentiment is often expressed among Ghanaians that various macroeconomic reforms are
pursued only to satisfy donor conditions for assistance. Hence, in the absence of such
assistance, the government would reverse policies on liberalization. In reaction to this, the
private sector chooses to put their capital in short-term assets and dabble in sectors of the
economy with quick and relatively high turnover, such as trading.” Aryeetey (1994) p. 1219
208
23 Summary - the challenges of Ghana’s Diamond of National
Advantage
This chapter contains the summary and conclusions on the nature of competitive
advantage, and the capacity for innovation of Ghana’s industries.
23.1 Nature of competitive advantage
The main factor driving the competitiveness of Ghana’s industries are natural
resources. Only industries building on the basic factor advantages, i.e. natural
resources have been able to build up a competitive advantage. The aluminum
industry benefits from the availability of cheap power and good bauxite resources.
The cocoa industry benefits from Ghana’s climate and soil. The food industry
depends on the availability of rich fishing resources as well as a good climate. The
success of the gold mining industry comes from the availability of rich ores. Finally,
the timber and furniture industry benefits from Ghana’s tropical forests. Only few
industries have been able to build up a competitive advantage based on more
advanced factors, namely the furniture and fresh fruit industry. In the six industries
reviewed above, four elements were in place at all successful companies to
overcome the shortcomings and disadvantages of Ghana’s environment. First, they
had overcome the absence of a good supplier network by internalizing their supplier
markets through backward integration whenever possible. Second, they invested
significantly in building up their own infrastructure where the public infrastructure
was insufficient. Third, they made-up the country’s lack of skilled management by
working with foreign management, and they invested significantly into the training
of their labor force. And fourth, they relied on simple products, either on commodity
products where the tastes of the final customers did not really matter, or on products
where the tastes and demands of their final customers could be transferred through
agents. In sum, the industries that achieved a competitive advantage were those that
fully leveraged Ghana’s basic factor advantages, and found ways to work around the
country’s disadvantages.
The competitiveness of Ghana’s industries has improved in the past 17 years since
the beginning of the ERP. Many successful companies have been started in the last
10 years, benefiting from an improved climate for investment. However, the reliance
on basic factor advantages has not produced a rapid growth of the nation’s wealth.
209
Since 1985 Ghana’s terms of trade (the purchasing power of its exports) have been
decreasing by roughly 20 percent, parallel to the drop in world market prices of its
primary export commodities cocoa, gold, and aluminum (Figure 25).504
200
180
160
140
120
100
80
60
40
20
0
T e rm s o f T ra d e
C ocoa
G o ld
19
97
19
95
19
93
19
91
19
89
A lu m in iu m
19
87
19
85
Price index, 1985 = 100
Figure 25: Terms of trade and price development of cocoa, gold, aluminum
Source: IMF (1999b) pp. 176-177, IMF (1998) p. 43, IMF (2000b) p. 44, own calculations
Ghana’s competitive products have to compete in difficult markets. In cocoa, the
country faces inelastic demands, with the consequence that a production increase
will lead to further price decreases505. In aluminum and gold, world market prices
have been falling since 1989, and there are no indications for a recovery to “old
levels”. In timber, consumer behavior is changing. And in fresh fruit and food, the
country faces protected markets.506
The conclusion that Ghana´s competitive advantage rests largely on natural resource
advantages is nothing new, and in line with the first hypothesis defined in Chapter
2.3. However, the challenge for Ghana is to recognize that what has been
traditionally seen as strength is in fact a weakness that makes upgrading and
innovation difficult. The illusion of natural wealth prevents any investments in
504 Between January and July 2000, the value of the cedi dropped (relative to the USD) by 50
percent, for which the government blamed “external shocks”, i.e. the drop in cocoa prices and
the rise in oil prices. Economist, July 22, 2000, p. 44. “Ghana: Dog days”
505 Lele, Gockowski, Adu-Nyako (1994) p. 4
506 Ghana’s current competitiveness is also very vulnerable to weather conditions. Droughts in
1990 led to GDP growth reduction of about 2 percentage points because of poor cocoa exports
and reduced production of hydroelectric power. La Verle (1995) p. 139
210
innovative industries. High resource abundance leads to increased demand for labor
that shifts workers away from high learning-by-doing sectors and thus depresses
growth in labor productivity.507 In manufacturing for instance, there has been no
technical progress, and the skill level of Ghana’s workers has not improved.508
Also, the illusion of wealth makes people greedy and shifts their focus on getting as
much of the current pie as possible, rather than thinking about how to enlarge the pie
for everybody.509
With this industry structure, it is very difficult to build up advanced competitive
advantages based on innovation and upgraded factor advantages. Since successful
industries were forced to build their own “enclave economies” that rely on imported
technology and vertical integration, there are little spillovers of innovative knowhow to other industries.510 As a result, there are basically no related or supporting
industries to reinforce innovation and upgrading. The focus on resource-intensive,
simple products makes active research unnecessary, and hence does not contribute to
innovation either. And last, the high investments required to build up an own
infrastructure puts significant strains on the profitability of companies, and leaves
little resources available to be invested into research and development.
For the future, the situation seems to be worsening: a number of Ghana’s basic
factor advantages are not sustainable and will be competed away eventually. The
end of cheap electricity means that the competitive advantages of Ghana’s aluminum
smelter are melting away rapidly. In the cocoa industry, limited investments into
new trees could lead to a significant production decrease. In gold mining, there are
other African countries that have adapted their mining regulations in order to draw
away foreign investments from Ghana. In timber, new competitors like Russia are
entering the world timber market, while Ghana has to reduce it’s felling to protect its
endangered tropical forests.
507 Findings from Sachs, Warner (1995) p. 21
508 “In none of the equations was there any evidence for a rise in underlying productivity over
time. It was shown that nearly all of the differences across firms in labour productivity, which
were very large, were explained by differences in physical, not human capital endowments.”
Teal (1997) p. 9 Worse, there are indications for technical regress shown by Teal (1997) with
the fact that the demand for unskilled workers relative to skilled workers has risen – they can
only be substituted when there is technical regress. Also, the current investment rates are too
low to even replace old equipment.
509 Sachs, Warner (1995) p. 4 find that resource-rich economies in general are subject to more
extreme rent-seeking behavior.
510 See also Osotimehin, Tiffin, Saunders (1991) pp. 54
211
The findings from this thesis are that Ghana’s government has not been able to
provide an environment that would have allowed the development of competitive
industries that were not dependent on natural resource advantages only. This
confirms the second hypothesis of Chapter 2.3 that Ghana´s structural adjustment
program has not gone far enough, and regulatory uncertainty, unpredictable
macroeconomic policy and bureaucratic inefficiency did not create a microeconomic
environment conducive to business. In the words of Collier and Gunning511,
Ghana´s government continues to commit both “sins of commission” as well as
“sins of omission”. The sins of commission include elements such as the high taxes
on cocoa, and the continuous involvement in business affairs. The sin of omission is
basically the failure to have done everything possible to provide an optimal
environment for private business. All firms continue to face high transaction costs
from the lack of a working infrastructure and public social capital, and from specific
barriers to business, such as information costs, negotiation costs, and enforcement
costs. These high transaction costs lead to a waste of resources and energy through
inefficiencies, and reduce the number of profitable business transactions.512 The
results are limited new investment, limited technical improvements, and the
absorption of valuable management capabilities. Those firms that want to compete
with advanced products are fully exposed to global competition, where everything
has to work perfectly. If only one small element is missing, and an order is delayed
or of poor quality, it could become worthless for the customer. However, an
improvement in this direction is difficult to accomplish in the current competitive
environment of Ghana.
23.2 Capacity to innovate
Given its current position, Ghana has significant room to improve its competitive
advantage through innovation and increased efficiency. While innovation should
lead to more advanced competitive advantage, improved efficiency allows capturing
higher returns from current activities as a basis for investment into innovation and
511 Collier, Gunning (1999) p. 66
512 This is the case not only for Ghana, but also for most African countries. Elbadawi (1999)
compared the performance of manufactured exports of a sample of African and Asian
countries. He found that transaction costs (measured by corruption, miles of paved road, and
telecommunication quality) were the most important factor that prevented the export of
manufactures from Africa.
212
growth. If Ghana can realize this innovation potential, it would form a basis for
sustainable growth and development of the country’s industry.
The first step towards innovation could be to raise operational standards to world
standards. Most industries would be able to improve their effectiveness and their
efficiency with the help of modern machinery, new production processes, the
rationalization of small facilities, and upgraded management methods. In the cocoa
industry, yields could be increased considerably by planting new hybrid varieties
and by using modern agrochemicals. In the fresh fruit industry, modern production
structures based on larger farms would lead to significant productivity increases.
And with new farming structures in place, the food processing industry could tap on
processing agricultural products in other areas of the country. A second step towards
increasing innovation could be to widen the range of activities along the value
chain. In the fresh fruit industry, more value could be captured in other steps such as
marketing, and logistics. In the timber industry, significantly more value could be
added with the production of furniture or pre-fabricated elements. The third step in
innovation would be to move from short-term opportunities towards long-term
strategies. A significant share of skilled labor is currently absorbed in activities such
as trading and other services, mostly because few entrepreneurs are ready to invest
significantly in long-term projects. A fourth step would be to create distinctive,
long-term competitive positions, e.g., through brand reputation, and labeling. Firms
would have to make explicit choice about where to compete, and where not to
compete. This implies for instance the choice between focusing on costs or on
quality, like in the cocoa industry, where Ghana has chosen to compete in the quality
segment. A fifth step to improve innovation would be to gain direct contact with
foreign customers, and to take control of international distribution channels.
Communication with customers helps to understand their needs better, like the
success in the furniture industry has proven. Control over distribution channels
would allow keeping the share of profit that goes to middlemen. A sixth step would
be to expand trade with neighboring countries where demand is less sophisticated.
In these markets, processed aluminum products could be sold, which cannot be sold
on advanced markets, but provide an opportunity to start simple upgrading and
innovation.
23.3 Conclusion
Although the determinants of competitive advantage of Ghana have improved in the
past two decades, significant barriers prevent firms from fully realizing their
213
potential. The objective of the last part was to summarize these barriers on a country
level, to support the individual findings at the industry level. Even though the
determinants of competitive advantage are very specific for each industry, there are
barriers to competitiveness (such as uncertainty on the future of economic reforms
or low-skilled labor) that affect all industries. As such, Ghana’s industries have
significant capacity for innovation that could be released once these barriers have
been removed.
To remove these barriers, Ghana´s government has to undertake bold steps to
stabilize the country’s macroeconomic environment, and to ensure an enabling
microeconomic environment. What Ghana´s government should not do is to manage
firms, and to define in which industries the country should be competitive. Rather,
Ghana´s government should only be active in areas where firms are unable to act
(e.g., trade policy, exchange rate stabilization), where there are opportunities for
valuable clustering and external economies of scale, or where externalities cause
firms to underinvest, like general education and infrastructure. When cooperating
with companies, Ghana´s government must ensure that it does not protect them and
remove the pressure of foreign competitors. Otherwise, these companies will not be
forced to innovate and upgrade their advantages, but will be happy with the current
static comparative advantages that can be easily competed away. The process of
creating competitive advantage might be uncomfortable for firms and their
employees. Many firms prefer an environment where prosperity is guaranteed. The
challenge is to bear the cost of bankruptcies of uncompetitive industries while the
country is focusing on its competitive industries. However, Ghana´s government
alone cannot manage the establishment of an enabling environment. The impact of
its work depends much on corporate attitudes, on how much responsibility is
transferred to and taken over by firms and other institutions, and how effective firms
can actually implement sophisticated strategies and efficient operations. Things like
joint public-private training and research institutions, close links with Universities,
and the involvement of trade associations in policy formulation are the steps that
ensure the effectiveness of government activities to foster Ghana’s competitiveness.
214
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226
Several institutions have provided statistics and brochures, or have Websites from
which information and data were downloaded:
Aluworks, Tema
Centre for the Study of African Economies, Oxford
(www.economics.ox.ac.uk/CSAE)
Divestiture Implementation Committee, Accra (www.webstar.com.gh/)
EIU ViewsWire, London (www.viewswire.com)
FAO, Rome (www.fao.org)
Ghana Export Promotion Council, Accra
Ghana Free Zones Board, Accra
Ghana Investment Promotion Centre, Accra (www.gipc.org.gh)
Ghana Timber Export Development Board, Accra
Ministry of Education Statistical Service, Accra
Ministry of Trade and Industry, Accra (www.ghana-embassy.org)
Tradeport, Washington (www.tradeport.org)
US Department of Commerce, Washington (www.bea.doc.gov)
World Economic Forum, Geneva
(www.weforum.org; www.worldeconomicforum.org)
227
Interviews
Company / Institution
Interview partner
Location, Date
Akosombo Textiles
Kwaku Asare-Menako,
Administrative Manager
Accra, March 1998
Akuaba Limited
H.M. Adusei-Herbstein,
Managing Director
Accra, March 1998
Aluworks
John Nyarko, Managing Director Tema, Feb. 1998
Ashanti Goldfields
James Anaman, Corporate
Affairs Manager
Pamela Djamson-Tettey, Deputy
Investor Relations Manager
Accra, August 1995
Association of Ghana
Industries
Dr. Justice Addison, President
Eddi Imbeah-Amoakuh,
Executive Secretary
Accra, Feb. 1998
Accra, August 1995
Asuo Peabo
Dr. Ebenezer Mireku, Consultant Accra, March 1998
Barclays Bank
Robert A. Wallace, Export
Officer
Accra, August 1995
CAL Merchant Bank
Ken Ofori, A.G. Director, Credit
Accra, March 1998
CEPA
Dr. Charles Jebuni, Professor of Legon, August 1995
Economics
Accra, Sept. 1995
Dr. Samuel Ashong, Research Accra, March 1998
Fellow
Cessa Textiles
Cynthia Agyekum, Owner
Accra, Sept. 1995
Chamber of Commerce
Sal Doe Amegavie
Accra, August 1995
Cocoa Marketing Board
Ken Brew, Economist
Accra, Feb. 1998
Deloitte & Touche
Consulting
Dr. P. Kwesi Nduom
Accra, August 1995
Domod
Dr. Henry Mesah-Brown,
General Manager
Accra, Feb. 1998
Ghana Bauxite Mining
Corporation
Ben Adoo, Managing Director
Accra, March 1998
Accra, March 1998
228
Company / Institution
Interview partner
Location, Date
Ghana Export
Promotion Council
Tawia Akyea, Executive
Secretary
Constance N. Luacoe, Director
General
Accra, Feb. 1998
Ghana Investment
Promotion Centre
Stephen Osei Yeboah
Accra, August 1995
Goldfields Ghana
Helgo Kahle, Managing Director Accra, March 1998
Mahagony Wood
Processing
Fritz Soltermann, Managing
Director
Accra, March 1998
Milani Pineapple
Bijean Milani, Owner and CEO
Accra, March 1998
Ministry of Trade and
Industry
Abraham Laryen-Odai
Accra, March 1998
Merki Woodworks
Kurt Merki, Owner
Tema, March 1998
Nkulenu Industries
Dr. Esther Okloo, Founder and
CEO
Legon, March 1998
Pioneer Food Company
Dr. Osei Boeh-Ocansey,
Managing Director
Tema, Febr. 1998
Scanstyle MIM
Michael Pepera, Managing
Director
Kwasi Amponsah, Operations
Manager
Accra, March 1998
Standard Chartered
Bank Ghana
E. A. Boate, Head Credit
Operations
Accra, Febr. 1998
State Enterprise
Comission
W.A. Adda
Accra, August 1995
Accra, August 1995
Accra, Sept. 1995
229
Curriculum Vitae
Anton Hoefter
1969
Born in Bad Tölz, Germany
1998
Matura Typus A at the Stiftsschule Einsiedeln
1988 – 1989
Chinese language studies at the Shanghai University of
Engineering Science, China
1989 – 1993
Studies of politics, law, and economics (Staatswissenschaften)
at the University of St.Gallen (HSG); two terms at the London
School of Economics (LSE) with General Course; internships
in Hong Kong and Nicaragua
1993 – 1995
Master of Business Administration (MBA) at the University of
Michigan, Ann Arbor
1995 – 2000
Associate / Engagement Manager with McKinsey & Company,
Zürich
1995 – 2001
Completion of doctoral thesis at the University of St.Gallen
(HSG)
since 2000
Chief Executive Officer of Bellvita AG, Zürich