State-Business Relations and Economic Performance in Ghana

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State-Business Relations and Economic Performance in Ghana
    State-Business Relations and Economic Performance in Ghana Charles Ackah, Ernest Aryeetey, Joseph Ayee & Ezekiel Clottey * Discussion Paper Series Thirty Five January 2010 IPPG Discussion Papers available at IPPG Programme Office, IDPM, School of Environment & Development University of Manchester, Arthur Lewis Building, 2.023, Oxford Road Manchester M13 9PL; Telephone 0161 306 6438;    2 *Charles Ackah and Ernest Aryeetey are researchers at the Institute of Statistical, Social and Economic Research, University of Ghana while Ezekiel Clottey is a PhD Candidate at the same institute. Joseph Ayee is a Professor in Political Science at the University of Ghana. The authors gratefully acknowledge funding from the IPPG. Charles Ackah is the corresponding author: Paper prepared for the DFID-funded Research Programme, Institutions and Pro- Poor Growth (IPPG). The authors are grateful to DFID for the funding that made this research possible. The views expressed in this paper are entirely those of the author and in no way represent either the official policy of DFID or the policy of any other part of the UK Government. Material published by the IPPG may be reproduced free of charge in any format or medium provided it is reproduced faithfully, not used in a misleading context and properly attributed to the author(s). Copyright exists in all other srcinal material published by members of the Programme and may belong to the author or to the University of Manchester depending on the circumstances of publication. Enquiries should be sent to the editor at the above address.   3 E XECUTIVE SUMMARY The relationship between the state and business community in Ghana has varied since independence. Though each government has had distinct relations with business and private sectors, civilian governments have generally promoted and enjoyed good rapport with the business community while military governments especially in the 1980s have tended to have confrontations with the private sector. This study used a multi-disciplinary approach that included both qualitative and quantitative aspects of the disciplines of political science, economics, history, sociology and organizational management. To seek to understand what constitutes effective state-business relations, and to assess how state-business relations are related to economic performance, the study relied on historical institutionalist inductive theories- comparative historical analysis and path-dependence, among others. For this analysis, the study relied on both primary data, from interviews with selected formal and informal enterprises and regulatory agencies within Ghana, and secondary data derived from a review of statutory literature such as the Constitution of Ghana, Acts of Parliament, Statutes, Codes, Contracts, rules and procedures and conventions establishing institutions. The purpose here was to examine the characteristics of formal and informal rules and regulations governing the establishment and operation of foreign and indigenous businesses, how these have evolved over time and how they may have impacted economic performance. For the quantitative economic analysis, the study used a panel of 256 Ghanaian manufacturing firms over the period 1991-2002 to analyze the extent to which an effective state-business relationship is beneficial to economic performance. Focusing on total factor productivity, we have found that an effective State Business Relations (SBR) or a sound investment climate correlates positively with better firm performance, possibly channelled via a more optimal allocation of resources in the economy. Concerning the effect of the investment climate indicators, our results show that an ‘unfriendly’ investment climate illustrated through firms’ perceptions about economic and regulatory policy uncertainty affecting their operations and growth are negatively correlated with productivity. With regards to the SBR measures, we find that social networks as indicated through the extent to which firms or their managers have close contacts within the government or bureaucracy have a statistically positive correlation with firm performance. These results indicate that being well connected with those who make and implement government policy increases the chances of being able to lobby to overcome some of the difficulties confronting normal business enterprises, such as the number of procedures it takes to obtain licenses and permits and the number of days it takes to clear imported goods from the port. Narrative analysis of state agencies and Private Enterprises Foundation’s perceptions of SBRs in Ghana from 1992 to 2008 which also coincides and extends beyond the period of econometric analysis of SBRs on firm performance confirms the results discussed above. Both state and BAs agree on a shift from a predominantly ad hoc and informal clientelistic relationship to a more formal and synergistic SBRs in Ghana since 1992. Formal and regularized meetings between state agencies and businesses have positively impacted on firm productivity. For instance, PEF’s formal advocacy role and function resulted in the use of GCNET to expedite clearing of imported goods. Business concerns of firms are channeled more often through formal by BAs to state agencies. Firms through their BAs make inputs into budget and other policy on formalized basis. Moreover, strong formal relationship between the executive and BAs such as the investors advisory council have helped firms stay close to government and bureaucracy.   4 Overall, our findings contribute to understanding the link between an effective state-business relations and economic performance. This paper adds to the work done by Qureshi and te Velde (2007) by investigating the key determinants of firm performance and also assessing the relationship between an effective SBR and firm productivity in Ghana. The results of the study stress the need for an enabling environment for the private sector. Experiences from East and Southeast Asian economies have also shown that investment and productivity growth critically hinges on an effective and vibrant private sector underpinned by a sound investment climate. Promoting a sound investment climate is one of the core responsibilities of the state in both developed and developing countries to achieve rapid capital accumulation and sustained growth and poverty reduction. Markets are good but are not without flaws. Thus, in order for inequalities in incomes and opportunities not to be exacerbated by the markets, it is important that the many constraints that inhibit the private sector from responding effectively to market incentives are removed, complemented with an increased effectiveness of government involvement in supporting private sector activities. Apart from the positive effect of SBRs on economic performance, the other lesson which can be drawn from the paper is that even though successive governments in Ghana have shown some commitment to supporting a viable private sector that commitment has, at the same time, been undermined by governments' own fear of a strong private sector acting as a countervailing force and thereby weakening their monopoly over neo-patrimonialism. Consequently, the commitment may be seen as a public relations hoax. An effective SBR in Ghana requires sustained formalized political commitment to policies that sees the private sector as a catalyst and initiator of pro-poor growth and development.   5 C ONTENTS P AGE 1 Introduction 6 2 Conceptualising SBRs 8 2.1 Macroeconomic Impacts 9 2.2 Microeconomic Impacts 10 3 Contextualising SBRs in Ghana 11 3.1 Pre-independence era 13 3.2 Nkrumah Regime 13 3.3 NLC and Progress Party regimes 15 3.4 NRC/JMC regimes 17 3.5 Lamann’s PNP regime 17 3.6 PNDC and NDC regime 18 3.7 The NPP regime 20 4 Political and Economic Analysis of SBRs on Firm Performance 21 4.1 Empirical Approach 22 4.1.1 Measuring Firm-level Productivity 22 4.1.2 Estimation Strategy 23 4.2 Measuring SBRs in Ghana 25 4.3 Data and Summary Statistics 27 4.4 Empirical Results 29 4.4.1 Robustness Checks of the Estimates 32 5 Conclusion and Policy Implications 32 References 34 Appendix 36
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