Ghana - Manufacturing

Manufacturing

At independence in 1957, the Nkrumah government launched an industrialization drive that increased manufacturing's share of GDP from 10 percent in 1960 to 14 percent in 1970. This expansion resulted in the creation of a relatively wide range of industrial enterprises, the largest including the Volta Aluminum Company (Valco) smelter, saw mills and timber processing plants, cocoa processing plants, breweries, cement manufacturing, oil refining, textile manufacturing operations, and vehicle assembly plants. Many of these enterprises, however, survived only through protection. The overvalued cedi, shortages of hard-currency for raw materials and spare parts, and poor management in the state sector led to stagnation from 1970 to 1977 and then to a decline from 1977 to 1982.

Thereafter, the manufacturing sector never fully recovered, and performance remained weak into the 1990s. Underutilization of industrial capacity, which had been endemic since the 1960s, increased alarmingly in the 1970s, with average capacity utilization in large- and medium-scale factories falling to 21 percent in 1982. Once the ERP began, the supply of foreign exchange for imported machinery and fuel substantially improved, and capacity utilization climbed steadily to about 40 percent in 1989. Nevertheless, by 1987 production from the manufacturing sector was 35 percent lower than in 1975 and 26 percent lower than in 1980.

Ghana's record with industrialization projects since independence is exemplified by its experience with aluminum, the country's most conspicuous effort to promote capital-intensive industry. This venture began in the mid-1960s with the construction of a 1,186-megawatt hydroelectric dam on the lower Volta River at Akosombo. Built with assistance from Britain, the United States, and the World Bank, the Akosombo Dam was the centerpiece of the Volta River Project (VRP), which the Nkrumah government envisioned as the key to developing an integrated aluminum industry based on the exploitation of Ghana's sizable bauxite reserves and its hydroelectric potential. Foreign capital for the construction of an aluminum smelter in Tema was obtained from US-based Kaiser Aluminum, which acquired a 90 percent share in Valco, and from USbased Reynolds Aluminum, which held a 10 percent share. Valco became the principal consumer of VRP hydroelectricity, using 60 percent of VRP-generated power and producing up to 200,000 tons of aluminum annually during the 1970s.

Changing global economic conditions and severe drought dramatically affected the Ghanaian aluminum industry during the 1980s. The discovery of vast bauxite reserves in Australia and Brazil created a global oversupply of the mineral and induced a prolonged recession in the aluminum trade. Under these conditions, Valco found it far more economical to import semi-processed alumina from Jamaica and South Korea than to rely on local supplies, despite the discovery in the early 1970s of sizable new deposits at Kibi. Valco's refusal to build an aluminum production facility brought Kaiser and Reynolds into bitter conflict with the government.

Severe drought compounded the effects of unfavorable market conditions by reducing the electricity generating capacity of the Akosombo Dam and by forcing a temporary shutdown of the smelter from 1983 to 1985. Aluminum production was slow to recover in the wake of the shutdown. In the early 1990s, aluminum production and exports continued to be negligible.

Drastic currency devaluation after 1983 made it exceptionally expensive to purchase inputs and difficult to obtain bank credit, which hurt businessmen in the manufacturing sector. Furthermore, the ERP's tight monetary policies created liquidity crises for manufacturers, while liberalization of trade meant that some enterprises could not compete with cheaper imports. These policies hurt industries beset by long recession, hyperinflation, outmoded equipment, weak demand, and requirements that they pay 100 percent advances for their own inputs. Local press reports have estimated the closure of at least 120 factories since 1988, mainly because of competitive imports. The garment, leather, electrical, electronics, and pharmaceuticals sectors have been particularly hard hit. In 1990, even the New Match Company, the only safety match company in the country, closed.

ERP strategies made it difficult for the government to assist local enterprises. Committed to privatization and the rule of freemarket forces, the government was constrained from offering direct assistance or even from moderating some policies that had an obviously detrimental impact on local manufacturers. Nevertheless, the Rawlings government initiated programs to promote local manufacturing.

In 1986 the government established the Ghana Investment Center to assist in creating new enterprises. Between 1986 and 1990, the vast majority of projects approved--444 of 621--were in the manufacturing sector. Projected investment for the approved ventures was estimated at US$138 million in 1989 and at US$136 million in 1990. In the initial phase, timber was the leading sector, giving way in 1990 to chemicals. In 1991 the government established an office to deal with industrial distress in response to complaints that "unrestrained imports" of foreign products were undermining local enterprises. The 1992 budget included assistance for local industrialists; ¢2 billion was set aside as financial support for "deserving enterprises."

The dominant trends in manufacturing, nonetheless, were the involvement of foreign capital and the initiation of joint ventures. Significant new enterprises included a US$8 million Taiwanese-owned factory, capable of turning out ten tons of iron and steel products per hour, which began trials at Tema in 1989. Although approximately 500 projects had been approved since the investment code came into force in 1985, almost half had still not been launched by the end of 1989. Between 90 and 95 percent of the approved projects were joint ventures between foreign and local partners, 80 percent of which were in the wood industry. Restructuring of the sector was proceeding through divestiture, import liberalization, and promotion of small-scale industries.

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