Finance
Divestiture in Ghana
AN INTEGRAL part of the Economic Recovery Programme (ERP) has been the privatisation of some State-Owned-Enterprises (SOEs), under which the government embarked on a process of divesting itself from involvement in the management of these organisations. Since then, the programme has been on course, with government's interest in several organisatio ns already divested. The greatest challenge facing this programme now is the need to sustain the momentum, and also ensure that its overall effect fits into the objectives of the adjustment programme.
Divestiture Experience
Recently the newest addition to the growing list of divested organisations was the Social Security Bank (SSB), whose shares were offered for sale to the investing public. In many ways, the shares offer was a milestone in the ongoing divestiture programme. The offer, said Dr G.K. Agama, g overnor of the Bank of Ghana and the chairman of the launching, was "a practical manifestation of government's sincerity in freeing the public sector from state control. There is no turning back and let me affirm the government's determination to provide t he encouragement needed to all sectors of the economy to achieve optimum performance in a deregulated economy".
Referring to the experience gained so far in the adjustment programme that has taken place in the financial sector, under the Financial Sector Adjustment Programme, FINSAP, Agama noted that measures taken under the first phase of the programme have yielded positive result, such as the ability of the banks to meet the capital adequacy levels set by the central bank. The sale of SSB's shares falls under the second phase of the programme, under which government is reducing its holdings in public banks.
"It is hoped that as this programme gathers momentum, credence will be given to government's determination to ensure that the financial sector plays its crucial role in the economy," he added. In a way, state control is the antithesis of the essence of div estiture, for, in the first place, it was the ubiquitous involvement of governments in economic activities that gave rise to a motley of what became kn own as SOEs. While they existed - in most cases to satisfy some political exigencies of the ruling group - they often failed woefully on the economic scale. But, despite this they always found themselves surviving from one government to another, as differe nt regimes across Africa and the larger part of the developing world, sought to achieve political goals by means of such enterprises.
Unfortunate legacies
Thus one of the legacies of some past governments is a long list of bloated public enterprises whose main distinguishing feature is the lack or absence of the entrepreneurial spirit. Such enterprises existed not on the basis of wealth creation, but on the government's largesse. Efficiency criteria were normally non-existent, just as there usually were no effective cost control measures. Thus, in the absence of clearly stated cost recovery and profit objectives, these organisations usually ended up as waste pipes of the tax payers' money.Rates of return on investments by the government in such enterprises w ere so low, and in most cases negative.
Comparing these with rates of return being made in the private sectors of some economies there was clearly no justification continuing to pump public money into such entities.
In what looked like the features of the command economies of the socialist economies of the former Soviet Union and Eastern Europe, some cost items such as interest rates were kept at ridiculously low levels that there often was no basis for realistic cost calculations. This led to what economists came to know as "financial repression", which made interest rates, for instance, not a true reflection of the cost of funds in the system. This tended to encourage imprudent use of resources.
In the financial sector, for instance, banks were the greatest victims - as well as the causes - of this massive misallocation of financial resources. Without appropriate guidelines, bank lending and credit policies were carried out in total disregard to a ccepted prudential principles. Projects were never appraised correctly to ascertain both their financial and technical feasibilities. There were also cases of poor financial intermediation of credit mis-match as short-term bank deposit were used to financed long term projects.
Conduit pipes
As a consequence, most projects financed by the banks turned out to be conduit pipes through which financial resources were being drained away from the system. They were not viable and therefore the projected cashflows could not materialise. As the loans f ell due, the debtors could not repay. The banks were thus saddled with a large and rising level of non-performing assets.
In essence, therefore, scarce resources were being used, perhaps inadvertently, to prop up unproductive or unviable enterprises, which, ordinarily, should be allowed to take their exit under a competitive environment. This added to the misallocation of res ources, with the result that the activities in the financial sectors of most African economies often had a negligible impact on the real sector, where the goods and services are produced.
While such features of an economy could pass in the days of government's over-bearing presence in the economy, the reality of the violent economic dislocations which most African countries including Ghana, suffered in the late 1970s and early 1980s dictate d a different approach to economic management, more so in the context of the emphasis on the need to give more room to the private sector to act as the engine of growth for the economy.
ending era of wastes
It is thus not surpr ising that the adjustment programme which Ghana embarked upon should have divestiture as one of its cornerstones, given the heavy burden that these organisations had placed on the state finances. In the wake of reform programmes which have swept across the world, policy measures have been designed with emphasis on the need to end the era of wastes in the public sector of many countries which derive essentially from the unduly bloated public enterprises.
"For many years past, poor financial performance and l ow productivity have characterised many of Ghana's SOEs. The results are an accumulation of huge financial losses to the state that have to be funded by taxes or borrowing both of which impose a heavy burden of payment on the country and a diversion of res ources which could be better utilised for other purposes," the Divestiture Implementation Committee (DEC) says in its handbook.
l To be continued
Editor: Ali B. Ali-Dinar
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Taxation as incentive for economic welfare
THE EXPERIENCE OF the past leaves little doubt that every economic system must sooner or later rely on some form of profit motive to stir individuals and business entities to productivity. Substitutes like slavery, police supervision or ideological enthusia sm have proved to be unproductive, expensive or transient. In the language of economics, individuals allocate their time and money according to expected after tax earnings.
Nevertheless, the notion that governments can enhance welfare by ever increasing levels of taxation has proved most appealing to politicians in both developed and developing countries. It is argued that taxes raised at the expense of private consumption ca n be used for productive state investment. This will then lead to higher economic growth and long-term national welfare. Even if taxation turns out to be at the expense of private investment it is argued that economic growth can still be accelerated if the rate of return on government investment exceeds the return on private investment.
Based on the experience of developing countries in recent years there is scant empirical evidence to support this economic logic. Ghana provides a good example.
Soon after independence Ghana toyed with the Soviet-style economic model in the form of the seven year development plan. The following arguments were advanced to support this planning model: the private sector was deemed too sluggish to respond to the urge nt needs of a new nation; the free market was too rudimentary (and inconsistent with the ideology of state socialism); the state was to play the leading role in fostering economic expansion; the rapid industrialisation was to replace the production of agricultural com modities; the import substitution was to protect the economy from dependence on the international market; taxation, nationalisation, state enterprises were to achieve the desired transformation.
The subsequent decline of the economy and of living standards in Ghana have been well documented. Private consumption and private investment both collapsed in the face of punitive taxation and heavy government borrowing. In practice government used much of the revenue raised for consumption purposes to establish sta te owned enterprises most of which eventually degenerated into 'white elephants'. These investments have had returns that have been low or negative. The consequent decline in economic opportunities within the country forced many Ghanaians to exit the syste m to live and work abroad.
The success of the Economic Recovery Programme (ERP) which Ghana has followed since 1983 can be attributed to the systematic reduction in personal and corporate income tax rates and control of government expenditure. As a result a public sector budget surp lus was achieved, inflation was bro-u- ght under con-trol and the curre-n-cy achie-ved a measure of stability. Ghana has achie-ved an average annual rate of growth of export earnings of eight per cent per year since 1982 while GDP has been rising by five per cent per annum. Ghana has also embarked on a programme of selling off state owned enterprises. Private remittances from Ghanaians living abroad has increased from a negative net figure of US$1.8m in 1983 to a positive net amoun t of US$271m in 1994. These funds have been sent to Ghana to take advantage of growing opportunities including real estate and equity investments on the fledging Ghana Stock Exchange.
The progress made by Ghana is reflected in the opening up of opportuniti es for CDC to support economic development by investing in commercially sound businesses. In 1983 CDC had just one investment of Pound4m on its books. By the end of 1994 this had risen to Pound 35m invested in sixteen projects and two uncommitted approvals totalling Pound14.7m and current investigations in four projects with investment potential of a Pound8.9m. The projects in which CDC invests employ about 7,500 people.
Ghana's hard won success can however be reversed easily and there have been some recent warning signs: t he public sector budget slipped back into deficit in 1992 and 1993 due to rising expenditures. Higher inflation and a substantial fall in the value of the currency have been the result. A budget surplus was achieved in 1994 - but only as a result of the 'w indfall' profits from the sale of shares in Ashanti Goldfields Corporation; several institutional barriers remain which act as an implicit tax on productivity. These include elaborate requirements for obtaining business licenses and permits etc. A recent s tudy has shown that these institutional factors penalise non- traditional exports from Ghana by between five per cent and 20 per cent of the sales value; proposals have been tabled to levy export taxes of up to 40 per cent of the sales value of timber expor ts to raise revenue for rural development.
The 'optimum' level of taxation is not easy to determine. A tax rate of zero will obviously yield zero tax revenue, and at the other extreme a tax rate of 100 per cent will also yield zero by removing all incentiv e to work. It is one of the key assertions of supply-side economics that generally tax rates have become too high and that cuts in tax rates will frequently stimulate production so that overall tax revenues will rise.
In 1879 the American economist Henry George propounded certain canons of taxation which are still appropriate today. The ideal tax should: bear as lightly as possible on production; be as easy and cheap to collect as possible; be simple and certain (to avo id evasion by the taxpayer and corrupt ion by the tax gatherer); bear equally so as to give no citizen an unfair advantage over another. These principles hold out the best chance of raising essential public revenues whilst enhancing economic development. History has shown that punitive taxation of private industry to divert resources into state enterprises simply does not work.
The role of government should be that of a promoter of economic growth and development while desisting from policies which hinder successful private sector expansion. Its proper role should include: taking aggressive steps to attract foreign investment; capture, adopt and adapt external technology; reward gains in productivity; create incentive structures in line with market signals; help the nation to develop its competit ive advantages based initially on natural resource endowment and gradually move into manufactured goods export.
A lot of attention has been paid recently to attempts by the American Congress to pass a balanced budget amendment to the Constitution, in order to place legal constraints on state spending. If this restriction on executive power is thought necessary in the world's most advanced democracy, is there not a message for the emerging economies of the third world?
Editor: Ali B. Ali-Dinar
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