THE RETURN OF STATE-OWNED ENTERPRISES AND GHANA’S EMERGING ANTI-STATE MOVEMENT (PART 2)

ImageThis article is a slightly-revised version of my publication with the same title in the May 19, 21 and 22, 2014, issues of the Daily Graphic. Overall, the article (whose Part One could be found by clicking here) seeks to provide a counterweight to the oft-sung cliche that “government has no business doing business.” Specifically, this second part of the article will show that the State-driven approach to development has recorded tremendous achievements elsewhere; and has, contrary to the cliche, transformed underdeveloped economies into players on the global stage. It will begin with a brief descriptive of the the World Bank/IMF divestiture program and how Ghana’s economy is yet to benefit from it. The Part will, then, end with several questions which are meant to signal a reassessment by the Ghana anti-State movement of their position.

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The Coming of the Structural Adjustment Programs

The mismanagement of SEOs in late 1960s and the debt crisis of the 1970 went into a full-blown manifestation in the early 1980. By 1983, the World Bank and IMF have happily secured the reluctant invitation of the PNDC military government. They came with the Structural Adjustment Programs (SAPs). Ghana’s version of the SAPs was christened the Economic Recovery Programs (ERPs). The ERPs contained a series of prescriptions – trade liberalization, price deregulation in industry and agriculture, currency devaluation, drastic cutbacks on government expenditure on health, education, etc, financial liberalization, and privatization/divestiture, etc.

Of relevance to us here, however, is the divestiture programme. The divestiture program was intended to shrink the public sector and to improve the performance of enterprises by mobilizing private sector management and capital. The program, thus, comprises of privatization – that prescription which requires the government to offloads its interest in SOEs to the general public. It also consists of liquidation of SOEs. In 1987, the State Enterprise Commission was established under State Enterprises Commission Law (PNDC LAW 170) to supervise the SOE reform program. The divestiture program however formally took off in 1988 under the State-owned Enterprise Reform Programme which in itself was a part of the broader ERP.

The record shows that there were more than 350 SOEs when the reform program took off. By 1993, the first round of the program had seen some 55 SOEs privatised. Then came the second round which was implemented by another government agency, the Divestiture Implementation Committee (DIC). The DIC was established by the Divestiture of State Interests (Implementation) Act, 1993. Just into its second year of work, the DIC saw some 195 more SOEs privatised.

How did the Divested SOEs fare?

The ‘casualties’ of the divestiture programs included the Ashanti Goldfields Corporation, 30% of whose stock was floated on the London Stock Exchange in 1993. Others include the Ghana Commercial Bank, Accra Brewery Limited, Ghana Telecom, State Insurance Corporation, Cocoa Processing Corporation and Ghana National Manganese Corporation. Ironically, it is the same DIC that granted the ‘takeover’ bid to the DIHOC, a State enterprise, to revive Kumasi Shoe Factory.

Serious research into the life of the divested SOEs is wanting. It is however observed that a good number of them either died out in private hands or are not performing any better than they actually were under State-control.

What is true however is that the privatisation did not prevent Ghana from becoming more indebted. Barely 10 years later, Ghana would find itself among the group of Highly Indebted Poor Countries (HIPC). It is equally true that Ghana is more indebted now than it was during the 1970 debt crisis. In fact, we are currently considering an IMF bailout package, even after the discovery of oil over 5 years ago.

Further, all we are told is the number of SOEs that are not performing. No one seems to be taking stock of the number of private companies that have collapsed since independence. Had we, we would have, perhaps, realized that the SOEs are even more durable than the private companies. This raises the question whether the poor performance of SOEs is due, simply, to the fact that they are owned or controlled by the State; or whether there is a third factor somewhere, say, the prevalence of  poor corporate governance in the polity generally, that accounts for the poor performance of both private enterprises and SOEs.

SOEs Elsewhere

Be that as it may, this morbid story of Ghana’s SOEs is not the case everywhere. Once we are able show this two consequences follow as a matter of course. First, then, we can no longer use Ghana’s situation as basis for our conclusion that SOEs are a waste of public money. Second, then, the argument of the Ghana anti-State movement that ownership, whether private or State, is the sole or main determining factor of firm performance begin to show fatal cracks. And, this is exactly where the difficulties of the Ghana anti-State movement begins.

A slightly broader consideration of the modern development trends would reveal that the concerns of the Ghana anti-State movement, though genuine, is a little too much misdirected. This is because some countries have refused to swallow the World Bank and the IMF prescriptions. Others, too, quickly spat them out soon after tasting. These countries have rather employed development paradigms that retained the State as the principal actor in their economies.

Particularly, the paradigms of ‘developmentalism,’ ‘state capitalism’ and the framework of ‘embedded autonomy,’ have been invariably explored to breed what has become known in development circles as the ‘rising economies.’ This development paradigms, where the State plays a leading role, are found to be on the ascendency since the 1980s, when Ghana was vigorously romancing with the SAPs. The Economist, for instance, reports as recently as 2012 that “they [States] have become the most powerful shareholders across much of the developing world from China to Thailand and from Russia to Saudi Arabia.”

A more specific example will, perhaps, drive the point home better. Brazil, China and India are considered as the leading ‘rising economies.’ It is projected by the UNDP in its 2013 Human Development Report that these three economies will contribute more than 40% of global economic output by 2050. The three economies together with the whole of the developing world (Latin America, Asia and Africa, included) did not contribute more than 30% of the global economic output in just less than 3 decades ago. This rate of growth is unprecedented.

Other developmentalist states include the East Asian dragons and tigers – Taiwan, Singapore, Malaysia, South Korea, etc.

These economies have one common denominator – States own or control the leading corporations in their economies. It is found that this common denominator accounts, significantly, for their current status as competitive figures in the global economy.

This role by the state – owning shares in or having control over public corporations – is not limited to developing countries. Governments in industrialized economies too do intervene, albeit intermittently, to bail out corporations from financial distress. They do not do this by simply supplying money and creating ‘conducive environments.’ They do this by acquiring controlling shares, equity, in the distressed companies.

During the recent global economic crisis, for instance, the governments of the industrialised West stepped in and took control by acquiring equity in the corporations that were considered as ‘national champions.’ The US for instance injected huge capital into Citigroup, AIG, GM, Chrysler, etc. in exchange of equity and control. The UK, too, did same by taking equity in Royal Bank of Scotland (RBS), Lloyds, Northern Rock, Bradford & Bingley, etc. Other Western powers, Canada, Germany, France, etc. followed.

The 2008 takeovers were merely a repeat of history. During the Great Depression, for instance, the governments of the industrialised west took control of the major corporations of the time. As a matter of fact, development history tells us that none of the western States took the backstage in commerce until they acquired a commanding stature in the global market. Alexander Hammilton’s 1791 Report to Congress on Manufactures speaks directly to the role of the State in the foundation of the United States’ economy. Most European countries remained largely welfare States even into the middle of the 20th century.  For instance, it would take Margaret Thatcher to knock capitalism deep into the British economy in the 1980s. The results of Thatcherism is itself mixed at best.

Quite apart from these intermittent bailout programs and the historic accounts, other industrialized countries, like Norway, currently run SOEs as the backbone of their economies.

Some More Questions

The facts above do not support the claim that State ownership is any worse than private ownership for developing economies. They rather make it doubtful that State-participation in equity per se was the actual cause of the failure of the SOEs and debt crisis in Ghana. In this regard, several questions may be asked:

Could it be the case that there are some third factors that are responsible for the failure of Ghana’s post-independence SOEs? If so, are these third factors inextricably linked with State-ownership? If not, how do we hive off this third factors from State-ownership in order to make State-ownership better, as it is done elsewhere? 

Is it the case that post-independent Ghana did not have the requisite skills or competences for managing huge public corporations? This question is very legitimate, considering the fact that the huge corporations that operated in the Gold Coast were not managed from within the country coupled with the fact that our institutions of training produced only middle management personnel until, at best, after independence.

Derivatively, one may also ask whether the problem is simply one of poor corporate governance in the country generally. Could it be that post-independent Ghana lacked the institutions, namely, stock exchange, banks, insurance companies, pension funds, securities and exchange regulatory bodies, etc. that are needed to ensure good corporate governance? This question becomes even more important in light of the following facts: Banking was not democratised in Ghana until after the year 2000. The Ghana Stock Exchange, which has been on the drawing board since 1969 when the Pearl report by Commonwealth Development Finance Co. Ltd. recommended that a stock exchange be established in Ghana, did not trade until November, 1990. The Securities and Exchange Commission, without which a financial market cannot command integrity or woo the confidence of investors, would not be established before 1993. Same (if not similar) may be said of insurance and other financial market institutions.

Another branch of query regards the role that was played by external economic forces in weakening the SOEs.

In other words, what amount of investigation have the Ghana anti-State movement conducted into these matters to warrant the rather stubborn latching on to the belief that there is nothing good about SOEs, even in the teeth of all this evidence? Is it just a matter flowery expression of ideological preferences at the expense of practical approach to development?

Conclusion

This article does not, and should not be taken to, argue that State-owned enterprise is without flaws. In fact, it does not even argue that it is the best development model for all economies at all times. What the article does, principally, is to subject the views of those persons who still hold on to the belief that SOEs are in and of themselves a bane to economic growth and development. It only draws the attention of those who still hang on to the hard-line culture of wholesale condemnation of SOEs to the fact that so much water has passed under the bridge since the Cold War.

The literature on SOEs has long changed. The trending approach is to deconstruct the political economy within which SOEs operate, identify the flaws, design or borrow from others’ successes to correct the flaws and, then, reconstruct the political economy to make State-ownership more viable. For, if the State of underdeveloped countries cannot find a footing on the global stage, it is very doubtful if a private person from these countries could.

In all this, the Ghana anti-State movement owe us a primary duty, a duty to point to a country that was able to make it out of underdevelopment by excluding the State from playing a direct role in business. 

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THE RETURN OF STATE-OWNED ENTERPRISES AND GHANA’S EMERGING ANTI-STATE MOVEMENT (PART 1)

Photo May 20, 11 56 43

This article is a slightly-revised version of my publication with the same title in the May 19, 21 and 22, 2014, issues of the Daily Graphic. Overall, the article seeks to provide a counterweight to the oft-sung cliche that “government has no business doing business.” It is divided into two parts, Part 2 of which may be found here. This part begins by showing that Ghana is gradually going back for the State-driven development model, where the State actively and directly participate in commerce. It recounts the failure of Ghana’s State-owned enterprises and how that failure appears to supply the evidence that is invariably used to support the claim that State-participation in business is counter productive in all situations. The second part of the article (which I’ll publish later) attempts to dissolve, completely, the force of the cliche. It does this by showing that the State-driven model is the predominant (if not the only) development model that elevates countries from under-development to what has come to be known as “rising economies.” 

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The DIHOC

In July 2011, the then Minister for Defence, Lt. Gen. Joseph Henry Smith, announced that the Ghana Armed Forces (GAF) had acquired the remnant of the then defunct Kumasi Shoe Factory (KSF). The acquisition was done through a 40-60 partnership between the Defence Industries Holding Company Limited (DIHOC) and Knights Ghana Limited (KGL).

DIHOC is a limited liability company held by GAF under its newly-created Defence Industries Department (DID). It is touted as the “driving force and engine” of GAF’s Civil–Military Collaboration for Socio-Economic Development in Ghana (CIMCSED) program. In addition to the Footwear Division, the CIMCSED program currently operates an Ammunition and Explosive Ordnance Devices Manufacturing Division, an Electrical and Electronic Manufacturing Division, a Shipbuilding Manufacturing Division, a Textile and Garment Manufacturing Division and a Solar Manufacturing Division. It also operates a Printing and Publishing Division, a Construction and Civil Work Division, an Agriculture & Agro-processing Division and a Pharmaceuticals Manufacturing Division.  What is worth noting here is that DIHOC is a State-owned enterprise (SOE).

KGL on the other hand is a privately-held Ghanaian company with a Czech heritage. 

In 2009, the DIHOC-KGL partnership submitted a bid to the Divestiture Implementation Committee (DIC) for the acquisition of the defunct shoe factory. The bid was accepted and work on reviving the factory which collapsed in the 1970s commenced later that year.

Opposition

The CIMCSED program in general and the DIHOC-KGL acquisition in particular, however, faced pockets of opposition from certain interests. The opposition was founded upon a number of reasons. Some raised questions over the mandate of GAF. They queried how the military, a State institution whose core mandate is to use bombs, guns, knives, and military intelligence to defend the territorial integrity of Ghana, could be engaged in such commercial activities.

Others went as far as questioning the entrepreneurial acumen of the officers and men of GAF, and even the very capacity of Knight A.S. (the Czech holder of KGL) to manufacture shoes. Some, too, relied on the sad history of Ghana’s State-owned enterprises (SOEs) and questioned the viability of not just the DIHOC venture, but also SOEs in general.

Yet still, the ideologically-persuaded were not slow at using the opportunity to launch a full-scale ideological warfare. They trumpeted a very familiar cliché, namely, that “government has no business doing business.” In fact, by October 2012, some high-ranking social commentators had started claiming credit for predicting in 2011 that the project would not see the light of day.

For the purposes of simplicity, I will invariably refer to this group of interests as the Ghana anti-State movement, not least because they seem extremely antagonistic to any idea of State commerce.

DIHOC Shoes

Last week, about 4 years after the DIHOC-KGL partnership was given the green light by the DIC, the President, H.E. John Mahama, went to Kumasi to launch the revival of the factory. The factory currently has about 400 women and men in its employment and is capable of producing 1.8 million pairs of shoes a year.

At the luncheon, the President announced that the government will purchase DIHOC shoes for distribution to school children under the free school uniform program. GAF has announced its intention to order 16, 000 pairs of boots for its women, men and officers from the factory, while the Ghana Immigration Service has already taken delivery of some 4,000 boots. This is quite apart from what other private individuals and institutions have and will continue to purchase. The factory aims at feeding the African shoe market by the  year 2018.

This seems to have stung the Ghana anti-State movement very badly, causing them to resume the recitation of the anti-State cliché – ‘government has no business doing business.’

The New National Development Model

The DIHOC shoe story aside. Government has been incorporating new SOEs recently. An example is the Ghana Gas Company Limited, which was incorporated in 2011. Just two weeks ago the chairman of the National Development Planning Commission (NDPC), Mr. P.V. Obeng, announced to a group of workers in the industrial city of Tema that a new development model will be launched later this year. The B&FT reports him to have mentioned that the new model will chart a “new economic path where the role of the State would be paramount.”

Taken together, there is no doubt that the governments activities are going to keep the Ghana anti-State movement very busy for the next godknows how many decades.

‘Government has no Business doing Business’

The cliché ‘government has no business doing business’ may mean so many things. But its core tenet is that government, the State, should take its hands off business. The State should not be seen to be investing national resources into commercial enterprises. This supposition is based on the idea that the State is very terrible at running business while private hands are better (than the State) at driving development. The corollary of supposition is that commercial enterprises should be reserved for private hands, while the State creates what is often referred to as ‘conducive environment.’ In sum, subscribers to the cliché decry any idea of State-owned enterprise outrightly.

A necessary offshoot of the cliché is that the failure or success of an enterprise is largely dependent on whether it is owned by a private hand or by the State. In this regard, it is important to mention that this cliché makes no exception to the nature of the political economy within which the enterprise operates.

However, is there enough merit in this claim? Put slightly differently, is it really true that ownership per se explains the success or failure of companies, so that by merely offloading the shares of a State-owned company into private hands, that company would transmogrify into a high performing enterprise?

I wish to make a case in support of the claim that there is more to a company’s performance than the question of who owns its shares or controls it. More specifically, I argue that companies do not succeed simply because they are owned or controlled by private persons; neither do they fail simply because they are owned and operated by the State.

If this argument is true, then, we should see enterprises failing or succeeding irrespective of whether they are owned or controlled by a State or a private person. However if it is false, that is, if the Ghana anti-State movement is right, then we should not see SOEs succeeding on a large scale or privately-owned enterprises failing on a large scale in any political economy.

May I add that this topic has long been flogged extensively elsewhere. It would not have required much discussion here, but for the recent overreliance on this cliché by the Ghana anti-State movement. I will therefore focus much of the discussion on drawing attention to what seems to have eluded the movement, namely, how State involvement elsewhere has helped to lift economies out of underdevelopment. I will show that hardly, if at all, do underdeveloped or developing economies become global players by excluding the State from directly engaging in business.

The Rise of Ghana’s SOEs

We may need to do a little history by way of creating a context for the discussion. Without it we will not know where we come from and, consequently, where we are heading.

Colonization deprives a colonized people of skilled labour, modern technology, access to capital, direct access to the global market, self-confidence and clout. These denials result in a weak (if not non-existent) competitive indigenous private sector. This was the case in Ghana at independence.

John Esseks, thus, gives the following account of the structure of Ghana’s economy:

“In March 1957, when Ghana gained her political independence, over 90 percent of the country’s import trade was in the hands of foreign firms; two British banks shared about 90 percent of all banking business; expatriate companies held 96 percent of total timber concessions; foreign investors owned all functioning gold mines and controlled about half of the annual diamond production; general insurance was entirely in the hands of expatriate firms; and foreign companies earned the bulk of total receipts in the small manufacturing sector.”

The overarching aim of the fight for independence was to take control over our own affairs. However, becoming a global players in our own right was also an integral part of the struggle. Attaining this goal required us to catch up with the global players, who were at the time a couple of centuries ahead. Catching up required a well-coordinated and a more aggressive development plan. We needed to run while others walk.

How do we do this with the very weak, largely-disorganised and heavily-unskilled private sector that colonialism left us with? State-ownership and control of the factors of production, it appeared, was the only plausible way by which the former colonies, including Ghana, could launch themselves onto the much developed and far more sophisticated global market.

Therefore, Ghana, like most former colonies, began its statehood with an economy which rested almost-entirely on SOEs. Through the de-colonization process, the State became a major player in almost all the sectors of the economy – transportation, aviation, agriculture, fishing, education, manufacturing, commerce and even entertainment. Barely 5 years after Ghana attained a republican status, John Esseks reports, again, in another publication:

“By 1965 the state importing enterprise handled 35 percent of the country’s total commercial imports; the state insurance corporation transacted about 50 percent of all insurance business; the government’s commercial bank accounted for over 60 percent of total deposits; the state-owned Black Star Line carried about 17 percent of Ghana’s seabourne commerce; the government’s Ghana National Construction Corporation had succeeded in displacing almost all private contractors from the largest subsector of building and construction, that financed by public funds; and the factories owned by the state or partnerships between government and private interests produced 27 percent of total output in manufacturing.

We were on track. But those were the glorious days of SEOs in Ghana. They were short-lived.

The fall of Ghana’s SEOs

One great evil that afflicts SOEs is political influence; I mean misguided political influence. The evil becomes even greater when the polity within which the SOEs operate lacks stability; and even much worse when competent, skilled and public-spirited management and strong capital market institutions are lacking. Ghana bore all these elements in significant proportions after the middle of the 1960s. Thus, by the close of the 1970s, most of the public corporations had been ran down.

The country was heavily engrossed in debt owed to the countries and institutions of the industrialised West. Inflation rate was swinging above 100%; GDP per capita had fallen from US$ 1,007 in 1960 to barely US$ 700 in 1983; and unemployment hitting all time high. Countrymen were compelled by the severe economic conditions to embark on a desperate search for greener pastures outside the country’s borders. Ghana has abdicated the throne of grace and has settled for the mat of withered grass.

The Case of the Ghana anti-State Movement

At this point, one could hardly dismiss the concerns of the Ghana anti-State movement. These facts supplied all the evidence that one needs to support the claims that State-ownership or control of companies is a waste of public money and everyone’s time. With these facts, one could hardly dispute the claim that State-ownership is a prime promoter monopoly, rent-seeking, corruption, cronyism, nepotism, political interference, etc.

Indeed, all this formed a major part of the operating causes of the failure of SOEs in former colonies in general and Ghana in particular. These observations, thus, inform and are at the heart of the wholesale condemnation of everything State.

Further, this vivid body of evidence also readily fed into the neoliberal rhetoric on whose back the western side of the Cold War rode to glory. It also formed the basis of the World Bank’s privatization programs that swept across Africa, Europe and Latin America starting from the 1970s. It is recorded that the World Bank, between 1988 and 1993, saw some 2,655 SOEs privatised in the world, valuing over US$ 270 billion.

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I will pause here. In Part 2 of the article, I will show that the State-driven approach to development has recorded tremendous achievements elsewhere; and has, contrary to the cliche, transformed underdeveloped economies into players on the global stage. It will begin with a brief descriptive of the the World Bank/IMF divestiture program and how Ghana’s economy is yet to benefit from it. The Part will, then, end with several questions which are meant to signal a reassessment by the Ghana anti-State movement of their position.