Re: [PEN-L] Ghana water privatisation

[soula avramidis]

These are abridged notes about an FDI reprot on Ghana in 2002. Look towards the end.

 

1.                  It appears that although Ghanian per capita GDP dropped by about a third the numbers of people in poverty declined. The national poverty line dropped from 40% to 31%. It is also evident that steady growth experienced  by Ghana since 1984 did not translate into a commensurate level of human development ( the human development index remained nearly unchanged). This raises the question: why growth did not spill over into development and, in particular, what was the role of free market reform and FDI promotion in precipitating this poor development outcome.

2.                  Apart from the high peak of FDI flows in the mid nineties, which was due namely to a bout of privatisation in the primary sectors, the levels of FDI declined significantly afterwards and any above average performance can be ascribed to a shift in property of already existing capital stock rather than net additions caused by an expansion of economic activity. More importantly, if one considers the trends in FDI apart from this bout of privatisation, it appears that on average, the non market friendly period of pre 1984 is just the same, if not higher, than the post 1984 market friendly period. I understand that a shift in property in the primary sectors is not in itself a kernel for development unless it leads to an expansion in economic activity, viz. industrial activity. However, one notices that local industry did not expand. If anything, industry shrunk (see share of industry/manufacturing  in Ghana)

3.                  Moreover, it appears that the revenues generated from privatisation  had no lasting effect on growth (recent recession), and in all likelihood they went to service  a growing budget deficit and external financial constraints/requirements. A closer look at macro data indicates that the 2000 recession was caused by a decline in ODA levels (delays in disbursements as well). Thus irrespective of higher revenues from privatisation, as a ratio from GDP these privatisation revenues remained low. One also asks what are the institutional drawbacks that make privatisation a one time gain, e.g. absence of progressive taxation.

4.                  Overall and as a ratio from GDP, ODA remained significant to this economy. Evidently it is this latter component that needs to be addressed- quality and targets for investments. Recall that national savings remained extremely low (about 6% of GDP); so growth must have been generated through external savings. What else would explain the high ratio of investment (nearly a quarter of GDP). And if so, when inflation was brought under control and fiscal restraint was being exercised under the dictate of the Bank and the Fund, also growth was proceeding at a steady pace, why haven’t private flows picked up. This crucial question is answered in the sense that more market reforms are needed to boost the process. But the initial flaw lies in the savings investment nexus. No one is going to feel comfortable in a situation where investments are fuelled by additional borrowing and savings do not pick up. That is a recession waiting to happen. So the point is in how to allow a genuine process of high internal savings high investments. The already existing framework for foreign investors guarantees the principal right of high returns and repatriation, so the flaw is more endemic on the macro level and this is a completely forgotten point. 

5.                  There is no significance of the contribution of FDI to growth. The most recent empirical results from the literature show no effect of FDI on growth or, at best, the results are inconclusive. In the case of Ghana the ratio of FDI to GDP is less than one percent. Additions to capital stock over time have to be comparable to these low ratios.  However, Ghana, was one of the highest recipients of ODA in Africa (about 600 Dollars per head on average). Also a big chunk of public investment, which is more than four times the size of private investment, is determined by ODA. Also note that in Ghana, private investment since the nineties remained steady and the rise in total investment is principally fuelled by public investment. Therefore, this significant component of investment is not given the consideration it deserves. I think that one should talk about the stylised facts of high foreign capital flows to GDP ratio and low savings to GDP ratio. This may indicate that Ghana experienced a significant  consumption leakage, hence reducing private savings. It may be that the government is not growth maximizing and that ODA flows are channeled into raising consumption either directly, or through shifting resources currently earmarked for investment. Consequently public savings could fall with falling tax receipts or by a change in the composition of government expenditure. Indeed, foreign capital lowered domestic savings in this instance. Also rising foreign imports could reduce savings by stimulating the consumption of both importable components and exportable ones.  

6.                  There are structural barriers to extending production sharing into Ghana because of high shipping costs.  Even so, the privatisation policies that are propagated do not affect FDI alone but have far reaching implications for this economy. A recent reading of the conditions inside Ghana call for concern and an immediate reversal of the policies that have led to further impoverishment, yet the report calls for much of the same old policies to be expanded, namely liberalisation and privatisation. I urge the authors to look closely at the water riots in Ghana. Privatising water is a human rights issue. Already much of the population drinks unhealthy water. Privatisation, given the degradation in incomes is likely to deprive much of the population of water and electricity supplies. I also urge the authors to look closely at the Rwandan experience in the early eighties and draw lessons from its coffee liberalisation schemes and the suggested Ghanaian cocoa liberalisation scheme. With much of the population still residing in the countryside subjecting the farmers to heavy price variations may invoke civil strife. It is probably a remote possibility, but it is one that I’d look closely at before making such impromptu recommendations.

 

__________________________________________________
Do You Yahoo!?
Tired of spam? Yahoo! Mail has the best spam protection around
http://mail.yahoo.com