Building A Better Society in Ghana: The Private Sector Needs a Strong State Support

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Property owning democracy and private sector-led development are some of the statements President Akuffo-Addo often make about how he wants Ghana to develop and industrialise. According to President Akuffo-Addo, his government “is instinctively to look for private sector solutions to the economic issues in our country. We are unashamedly the party of the private sector”. What these statements mean is that the private sector should lead the country’s economic growth, industrialisation and development efforts, while the government “creates the enabling environment”. Despite the claim by politicians in Ghana that they are creating the enabling environment, the private sector remains weak, deeply fragmented and without direction and the state’s support.

In fact, Ghana’s private sector has been waiting for the state to support it to grow and expand, but the state has been extremely slow to help. Indeed, the state does not seem to know how to support the private sector to lead Ghana’s development efforts despite the often-overused mantra of the government ‘creating the enabling environment’. The situation has been compounded by the relentless demonisation of government by the media, conservative economists, fiscal hawks and libertarian think tanks who view government as a threat to free market and hence tend to view any government’s role in the economy with serious suspicion. In fact, in the last three decades, Ghana’s politicians have subscribed to economic ideology that bans the state from helping the private sector in any meaningful way. This has contributed to the country’s underdevelopment, delayed industrialisation as well as Ghana losing the industrialisation race altogether.

The aim of this article is to show how U.S., Japan, Britain and South Korea helped their private sector firms to become global players and why the Ghanaian state must take the issue of private sector support seriously particularly now that the government is arguing for Ghana Beyond Aid.

It has become fashionable for conservative economists and fiscal hawks to claim that “it is not the duty of government to run businesses”, but economic history has taught us that throughout the world, countries that have industrialised or developed have done so through a “well-designed, consistent, and thoroughly implemented state intervention” [1]. Economic history also tells us that in the early stages of development and industrialisation, the steady visible hand of the state is crucially important to promote economic growth, protect private sector and promote broad prosperity through redistribution of the gains of economic growth. This was true for England in the 18th Century. It was true for Germany and United States in the 19th Century. It was true for Japan, South Korea, China, Taiwan, and Singapore in the 20th Century and will be true for countries that will industrialise in the 21st Century. In all these instances, either the state worked closely with the private sector and the market or was the lead actor in channeling scarce but crucial resources towards productive economic activities, and supporting indigenous firms to gain foothold in the global market. The state provided loans, credit guarantees, and grants to private investors. It also secured advanced technologies and plants for private firms, protected infant industries from aggressive foreign competition, and searched for market for products produced by their companies. It also invested in physical infrastructure such as roads, railways, electricity, telecommunication, ports and harbours and trained highly competent labour force which the private sector could tap into.

As the late Harvard University Economist Alice Amsden observed “State in modern history have always intervened to spur economic activity. Even the First Industrial Revolution, whose guiding principle was laissez-faire, is now being reassessed by historians with this axiom in view. The British government intervened to maintain law and order and to minimize the flight of technological capability to foreign lands. In the second phase of intervention that [is] associated with the Second Industrial Revolution in Germany and the United States, state intervention intensified because the economies of Germany and the United States were required not merely to industrialize but also to catch up [with England]. To catch up in the 20th Century has required still heavier doses of government support because backwardness has been relatively greater. The instruments of intervention have been cumulative. Not only have states in late industrializing countries intervened by protecting infant industries. They have intervened by providing private investors with a battery of incentives, that simplified, boil down to subsidies” [2].

The Economist Mariana Mazzucato tells us that “in countries that owe their growth to innovation, the state has historically served not as a meddler in the private sector but as a key partner of it—and often a more daring one, willing to take the risks that businesses won’t. Across the entire innovation chain, from basic research to commercialization, governments have stepped up with needed investment that the private sector has been too scared to provide. This spending has proved transformative, creating entirely new markets and sectors, including the Internet, nanotechnology, biotechnology, and clean energy” [3]

A study of the meteoric rise of China, Japan, South Korea, Taiwan and Singapore as industrialized nations in the 20th century reveals that the state played a strategic role in the allocation of capital for production as well as import and export decisions. Indeed, without the role of the state, the economic miracle of China, South Korea, Japan, Taiwan and Singapore (that continues to fascinate economists, development policy experts and politicians) would not have been possible.

In Japan for example, it was the state whose vision, policies, and strategies drove the industrialization process. The Japanese government for example deliberately and aggressively supported the zaibatsu (large indigenous private firms such as Mitsubishi and Nippon Steel) with capital and technology to enable them to compete against their more established European and American competitors. As the historian Bruce Cumings observed: “During the period of colonial rule Japan was unique in building an imperial economic unit marked by a strong role for the state…After 1945 a diffuse American hegemony replaced Japan’s unilateral system, but elements of the prewar model have survived: strong states direct economic development in South Korea and Taiwan (here termed “bureaucratic-authoritarian industrialising regimes”); both countries are receptacles for Japan’s declining industries; and both countries develop in tandem, if in competition, with each other” [4].

Diana M. Helweg of Southern Methodist University, who has written about the role of the Japanese state in the country’s industrialization drive notes that the Japanese established several banks which they used to channel financial resources to their companies. “Japan spent the last [20th] century perfecting a financial system that allocated capital according to government criteria. In fact, the recent affinity for state-directed economic policies began much earlier. When Japan isolated itself from the rest of the world during the Tokugawa era (1603–1867), the shogunate tightly controlled all domestic activity, from transportation to commerce. Unsurprisingly, when a few outlying samurai families decided to replace the Tokugawa shogunate with Emperor Meiji and begin crafting Japan’s first modern economic system in 1868, they continued to emphasize the state’s control of capital. The self-appointed reformers who shaped the Meiji government wanted a modern economy that could support industrial growth at a pace necessary to catch up with Western countries. To achieve such rapid-fire industrialization, the Japanese government—rather than individuals—took the risks and footed the bills. Some of the wealthy merchants who had made their fortunes during the Tokugawa period led and partially funded the new enterprises, but they worked in tandem with the state, not as independent entrepreneurs. Most merchants became political actors collaborating with the central government, and many started the government-supported, family-run companies and banking houses (zaibatsu) that fueled much of Japan’s growth in the first half of the twentieth century” [5].

After the Second World War, Japan strongly resisted pressure from the American government to stop supporting its firms and allow market forces to allocate resources. According to Diana Helweg, the government of Japan “established several financial institutions to apportion capital to companies and sectors it deemed important for economic recovery. The government-run banks included a long-term credit bank, an export-import bank, a development bank, a bank for small-business financing, a foreign-exchange bank, and even a bank for long-term lending to agriculture, forestry, and fishery ventures. The government used this network of banks to make Japan globally competitive by promoting specific industries such as steel, auto manufacturing, and consumer electronics for export. It also used the banks to subsidize small rice farmers and domestic food processors, protecting them from international competition. Eventually, economic growth became managed almost entirely by bureaucrats” [6].

It is well-known fact that the 1976 Japanese government initiative in the semiconductors, contributed to Japan’s dominance in the chip-making market. As Inman and Burton point out, the global market for the design and manufacture of integrated circuits was heavily controlled by U.S. firms in the 1960s and 1970s. This dominance however ended when in 1976 the Japanese Ministry of Trade and Industry (MITI) launched the Very Large Scale Integration (VLSI) programme. The programme helped Japanese firms to develop process technology and 64K memory chips. However, in 1979 pressure from the U.S. government forced the government of Japan to terminate the programme prematurely. Japanese firms that took part in the VLSI programme were so convinced of its merits that they mobilised funds to complete the programme’s research agenda [7].

As a result, they were able to parallel advances in technology with gains in quality, productivity and reduced cost. Their effort paid off quickly and handsomely. By 1980 Japanese companies had surpassed U.S. merchant semiconductor firms in the design and manufacture of the latest generation of semiconductor devices. By 1983 Japanese-based firms held shares of the world market equal to that of their U.S. competitors. By 1986 the Japanese had taken 65 percent of the world market for memory products, while the U.S. share had fallen to under 30 percent. In 1988 Japan held 85 percent of the market for one-megabit memory chips, while the American share (not including IBM, which makes memory chips for its own use) had dwindled to eight percent” [7].

The capture of the semiconductor market from American firms highlighted the impact that government intervention can have on industrial performance. The loss of U.S. market leadership was not due to a sudden shift in inherent national abilities or resources, but in large part to Japanese government’s technological programme. After the success of Japan’s VLSI programme, there was no longer any question that prudent government intervention in the marketplace could compensate for a late start in technology and significantly contribute to an industry’s comparative advantage [6].

Learning from the Japanese experience, the various South Korean governments from 1961 onwards aggressively supported the chaebol (large family owned businesses) with funds, technology and plant acquisitions, subsidized loans, guaranteed credits, and import and export licenses. In South Korea for example, Professor Alice Amsden reported that it was the state whose thoughtful initiatives got the private sector to enter into manufacturing: “The initiative to enter new manufacturing branches came from the public sphere. Every major shift in industrial diversification in the decades of the 1960s and 1970s was instigated by the state. The state also masterminded the early import-substitution projects in cement, fertilisers, oil refining, and synthetic fibres – the last greatly improving the profitability of the over expanded textiles industry. The government also kept alive some unprofitable factories inherited from the colonial period, factories that eventually provided key personnel to the modern general machinery and shipbuilding industries, which the state also promoted” [8].

“The transformation from light to heavy industry came at the behest of the state, in the form of an integrated iron and steel mill, which the state pushed for in the early 1960’s onward. The government played the part of visionary in the case of Korea’s first colossal shipyard, and it was responsible for the Big Push into heavy machinery and chemicals in the 1970s. The government also laid the groundwork for the new wave of import substitution that followed heavy industrialization and that carried the electronics and automobile industries beyond the simple stage of assembly. The government enacted the automobile industry protection law as far back as 1962, as part of its first five-year economic development plan. In conjunction with this decision, it promoted the oil-refining industry. Thus, major milestones in Korea’s industrialisation have been decided by the state” [8].

The government also encouraged the private companies to diversify their business portfolios as a strategy for growth and security during hard times. This explains why for Hyundai Heavy Industries for example there are five main divisions: Shipbuilding, Offshore and Engineering; Industrial Plant and Engineering; Engine and Machinery; Electro Electric Systems; Green Energy; and Construction Equipment. The products produced by the shipbuilding division of Hyundai Heavy Industries Co Ltd include very large crude carriers, tankers, product carriers, chemical tankers, containerships, bulk carriers, OBO carriers, ro-pax ships, ro-ro ships, pure car carriers, LNG carriers, LPG carriers, submarines, destroyers and frigates. The Construction Equipment division also produce excavators, wheel loaders, backhoe loaders, forklift trucks and skid steer loaders that are among the best in the industry. The Offshore and Engineering division also manufacture products such as floating units, mixed platforms, pipelines and subsea facilities, offshore installations. The Industrial Plant and Engineering division manufacture several types of plants such as combined cycle power plant, thermal power plant, oil and gas processing plant, LNG plant, refinery plant, petrochemical plant, process equipment, nuclear component, boiler and heat recovery steam generator which can be used to drive steam turbines.

This aggressive political commitment and sustained state support for the private sector continues to pay off for both Japan and Korea. Today in many homes and in businesses around the world, made in Korea and Japan products are common everywhere. They range from automobiles such as (Toyota, Honda, Mitsubishi, Kia, Hyundai, Ssangyong, Daewoo) to electronics, office equipment and household appliances such as mobile phones, computers, tablets, LCD television, MP3 players, portable media players, cameras, camcorders, memory cards, printers, scanners, photocopiers, microwaves, ovens, washers, refrigerators, air-conditioners, vacuum cleaners and many others.

In 2016 for example, Samsung Electronics the maker of Samsung Galaxy S7, controlled more than 20% of the global smartphone market ahead of Apple, Huawei, OPPO and Vivo. Samsung’s 2016 profit stood at $16 billion. Today, South Korea, a resource poor country, is the capital of the global shipbuilding industry. Its companies such as Hanjin Heavy Industries (founded in 1937), Samsung Heavy Industries (founded in 1972), Hyundai Heavy Industries (founded in 1973), Daewoo Shipbuilding and Marine Engineering (founded in 1978) control more than 50% of the market share of the global shipbuilding industry. These companies produce several high-tech vessels including cruisers, passenger ships, LNG carriers, oil supertankers, LPG carriers, container ships, chemical carriers, drilling-ships for crude oil and natural gas, icebreakers, hovercrafts, as well as frigates, submarines, destroyers, marine police and naval patrol ships. The country produces several high-tech construction and warehouse equipment including excavators, forklifts, and steel loaders. These companies provide direct employment for hundreds of thousands of Koreans as well as millions of jobs worldwide. For example, LG Corporation employs 137,000 workers in Korea and 85,000 overseas.

In 2016, there were 67 Korean companies that made it to the list of the top 2000 global companies compiled by Forbes magazine. These 67 companies with a total assets value of more than $3.4 trillion made a combined profit of more than $75 billion in 2016. These milestones became possible through the support which came directly from the state in the form of not only financial and technological support but also legal, and moral support. Sadly, no Ghanaian company made it to the list.

Even the United States, which strongly advocates for a complete divorce between the state and business, there is huge evidence that private firms constantly receive financial and technological support from the federal and state governments. Boeing, the most important aircraft manufacturing in the world receives billions of dollars in subsidies from the US government annually.

After years of declining production of crude oil and natural gas, the United States has suddenly become one of the top three crude oil producers (alongside Saudi Arabia and Russia) because of the development of fracking technologies funded by the federal government which has enabled previously inaccessible oil and natural gas trapped in shale formation to be pumped out. As Maria Muzzacato points out “despite the mythmaking about how the shale gas boom is being driven by wildcatting entrepreneurs operating independently from the state, the U.S. federal government invested heavily in the technologies that unleashed it. In 1976, the Morgantown Energy Research Centre and the Bureau of Mines launched the Eastern Gas Shales Project, which demonstrated how natural gas could be recovered from shale formations. That same year, the federal government opened the Gas Research Institute, which was funded through a tax on natural gas production and spent billions of dollars on research into shale gas. And the Sandia National Laboratories, part of the U.S. Department of Energy, developed the 3-D geologic mapping technology used for fracking operations” [9]. In other words, without this huge investment in shale gas research by the government the increased oil and natural gas production in the U.S. would not have occurred.

Several companies in the United States including Tesla and Apple have received huge financial and technological support from the federal government. In 2009 for instance, “Tesla Motors which manufacture electric cars, received a guaranteed loan of $465 million from the US government. In the years afterward, Tesla was hugely successful, and the firm repaid its loan in 2013. The year Tesla received its government loan, the company went public at an opening price of $17 a share; that figure jumped to $93 by the time the loan was repaid. Today, shares in Tesla trade above $200. Google, the internet search engine giant, was developed with funding from the National Science Foundation, a U.S. government agency responsible for promoting science and engineering through research programmes and education projects. Similarly, the U.S. government’s Small Business Innovation Research programme, funded Compaq and Intel when they were start-ups” [9]

Additionally, the Small Business Investment Company programme, initiated by the U.S. Small Business Administration, provided crucial loans and grants to early stage companies, including Apple in 1978. In fact, the U.S. government funded most of the features that make the iPhone the most sought-after phone in the world. For example, Siri, the iPhone’s voice-recognising personal assistant, can be traced to the U.S. government: it is a product of a research project undertaken by the Defence Advanced Research Projects Agency (DARPA) part of the U.S. Defence Department. The Internet’s immediate ancestor is the ARPANET, a programme also funded by the U.S. Defence Department in the 1960s. The now hugely popular GPS technology began as a 1970s U.S. military programme called Navstar [9].

The iPhone’s touchscreen technology was created by FingerWorks, a firm co-founded by Prof John Elias of University of Delaware (a publicly funded university) and Wayne Westerman a doctoral candidate of Elias who received grants from National Science Foundation and the CIA. Apple bought FingerWorks in 2005 and incorporated the touchscreen technology in the iPhone, iPad, iPod, MacBook Air, and MacBook Pro [10].

According to Hacker and Pierson the iPhone owes its success to the U.S. government: “…if you look inside that iPhone, you will find that most of its major components (GPS, lithium-ion batteries, cellular technology, touch-screen and LCD displays, Internet connectivity) rest on research that was publicly funded or even directly carried out by government agencies. [Steve] Jobs and his creative team transformed all of this into something uniquely valuable. But they couldn’t have done it without the U.S. government’s huge investments in technical knowledge—knowledge that all companies can use and thus none has a strong incentive to produce. That knowledge is embodied not just in science and technology but also in a skilled work force that government fosters directly and indirectly: through K–12 schools, loans for higher education, and the provision of social supports that encourage beneficial risk taking” [11].

In Europe, the Finnish Innovation Fund, or Sitra, which is operated under the Finnish parliament, was an early investor in Nokia’s transformation from a rubber company into a global cell-phone giant. In November 2016, the British government announced the creation of a £23 billion fund called “National Productivity Investment Fund” to finance technology and science research and help companies increase productivity, and product value and quality.

The private sector in Ghana has been waiting for a golden opportunity similar to the one Japan, Korea, U.S. China, Britain, Germany and other governments provided and continue to provide their private companies. The failure of the political leadership in Ghana to recognise this basic economic fact about the state’s role in economic development and industrialisation has led them to falsely believe that the private sector can do it all by itself. But it is a lie. The private sector needs support in the form of loans, credit guarantees, technology and plants acquisition, training of elite labour force, infrastructure building, marketing of Ghanaian made goods locally and abroad and other inducements. If Akuffo-Addo’s government is serious about his private sector-led model to development and industrialisation then he must do what other countries have done so well to succeed: i.e. aggressive state support for the firms. It is the only way to transform Ghana economically and reduce unemployment in the country.

References

[1] Kohli, A. (2004) ‘State directed development: political power and industrialisation in the global periphery’

[2] Amsden, A. H. (1992) ‘Asia’s Next Giant: South Korea and Late Industrialisation’ Oxford, pp.379

[3] Mariana Mazzucato (2016) ‘The Innovative State Governments Should Make Markets, Not Just Fix Them” Foreign Affairs, Volume 94 Number 1, pp.61-67

[4] Cumings, B. (1984) ‘The origins and development of the Northeast Asian political economy: industrial sectors, product cycles, and political consequences’ International Organisation, Volume 38, Issue 1, pp. 1-40

[5] Helweg, M. D. (2000) ‘Japan: A Rising Sun?’ Foreign Affairs, Volume 79, Number 4, pp.26-39

[6] Helweg, M. D. (2000) ‘Japan: A Rising Sun?’ Foreign Affairs, Volume 79, Number 4, pp.26-39

[7] Inman, B. R. and Burton, D. F. (1990) ‘Technology and Competitiveness: The New Policy Frontier’ Foreign Affairs, Volume 69, Number 2, pp.116-134

[8] Amsden, A. H. (1992) ‘Asia’s Next Giant: South Korea and Late Industrialisation’ see pp.80-81

[9] Mazzucato, M. (2015) ‘The Innovative State: Governments Should Make Markets, Not Just Fix Them’ Foreign Affairs, Volume 94 Number 1, pp.61-67

[10] Westerman, W. (not dated) ‘Wayne Westerman: Multitouch at the University of Delaware’ https://www.eecis.udel.edu/~westerma/About_Wayne.html

[11] Hacker, J. S. and Pierson, P. (2016) ‘Making America Great Again The Case for the Mixed Economy’ Foreign Affairs May/June 2016 Issue

This paper was written by Lord Adusei Aikins

Source: CEBSAR-AFRICA

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