Ghana & S Korea

INTERNATIONAL BUSINESS:
CASE: A Tale of Two Nations: Ghana and South Korea
In 1970, South Korea and the West African nation of Ghana had similar living standards.
South Korea’s GDP per capita was $260, and Ghana’s was $250. Nearly 50 years later, South
Korea boasts the world’s 11th-largest economy and has a GDP per capita of $32,000, while
Ghana’s GDP per capita is just $1,786.
Clearly, South Korea has grown much faster than Ghana over the last half century. According
to a World Bank study, part of the explanation can be found in the different attitudes of both
countries toward international trade during the second half of the twentieth century.
Ghana gained its independence from Great Britain in 1957. The country’s first President,
Kwame Nkrumah, was an early advocate of pan-African socialism. His policies included high
tariffs on many imported goods in an effort to foster self-sufficiency in certain manufactured
goods, and the adoption of policies that discouraged exports. The results of these inward-
oriented policies were a disaster for Ghana. Between 1970 and 1983, living standards in
Ghana fell by 35 percent.
For example, when Ghana gained independence, it was a major producer and exporter of
cocoa. A combination of favourable climate, good soils, and ready access to world shipping
routes made Ghana an ideal place to produce cocoa. Following independence, the
government created a state-controlled cocoa marketing board. The board set prices for
cocoa and was the sole buyer of cocoa in the country. The board held down the prices it paid
farmers for cocoa, while selling their produce on the world market at world prices. Thus, the
board might pay farmers 25 cents a pound, and then resell the cocoa on the world market at
50 cents a pound. In effect, the board was taxing exports by paying cocoa producers
considerably less than they would get for their product on the world market. The proceeds
were then used by the government to fund a policy of nationalization and industrialization
to promote self-sufficiency.
Over time, the price that farmers got paid for their cocoa increased by far less than the rate
of inflation and the price of cocoa on the world market. As returns to growing cocoa
declined, farmers started to switch from producing cocoa to producing subsistence
foodstuffs that could be sold profitably within Ghana. The country’s production of cocoa and
its cocoa exports plummeted. At the same time, the government’s attempts to build an
industrial base through investments in state-run enterprises failed to yield the anticipated
gains. By the 1980s, Ghana was a country in economic crisis, with falling exports and a lack
of foreign currency earnings to pay for imports.
In contrast, South Korea embraced a policy of low import barriers on manufactured goods
and the creation of incentives to promote exports. Import tariffs and quotas were
progressively reduced from the late 1950s onward. In the late 1950s, import tariffs stood at
60 percent. By the 1980s, they were reduced to nearly zero on most manufactured goods.
The number of goods subjected to restrictive import quotas was also reduced from more
than 90 percent in the 1950s to zero by the early 1980s. Export incentives included lower tax
rates on export earnings and low-interest financing for investments in export-oriented
industries.
Faced with competition from imports, Korean enterprises had to be efficient to survive.
Given the incentives to engage in export activity, in the 1960s Korean producers took
advantage of the country’s abundant supply of low-cost labour to produce labour-intensive
manufactured goods, such as textiles and clothing for the world market. This led to a shift in
Korea away from agriculture, toward manufacturing. As labour costs rose, Korean
enterprises progressively moved into more capital-intensive goods, including steel,
shipbuilding, automobiles, electronics, and telecommunications. In making these shifts,
Korean firms were able to draw upon the country’s well-educated labour force. The result
was export-led growth that dramatically raised living standards for the average Korean.
By the 1990s, Ghana recognized that its economic policies had failed. In 1992, the
government started to liberalize the economy, removing price controls, privatizing state-
owned enterprises, instituting market-based reforms, and opening Ghana up to foreign
investors. Over the next decade, more than 300 state-owned enterprises were privatized,
and the new, largely privately held economy was booming, enabling Ghana to achieve one of
the highest growth rates in sub-Saharan Africa. The country was helped by the discovery of
oil in 2007. Ghana is now a significant exporter of oil. In addition, Ghana remains a major
producer and exporter of cocoa, as well as gold. Although the state-run cocoa marketing
board still exists, it has been reformed to ensure that farmers get a fair share of their export
earnings. Today, one of its stated functions is to promote exports and protect farmers from
the adverse impact of volatile commodity prices. In short, Ghana has shifted away from its
inward-oriented trade policy.
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Ghana & S Korea

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INTERNATIONAL BUSINESS:

CASE: A Tale of Two Nations: Ghana and South Korea

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