Ghana: Protectionism at Whose expense?

The Ghana Investment Protection Council, GIPC, recently revived a regulation that requires foreign-owned businesses based in Ghana to raise at least $300,000 before they are allowed to operate. These measures are imposed to shield indigenous business owners from foreign competitors.
This is hinged on the belief that there is a need to curtail the influx of neighbouring countries‘ nationals from crowding out local business interests and creating job loss for Ghanaians.

Although the argument that the policy is designed to witch-hunt the nationals of any country has been debunked by the Ghanaian authorities, industry watchers and experts are not convinced. What is evident in view of the investment pattern is that the regulation is directly aimed at local entrepreneurs from West African countries who want to invest in Ghana and not against Chinese or Indian entrepreneurs whose chunk of foreign investments‘ loans are guaranteed by their governments.

Thus, raising the specified amount won’t be a problem for the Chinese and the Indians. By and large the policy will have more direct bearing on small and medium, scale businesses owned by nationals of West African countries as they do not enjoy the protection offered by their Chinese and Indian counterparts.

The GIPC merely re-enacts the age-old mercantilist argument which seeks to protect local industry. This is premised on the belief that intense foreign participation in the economy has the tendency of disrupting domestic social stability. Local industry protection has been part of industrialization policy in West African countries over the years. Rather than having the protected industries maturing, they are either producing inferior goods or unable to compete. Fundamentally protected local industries will have little incentive to increase productivity.

Regulation of this nature, anchored on the fear of job loss and foreign domination, are usually mistaken and amounted to do-it-yourself-economics. Whether this policy is directly aimed at Nigerians who have recently seen business opportunities in Ghana or not is immaterial. It is, however, important to access the implication of the policy on Ghana itself and regional trade, given the fact that the reason behind the establishment of the Economic Community of West African States is primarily to foster regional integration as well as economic cooperation.

Granted that the policy will enable indigenous businesses in Ghana to have much leeway to out-compete some foreign-owned company, the possible short-term gain dwarfs the danger and economic loss it would attract in the medium- to long-term. First, raising the bar for business to be set upon Ghana has the potential to reverse Ghana’s recent economic growth. Secondly, there is the tendency that the regulation will stifle growth and undermine economic development.

Lastly, there is the possibility that there might be industry capture in the future, as those in other sectors might be tempted to prevail on officials to roll out regulations to further stifle competition. It is recognized that competition, when allowed to flourish, brings about creativity, thereby enhancing products quality and efficient services to consumers. When competition is slaughtered, lethargy and stagnancy will ensue.

Ghana and its other neighboring countries have been trading partners. Aside from being within the same region, individuals within the region were used to trade with one another before colonialism. It is not by accident that the trade volume between Nigeria and Ghana in recent years has quadrupled. In 2008, the volume of export trade between Nigeria and Ghana was $525million. Out of this figure, Nigeria earned $89 million on oil exports to Ghana, while the value of Ghana’s exports to Nigeria was $25 million. Nigerians have investments of nearly $6 billion in Ghana.

Such a huge capital injection has boosted jobs, enhanced wealth-creation and bolstered taxable revenue.

What is likely to happen is that the effects of this policy will transcend the borders of Ghana when it is fully mature and ultimately further shrink the intra-trade within West Africa and movement of people within the region. Already, mobility within the ECOWAS sub region is low. Only three per cent of West Africans live in other West African countries. According to the Africa Economic Outlook report 2010, only 10 per cent of the continent total exports are traded within the region. This is against the60 per cent and 56 per cent volume of intra-trade within the Association of South East Asian Nations (ASEAN) and North American Free Trade Agreement (NAFTA).

The proponents of the regulation think that migrant entrepreneurs takeaway local jobs. This is absolutely incorrect. Migrant entrepreneurs create more jobs than they take away. The fear of job loss and displacement of locally owned businesses in Ghana are similar to the ones expressed by the anti-globalists. Many years down the lane, the reality has shown that instead of the job loss, globalization has indeed created more jobs.

A key fact that framers of this policy probably did not take into account is that migrant entrepreneurs take out less of what they brought into any economy. The balance between what they brought in and what they are able to take out adds to the growth of the local economy. This is one of the benefits of foreign investment. In addition, new ideas and techniques cross borders with foreign capitals. Even if investors are able to divest or remit all their capital due to certain circumstances, they will not be able to take away other non-physical assets like knowledge, skills and technical know-how.

It is a conundrum why a country that seeks and spends fortune to attract foreign investment should be hostile and encourage unfair treatment and give undue advantages to local businesses at the detriment of investments from firms and individuals from other West African countries. Early this year, one of the telecom operators in Nigeria, Globacom, indicated its intention to pull out of Ghana on account of the hostile business environment. The telecom giant complains of vandalization of its masts and the inability of security agencies to protect its property.

Also early last year, the Bank of Ghana issued a directive that all foreign-owned banks should raise their capital base to GH¢60million by the close of that year. Indigenous banks were given three more years to meet the new capital base. While such actions might invite retaliatory measures from other West African countries, an industry being shielded might not achieve the required growth and ultimately drive down its potential.

There are reports that a foreign actor who wants to feature in any movie produced in Ghana must pay the mandatory sum of $1000, all in the name of protecting local actors and raising Ghana’s Hollywood to enviable heights.

All over the world, the entertainment sector survives on creativity, talent and innovation. Since government cannot legislate talent and creativity, this new requirement will not only tax talent but also reduce the vibrancy in the movie industry. The fee will discourage non-Ghanaian actors from taking up roles in movies produced in Ghana and Ghanaian producers who needed actors elsewhere will have to pay more to get them.

Those who bear the brunt are ordinary Ghanaians who would have to pay more for movies, thereby freezing resources that can be used elsewhere.

What cannot be disputed is that West African countries share common history and problems. That informed the creation of a platform on which solutions to challenges facing them could be collectively tackled by the founding fathers of the sub- region. The current policy no doubt raises a red flag about Ghana as preferred investment destination. It consequently risks retaliatory measures as citizens affected by the policy might pressure their respective governments to impose more punitive measures targeting Ghanaians business interests. It is not too late for this regulation to be reversed.

Thompson Ayodele and Olusegun Sotola are with the Initiative for Public Policy Analysis, a
Public policy think-tank based in Lagos.