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Democracy and Development in Ghana: A Look at Eight Years of NDC Rule

Democracy and Development in Ghana: A Look at Eight Years of NDC Rule

By

Edgar Cooke's Entry For The 2004 Moffatt Prize in Economics

INTRODUCTION

After a little over a decade of military rule with its consequent excesses Ghanaians looked forward to multiparty democracy with its touted benefits of material progress, guaranteed universal freedoms and economic freedom.

In 1990 Ghana was under the Provisional National Defence Council (PNDC) military rule and was preparing for multiparty democracy. Elections were held in 1992, eventually won by the National Democratic Council (NDC) an offshoot of the PNDC. The NDC was in power for the eight years (1992-2000). In the 2000 election the New Patriotic Party (NPP) upstaged the incumbent NDC.

This is an assessment of the Ghanaian economic performance and democratic governance under the NDC. The study will focus on the years 1990 - 2002. The paper is divided into three sections, the financial sector, external sector and a general overview of the political economy.

The main focus of the financial sector will be to look at the banks in the country and their performance in the years under review. Interest and inflation rates and their impact on the banks will also be discussed.

Issues bordering on the balance of payments, and exchange rates will be discussed in the section on the external sector.

The final section, the general overview of the political economy will bring issues bordering on the liberalisation of the economy, free press and economic freedom into perspective and whether, over the period under review, the current democratic dispensation has helped us to achieve these political economic goals.

THE FINANCIAL SECTOR IN GHANA

    "The risk averse behavior of banks will magnify an initial negative economic shock, and make recessions deeper and longer. The banks' portfolio of activities can usefully be divided into recruiting and processing new customers; making (and monitoring) loans to existing customers; and buying a safe asset, like Treasury bills. When economic conditions worsen, banks' perceptions of the relative risk of loans increases; and since bad economic conditions are often accompanied by high default rates, banks' net worth decreases, along with their willingness to bear risks. On both accounts, banks respond to bad conditions by shifting their portfolio towards the safer activity: investing in Treasury bills. Equilibrium in the loan markets would be attained only at a higher real interest rate, which would also discourage investment activity. And banks will often be unwilling to raise interest rates, because of fear that higher rates will have the adverse selection effect of chasing away credit-worthy borrowers and adverse incentive effects, inducing them to undertake greater risks" (Stiglitz and Weiss 1981 quoted in Greenwald B. and Stiglitz J. New and old Keynesians in Journal of Economic Perspectives (1993) 7, winter).
The assertion of banks finding a safe haven in Treasury bills in the above quotation is what the banks have resorted to. Their reserves to the Bank of Ghana (BOG) that must be in Treasury bills far exceeds reserve requirements. This will be evident after reviewing the data available.

The banking sector is made up of commercial banks, development banks, merchant banks and rural banks. The first three, which form the vast majority of the banking sector, are seventeen (17) in number. They are Standard Chartered Bank, Barclays Bank, Ghana Commercial Bank, SSB Bank, The Trust Bank, Metropolitan and Allied Bank, International Commercial Bank, Stanbic Bank, UniBank, National Investment bank, Agricultural Development Bank, Prudential Bank, Merchant Bank, Ecobank Ghana, Cal Merchant Bank, First Atlantic Merchant Bank, Amalgamated Bank.

Since the Financial Sector Reforms, which began in 1991, a lot of progress has been made in the financial sector. However, are these reforms adequate?

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