Chapter 4 Outline

The Gains from Trade:
Ghana and South Korea

In 1970, living standards in Ghana and South Korea were roughly comparable. Ghana's 1970 gross national product (GNP) per head was $250, and South Korea's was $260. By 1995, the situation had changed dramatically. South Korea had a GNP per head of $9,700, while Ghana's was only $390, reflecting vastly different economic growth rates. Between 1968 and 1995, the average annual growth rate in Ghana's GNP was under 1.4 percent. In contrast, South Korea achieved a rate of about 9 percent annually between 1968 and 1995.

What explains the difference between Ghana and South Korea? There is no simple answer, but the attitudes of both countries toward international trade could provide part of the explanation. A study by the World Bank suggests that whereas the South Korean government implemented policies that encouraged companies to engage in international trade, the actions of the Ghanaian government discouraged domestic producers from becoming involved in international trade. In 1980, international trade accounted for 18 percent of Ghana's GNP, by value, compared to 74 percent of South Korea's GNP.

Ghana was the first of Great Britain's West African colonies to become independent, in 1957. Its first president, Kwame Nkrumah, influenced the rest of the continent with his theories of pan-African socialism. For Ghana this meant high tariffs on many imports, an import substitution policy aimed at fostering Ghana self-sufficiency in certain manufactured goods, and policies that discouraged Ghana's enterprises from exporting. The results were an unmitigated disaster that transformed one of Africa's most prosperous nations into one of the world's poorest.

The Ghanaian government's involvement in the cocoa trade is an example of how antitrade policies destroyed the Ghanaian economy. Favorable climate, good soils, and ready access to world shipping routes have given Ghana an absolute advantage in cocoa production. It is one of the best places in the world to grow cocoa. As a consequence,

Ghana was the world's largest producer and exporter of cocoa in 1957. Then the government of the newly independent nation created a state-controlled cocoa marketing board. The board was given the authority to fix prices for cocoa and was designated the sole buyer of all cocoa grown in Ghana. The board held down the prices that it paid farmers for cocoa, while selling the cocoa on the world market at world prices. It might buy cocoa from farmers at 25 cents a pound and sell it on the world market for 50 cents a pound. In effect, the board was taxing exports by paying farmers considerably less for their cocoa than it was worth on the world market and putting the difference into government coffers. This money was used to fund the government policy of nationalization and industrialization.

One result of the cocoa policy was that between 1963 and 1979 the price paid by the cocoa marketing board to Ghana's farmers increased by a factor of 6, while the price of consumer goods in Ghana increased by a factor of 22, and the price of cocoa in neighboring countries increased by a factor of 36! In real terms, the Ghanaian farmers were paid less every year for their cocoa by the cocoa marketing board, while the world price increased significantly. Ghana's farmers responded by switching to the production of subsistence foodstuffs that could be sold within Ghana, and the country's production and exports of cocoa plummeted by more than one-third in seven years. At the same time, the Ghanaian government's attempt to build an industrial base through state-run enterprises failed. The resulting drop in Ghana's export earnings plunged the country into recession, led to a decline in its foreign currency reserves, and limited its ability to pay for necessary imports.

Ghana's inward-oriented trade policy resulted in a shift of resources away from the profitable activity of growing cocoa-where it had an absolute advantage in the world economy-and toward growing subsistence foods and manufacturing, where it had no advantage. This inefficient use of the country's resources severely damaged the Ghanaian economy and held back the country's economic development.

In contrast, consider the trade policy adopted by the South Korean government. The World Bank has characterized the trade policy of South Korea as "strongly outward-oriented."Unlike in Ghana, the policies of the South Korean government emphasized low import barriers on manufactured goods (but not on agricultural goods) and incentives to encourage South Korean firms to export. Beginning in the late 1950s, the South Korean government progressively reduced import tariffs from an average of 60 percent of the price of an imported good to less than 20 percent in the mid-1980s. On most nonagricultural goods, import tariffs were reduced to zero. In addition, the number of imported goods subject to quotas was reduced from more than 90 percent in the late 1950s to zero by the early 1980s. Over the same period, South Korea progressively reduced the subsidies given to South Korean exporters from an average of 80 percent of their sales price in the late 1950s to an average of less than 20 percent in 1965, and down to zero in 1984. With the exception of the agricultural sector (where a strong farm lobby maintained import controls), South Korea moved progressively toward a free trade stance.

South Korea's outward-looking orientation has been rewarded by a dramatic transformation of its economy. Initially, South Korea's resources shifted from agriculture to the manufacture of labor-intensive goods, especially textiles, clothing, and footwear. An abundant supply of cheap but well-educated labor helped form the basis of South Korea's comparative advantage in labor-intensive manufacturing. More recently, as labor costs have risen, the growth areas in the economy have been in the more capital-intensive manufacturing sectors, especially motor vehicles, semiconductors, consumer electronics, and advanced materials. As a result of these developments, South Korea has gone through some dramatic changes. In the late 1950s, 77 percent of the country's employment was in the agricultural sector; today the figure is less than 20 percent. Over the same period, the percentage of its GNP accounted for by manufacturing increased from less than 10 percent to more than 30 percent, while the overall GNP grew at an annual rate of more than 9 percent.

http:www.worldnet-international.com/ghinfo.htm

Source: "Poor Man's Burden: A Survey of the Third World," The Economist, September 23, 1989; World Bank, World Development Report, 1997 (Oxford: Oxford University Press, 1997) Tables 1 and 2; and J. Wha-Lee, International Trade, Distortions, and Long-Run Economic Growth," International Monetary Fund Staff Papers 40, No. 2, (June 1993), p. 299.