Democracy And Foreign Direct Investment (FDI) in Ghana

Introduction

After 63 years of independence, Ghana, formerly known as The Gold Coast, has become one of the most attractive countries in Africa in terms of Foreign Direct investment (FDI). The present state of Ghana is a result of its sustainable democratic journey, aiming to build a strong path to attract investors as much as possible.
Originally, gold and cocoa were the main products that attracted investors into the country. Now, after over two decades of stability and steady democracy, irrespective of the government in power, the country has put in place reliable institutions to improve and sustain its business environment. Also, each successive government has considerably enhanced the legal framework to protect and encourage investments. It is evident that there is a strong tie between democracy and FDI.
The Cambridge Academic Content Dictionary defines democracy as the belief in freedom and equality between people, or a system of government based on this belief, in which power is either held by elected representatives or directly by the people themselves. This definition makes sense because, freedom and equality are the key elements underpinning trust which is paramount to FDI.
FDI is understood as an investment involving a long-term relationship which reflects a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise), in an enterprise resident in that other economy other than that of the foreign direct investor. Thus, the correlation between democracy and FDI is obvious and historical.

THE HISTORICAL LINK BETWEEN DEMOCRACY AND FDI IN GHANA

Ghana’s democratic transition did not occur at a single point in time, but rather over a span of years following its initial democratic opening in 1992. In fact, as Military rule had given way to an emerging democracy in early 1990, the Republic of Ghana, inspired by western common law countries, particularly UK and US, welcomed the multiparty system in 1992. Therefore, in the last 20 -30 years, Ghana has been run by the governments of two major political parties i.e. the National Democratic Congress (NDC) and the current running party New Patriotic Party (NPP)
According to the 2019 Economist Intelligence Unit (EIU) report, Ghana ranks the 6th most democratic country in Africa. This international recognition comes after improvements in the political system characterized by the organization of fair elections which impacted significantly the level of investments in Ghana. According to The Global Economy, since 1992, Ghana FDI, percent of GDP has constantly increased, moving from 0.35 to 4.56 in 2018, after pointing 9.52 in 2008, which has been the highest value so far. Taking a trip down memory lane, the privatization of Ashanti Goldfields Company (AGC) was an important part of Ghana’s neo-liberal reforms. Privatization is explicitly intended to alter the balance of power between the public and private sectors. The process revealed much about the relationship between the state and the country’s business community.
A close examination of the process confirms widely held perceptions of the Rawlings’ government and its reform process as highly state-driven and subject to the personal idiosyncrasies of the country’s then president. While the outcome of these processes was sometimes counterintuitive, overall, the privatization of AGC is likely to have shifted power out of the hands of the state and into the hands of an international group of shareholders ( Antoinette Handley, Business, Government, and the Privatization of the Ashanti Goldfields Company in Ghana).

In the same vein, the policies introduced by the reigning government (NPP) which took office in January 2001 helped stabilize the economy, which amongst others was a restructuring of debt under the heavily Indebted Poor Countries Initiative (HIPC) which took place at that time to strengthen Ghana’s economy for the future with reliance on improved democracy.

A STRONG DEMOCRACY FOR MORE FOREIGN DIRECT INVESTMENTS

Empirical studies that examine the impact of democracy on FDIs assume that the relationship between democracy and FDI is the same for resource exporting and non-resource exporting countries. Even though FDI inflows into Ghana decreased from 3 million USD to 2.3 million USD between 2018 and 2019 as stipulated in the United Nation’s Conference on Trade and Development’s (UNCTAD) World Investment Report 2020, Ghana still remains one of the most democratic countries in Africa, sustained by a large and inexpensive labor force, a substantial agricultural base, numerous natural resources and stable institutions which contribute obviously to attract FDI.
Political stability, steady growth and constant Government actions in favor of investors like reduction of corporate tax to 8%, establishment of a Free Trade Zone (FTZ), tax reduction for any investments in key areas of the economy and relief taxes for young entrepreneurs under 35 years, are the small picture of measures highlighting policymakers concern about more investments especially from foreigners. Nevertheless, these efforts must be sustained by an accurate legal framework.

FDI LEGAL FRAMEWORK ENHANCEMENT THROUGH POLITICAL CHANGE IN GHANA

Since the inception of the 1992 Constitution, Ghana has made considerable legislative efforts to improve the business environment in order to attract investors globally. With the launching of the Economic Reform Program in 1983, Ghana became a large recipient of official development assistance. Again, the privatization of AGC was an important step towards Ghana’s neo liberal reforms.
In addition, the economy and the welfare of the population appear paramount in Ghana’s political endeavors so far. Therefore, aspirants to presidential office are essentially focused on these. In the last held elections, the manifestos of one of the major political parties mentioned above, were essentially focused on campaign slogans such as the “Golden Era of Business” and “One District one Factory(1D1F)”. In the pursuit of a contemporary trend, these key slogans made a positive impact in the minds of citizens which contributed to the reigning government’s victory.
However, the milestone of all these projects is the inflow of foreign capital and investment. Accordingly, political stability, investment safety regulations through strong institutions, fair and enforceable laws are crucial to attract maximum foreign direct investments. In that way, successive, Ghanaian governments have been putting in place pro-business laws and institutions. The first and the most important of these laws remains the Ghana Investment Promotion Council Act (Act 865), 2013 which established the Ghana Investment Promotion Center aims at making Ghana the first destination of choice for investments in Africa.
GIPC has increased considerably the numbers of foreign investors to Ghana. Besides GIPC showing a strong business attitude, the 1995 Government enacted the Free Zones Act, an Act to enable the establishment of free zones for the promotion of economic development, to provide for the regulation of activities in free zones and for related matters. This Act established the Free Zones Authority which oversees the sector.
Furthermore, after over five decades of operating the now repealed Companies Law of 1963 (Act 179), Ghana has finally passed a new Companies Act,2019(Act 992). The long-expected Companies Act of 2019 is now in force and among the major reforms brought about by the new Act is the establishment of the Office of the Registrar of Companies which is an autonomous government body with perpetual succession. It is set up to register and regulate businesses and corporate bodies operating in Ghana and it has similar functions to the United Kingdom’s Companies House.
Outside the field of business and to consolidate its Akwaaba(welcome) vision for investors, the country has strengthened the Court system through an integrated Judicial Reform with the establishment of the Commercial Division of the High Court. This comes after decades of political turmoil that left behind a disrupted court system.
Internationally, Ghana has ratified the Convention on Settlement of Investment Disputes between States and Nationals of Other States (ICSID) after creating a Commercial Court. Furthermore, as a member of the World Trade Organization (WTO), Ghana is a signatory to the WTO investment rules, which are the Agreement on Trade-Related Investment Measures (TRIMS), Agreement on Trade Related Intellectual Property Rights (TRIPS) and the General Agreement on Trade in Services (GATS).

Conclusion

Democracy and FDI in Ghana have coexisted since 1992. This has been facilitated through smooth political transitions which has brought confidence to foreign investors. Consequently, beyond its proper national legal framework, Ghana has concluded bilateral investment treaties with several countries including the United States, United Kingdom, Netherlands, France and Germany to protect and enhance the number of investments from these countries.
However, there is still more to do in terms of improvement to attract FDI. Apart from the 1992 Constitution which is considered as a strategic instrument which needs to be updated to meet current and emerging needs, additional measures and regulations are required to ensure that the country derives the most benefit from FDIs. In particular, what is needed is more online transactions in the nature of dematerializing tax, legal and business registration processes in order to reduce time especially to avoid human contact in this Covid-19 era , and an eradication of bribery and corruption within the investment system.

Jean Bernard Simeu is a french native from Cameroon and a Paralegal with CQ legal and Consulting. He has keen interest in foreign direct investment, arbitration and Government contracts.

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