Public policy and foreign direct investment : the effects of public policy on foreign direct investment in the mining industry in Ghana

PUBLIC POLICY AND FOREIGN DIRECT INVESTMENT: THE EFFECTS OF PUBLIC POLICY ON FOREIGN DIRECT INVESTMENT IN THE MINING INDUSTRY IN GHANA Purpose: The purpose of this thesis is to examine the effects of macroeconomic incentive structure, namely, exchange rate policy, customs tariffs, and a fiscal regime (taxes and royalties) (that assures the government of a high revenue but silmultaneously meets the requirements of multinational mining companies cashflows and for reasonable rate of return on their equity investments), on output, and capital investments in the mining industry . To achieve the goals set for the thesis, the thesis proceeds along the following path: Chapter two deals with the theoretical framework Here I take up the controversial theories of development, namely, modernization, dependency and dependent development theories. Development policy making have been shaped by the rise and fall of different theoretical schools. While modernization theories focus on internal obstacles to development, dependency analysts ignore critical domestic variables, but dependent development emphasising the central role of the strong state, seeks to capture the internal distortions and external vulnerabilities of developing countries. I argue against Modernization and Dependency theories and take a more comprehensive, albeit somewhat eclectic approach, using an analytic framework advanced elsewhere by Peter Evans, 1979, Hagen Koo, 1984). This approach assumes that development policy in a Third World country is shaped by the interplay of state, classes and the World capitalist system.The focus of analysis is not the individual factors but the interaction among these three sets of variables. If we do not examine these variables in their dynamic interaction, I believe; we cannot delineate the specific ways in which each set of variables influences the development and the policy choice process in Ghana. Dependency mechanisms, for example, cannot be specified until we have investigated the ways in which external forces are linked to the internal class structure. Similarly, class relations in a peripheral nation like Ghana cannot be adequately uderstood unless we consider the influence of international capital and core states. Finally, the role of the state in economic development cannot be fully understood without it being situated in the contexts of class structure and world economic system. Thus, I believe a comprehensive framework of the political economy of Third World development must integrate these three sets of variables and comprehend the process of development as an outcome of their interaction. Using this framework I investigate the nature of the state, social classes and external linkages in Ghana and examine how interactions among these structural forces have shaped economic policy and its effects on investment in the country since independence. Indeed, the study of the Ghanaian political economy as a dialectic unity of internal and external factors would help avoid static analysis. The development discussion will serve to motivate my concern with the particular features of foreign direct investment in the Ghanaian mining industry. In Chapter three, I try to present a comprehensive picture of the Ghanaian economic structure and the mining industry. I outline the history of the mining companies and accounted for the decline and the closure of the old mines. Chapter four, I examine the general policy framework for attracting foreign investment to Ghana with emphasis on legal and institutional arrangements, economic and financial incentives, with special reference to the mining industry. The Ghana government, since 1983 have adopted policies and political strategies which have been translated into a practically applied economic policy for the mining sector with the objectives of maintaining government revenues over time, immediate revenue collection, allocation of investment, integration of the mineral sector in the total economy and the conservation of the mineral resources. The major policy concerns of the government, the instruments it has used to achieve these objectives and is the subject of this chapter. With the factual and the methodological background from the previous chapters, it is then possible to proceed to chapter five with a more detailed analysis of the emperical data of the effects of public policy on foreign direct investment in the mining industry. I use the Ashanti Goldfields Corporation as an empirical case of expansion and capital flows as a result of government mining policy. The last chapter concludes that government policies especially investment policies have been very successful in attracting foreign investments to the mining industry. In the 1930s there were over 30 gold producing mines in the country, and production peaked around 920 000 ounces in 1960. By 1983, there were just four gold mines producing 236 000 ounces. Recent policies have reversed that sad decline. There are now over 70 Ghanaian and 20 foreign companies engaged in gold exploration in the country. Gold production for instance, is expected to rise over the coming years from its current level of 900 000 ounces, to between 1.5 and 2 million tonnes, as Ashanti Goldfields (AGC) alone crosses the one million threshold in 1995, with total output significantly boosted by its investment in the Ashanti Mine Expansion Project