A Tale of Two Nations

Case Study: International Trade
A Tale of Two Nations: Ghana and South Korea
In 1970, South Korea and the West African nation of Ghana had similar living standards. South Korea’s
GDP per capita was $260, and Ghana’s was $250. Nearly 50 years later, South Korea boasts the world’s
11th-largest economy and has a GDP per capita of $32,000, while Ghana’s GDP per capita is just $1,786.
South Korea has grown much faster than Ghana over the last half-century. According to a World Bank
study, part of the explanation can be found in the different attitudes of both countries toward
international trade during the second half of the twentieth century.
Ghana gained its independence from Great Britain in 1957. The country’s first President, Kwame
Nkrumah, was an early advocate of pan-African socialism. His policies included high tariffs on many
imported goods to foster self-sufficiency in certain manufactured goods and the adoption of policies
that discouraged exports. The results of these inward-oriented policies were a disaster for Ghana.
Between 1970 and 1983, living standards in Ghana fell by 35 percent.
For example, when Ghana gained independence, it was a major producer and exporter of cocoa. A
combination of favorable climate, good soils, and ready access to world shipping routes made Ghana
an ideal place to produce cocoa. Following independence, the government created a state-controlled
cocoa marketing board. The board set prices for cocoa and was the sole buyer of cocoa in the country.
The board held down the prices it paid farmers for cocoa while selling their produce on the world
market at world prices. Thus, the board might pay farmers 25 cents a pound, and then resell the cocoa
on the world market at 50 cents a pound. In effect, the board was taxing exports by paying cocoa
producers considerably less than they would get for their product on the world market. The proceeds
were then used by the government to fund a policy of nationalization and industrialization to promote
self-sufficiency.
Over time, the price that farmers got paid for their cocoa increased by far less than the rate of inflation
and the price of cocoa on the world market. As returns to growing cocoa declined, farmers started to
switch from producing cocoa to producing subsistence foodstuffs that could be sold profitably within
Ghana. The country’s production of cocoa and its cocoa exports plummeted. At the same time, the
government’s attempts to build an industrial base through investments in state-run enterprises failed
to yield the anticipated gains. By the 1980s, Ghana was a country in economic crisis, with falling exports
and a lack of foreign currency earnings to pay for imports.
In contrast, South Korea embraced a policy of low import barriers on manufactured goods and the
creation of incentives to promote exports. Import tariffs and quotas were progressively reduced from
the late 1950s onward. In the late 1950s, import tariffs stood at 60 percent. By the 1980s, they were
reduced to nearly zero on most manufactured goods. The number of goods subjected to restrictive
import quotas was also reduced from more than 90 percent in the 1950s to zero by the early 1980s.
Export incentives included lower tax rates on export earnings and low-interest financing for
investments in export-oriented industries.
Faced with competition from imports, Korean enterprises had to be efficient to survive. Given the
incentives to engage in export activity, in the 1960s Korean producers took advantage of the country’s
abundant supply of low-cost labor to produce labor-intensive manufactured goods, such as textiles
and clothing for the world market. This led to a shift in Korea away from agriculture, toward
manufacturing. As labor costs rose, Korean enterprises progressively moved into more capital-
intensive goods, including steel, shipbuilding, automobiles, electronics, and telecommunications. In
making these shifts, Korean firms were able to draw upon the country’s well-educated labor force. The
result was export-led growth that dramatically raised living standards for the average Korean.
By the 1990s, Ghana recognized that its economic policies had failed. In 1992, the government started
to liberalize the economy, removing price controls, privatizing state-owned enterprises, instituting
market-based reforms, and opening Ghana up to foreign investors. Over the next decade, more than
300 state-owned enterprises were privatized, and the new, largely privately held economy was
booming, enabling Ghana to achieve one of the highest growth rates in sub-Saharan Africa. The
country was helped by the discovery of oil in 2007. Ghana is now a significant exporter of oil. In
addition, Ghana remains a major producer and exporter of cocoa, as well as gold. Although the state-
run cocoa marketing board still exists, it has been reformed to ensure that farmers get a fair share of
their export earnings. Today, one of its stated functions is to promote exports and protect farmers from
the adverse impact of volatile commodity prices. In short, Ghana has shifted away from its inward-
oriented trade policy.
Sources: “Poor Man’s Burden: A Survey of the Third World,” The Economist, September 23, 1980; J. S.
Mah, “Export Promotion Policies, Export Composition and Economic Development in Korea,” Law and
Development Review, 2011; D. M. Quaye, “Export Promotion Programs and Export Performance,”
Review of International Business and Strategy, 2016; T. Williams, “An African Success Story: Ghana’s
Cocoa Marketing System,” IDS Working Papers, January 2009.

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Case Study: International Trade

A Tale of Two Nations: Ghana and South Korea

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