¡Ü Project objectives

 The Knowledge Sharing Program(KSP) for Ghana aims at promoting Ghana's sustainable economic growth by assisting the Ghanaian government to build systematic policies and appropriate administrative bases necessary for the development of SMEs in Ghana. In spite of recent robust economic growth there has been displeasure at Ghana¡¯s historical economic stagnation. Five decades ago, Ghana was more economically developed than countries such as Korea, Mauritius, Malaysia, Kenya or Botswana. It is in the light of such historical underperformance and comparisons that Ghana has now stepped up its pursuits to joining the ranks of a middle income economy by 2015. Ghana¡¯s strategic economic focus has therefore shifted from macroeconomic stability to private sector development as the engine for attaining sustained economic growth. SMEs are at the core of private sector vitality and hence it is necessary to reinvigorate them to act as the backbone to Ghana¡¯s economy.

¡Ü Expected Benefits of the Project

 If successfully implemented by adopting the policy measures and institutional reforms recommended here, it is expected that the project would have three main effects namely:

¡Ü Produce a rapid growth in SME start-ups within the first two years of implementation;

¡Ü Significantly expand the market access and FDI for target SMEs sectors within 8 years of commencement of implementation of the policy measures;

¡Ü Sufficiently enhance the scale and competitiveness of SMEs to prepare them for global competition by the 10th year of implementation.

¡Ü Team Assessment and Prospects for the Ghanaian SMEs

 SMEs in Ghana constitute more than 90% of business units and provide employment to more than 60% of employed labor force. This places SMEs squarely at the core of any overall economic policy for development. In order for SMEs to operate optimally, they need to be rooted in a conducive environment. An analysis of the business circumstances that surround SMEs in Ghana however suggests that there are numerous obstacles to SME development.

Some of these include:

¡Ü Low level of entrepreneurship and managerial skills;

¡Ü Low level of technological capacity;

¡Ü Low level of international competitiveness in labor productivity and capitalization;

¡Ü Low market accessibility;

¡Ü Lack of vertical linkages and undeveloped clusters;

¡Ü Poor access to financing and

¡Ü A rigid labor market and low level of technical skills.

 These impediments prevent SMEs from attaining agility, flexibility, networking capacities and economies of scale, all of which would contribute in enhancing SME competitiveness in Ghana. In addition, Ghana suffers from two key economic obstacles which need to be addressed through vitalization of entrepreneurship and the industrial base. These are a poor and shrinking manufacturing base as well as chronic deficits in its current account. Sustained growth will depend on Ghana¡¯s success in reversing these drawbacks.

¡Ü Policy Recommendations

 A comprehensive SME development strategy comprises three components. First an SME strategy involves a carefully planned sectoral and industrial support strategy. Second, it involves key policy actions in fostering a better SME ecosystem (regulatory environment, capital and technology and human resource development). Third, SME development requires a phased implementation sequence that infuses policy actions within a planned time frame. The ultimate goal is to establish a strong national foundation upon which SMEs can grow to become the backbone to sustained economic growth.

<Component One: Overall Strategic Framework for SME Development>

 In a country embodied with chronic obstacles that hinder the development of SMEs, usual policies may not suffice for preparation of a sound foundation for SME development. With special reference to the Korean experience of SME development, this chapter proposes a comprehensive policy framework to build the foundation for the development of SMEs. The policies for supporting the SMEs may be pursued by a step-wise approach in the following way:

¡Ü Setting-up of target industries based on possession of comparative advantages, as well as future potentials of that industry. A list of candidate target industries is presented;

¡Ü Strategic inducement of foreign capital in the target industries;

¡Ü Strategic support for blue chip SMEs in the target industries for a given period of time with clear sunset clauses. The tools for preferential incentives could include, tax benefits, financial subsidization, market guarantees, subsidization in R&D, preferential credit allocation and guarantees, export awards and commendations and so on;

¡Ü National drive to foster technical man power in full consideration of labor demand in the market;

¡Ü Withdrawal of state intervention and complete opening to the global competition through deregulation and abolition of protection measures.

< Component Two: Recommended Policy Actions>

 This strategy should be buttressed with actions for improving the business environment in the four areas of business environment through policy recommendations. In fostering the regulatory environment, the following recommendations have been proposed:

¡Ü Revise and update the Companies Code of 1963 to reflect the changing business environment and to support the private sector development especially the SME sector;

¡Ü Introduce a negative licensing system;

¡Ü Exempt SMEs from labor/employment regulations;

¡Ü Create ¡°land banks¡± where land owners who may wish to offer their land for leasing or renting on a long term basis, can register their details.

¡Ü The Government of Ghana (GoG) should continuously place its efforts to reform administrative regulations in order to convert informal firms into the formal sector.

 In fostering access to Capital and Technology for SMEs the following recommendations have been proposed:

¡Ü Ghana should lower the entry barriers for GSE listing;

¡Ü Ghana should take actions for market transparency and investor protection by the reinforcement of announcement by listed companies, the tight monitoring role of regulators, and the enhancement of self-regulation by the GSE as a Self Regulation Organization (SRO);

¡Ü Ghana must consider a separate trading session for large firms and venture firms to facilitate financing from securities market for technology based firms whose performance may be poorer than that of large firms;

¡Ü The standards of entry barrier and the requirements of delisting for technology based firms must be applied differently to large firms or traditional SMEs;

¡Ü Ghana should make an effort to bring along talented financial specialists capable of risk management in preparation for market and credit risk due to a sudden drop of financial asset price;

¡Ü Ghana should raise its government fund and make efforts to expand the exit market for promoting the venture capital market;

¡Ü Ghana should consider establishing a credit guarantee system for traditional and technology-based SMEs in order to stimulate bank loans by sharing credit risk between bank and the government;

¡Ü Ghana should endeavor to provide policy fund transparently to SMEs so as to increase credit accessibility for the market failure area (innovative and technology-based SMEs);

¡Ü Ghana should expand the lending capability of bank in Ghana by lowering government borrowing from domestic banks as well as stabilizing the interest and inflation rates;

¡Ü Ghana should lower the Reserve Requirement Ratio for banks in order to increase the pool of capital available for lending to borrowers;

¡Ü Ghana should increase the credit guarantee accessibility by vitalizing the existing funds and expanding the opportunities for shared risk management between banks, the government and SME borrowers;

¡Ü Ghana should provide efficient policy funding systems by introducing specific financing opportunities for certain target economic activities. This complements private financial markets;

¡Ü Ghana should introduce national credit bureau (NCB) in order to increase the public information systems for credit-worthiness about business. This increases predictability in the credit acquisition process;

¡Ü Ghana should make relationship banking of rural and community banks (RCB) possible where banks and borrowers build long term relationships that foster trust and good background knowledge on credit capabilities of potential borrowers.

 In fostering Human Resource Development and Administrative Institutions for SME development the following recommendations have been made;

¡Ü Embark on a radical national campaign for eradication of illiteracy;

¡Ü Create highly specialized and optimally funded ¡®model¡¯ schools for technical training;

¡Ü Establish national institutes of research and human resource development for gold, cocoa and bio-fuel industry;

¡Ü Create a governmental agency under the Office of the President, or an inter-ministerial level control tower responsible for coordinating the governmental efforts of fostering SMEs;

¡Ü Enact a SME support Law;

¡Ü Lead and monitor SME development by the president;

¡Ü Enhance interactions between business organizations and the government in order to deal promptly with challenges and opportunities.

<Component Three: Action Steps and Phased Implementation>

 Building the foundation of SMEs goes through three main implementation phases, as the figure below shows: (1) Preparation of foundation stage; (2) The take-off stage; and (3) The sustained growth stage. It is estimated that it takes two years for the preparation of foundation and seven years for the take-off stage, which means that about 10 years are needed to prepare a sound base for SME development. Within each phase the following actions should be completed:

¡Ü Foundation Stage: It requires selection of priority sectors, resolute deregulation, and strategic inducement of foreign capital. As an outcome of these policies, entrepreneurship will revive, and start-ups and FDI will increase;

¡Ü Take-off Stage: Strategic support to SMEs based on the principle of ¡°selection and concentration¡± should be emphatically done as well as a national drive for fostering technical man power at a later stage of this phase. As an outcome, there should be a rapid increase in start-ups and FDI during this period;

¡Ü Growth Stage: State intervention to support SMEs will be withdrawn, and SMEs will be left to free markets with minimal intervention. By this time, domestic SMEs should withstand global competition.

 The following figure summarizes the strategic SME policy as well as the gradual development phases and the actions to be accomplished during each of these phases.