Exchange controls and parallel market economies in Sub-Saharan Africa : focus on Ghana

This paper provides a theoreticael framework to understand the way in which exchange controls modify the behavior of the different agents in the economy, leading to the creation of a parallel economy. It gives the necessary theoretical elements to analyze this parallel economy and provides a simple methodology to obtain relevant quarLtitative information about it. Finally, it elaborates some of the policy implications of the existence of such an economy. The model developed shows that parallel market activities can be explained through the optimizing behavior of exporters and importers. Exporters will keep shifting their exports from official to parallel market channels until the expected marginal benefit in both activities is the same. Import traders will devote resources to rent-seeking activity until the moment in which an additional unit spent in this activity is equal to the savings derived from being able to use official channels instead of the parallel markets. Their combined behavior determines the amount of import and export smuggling, the level of the rent-seeking activity, and the black market exchange rate that is consistent with an equilibrium position where no one has any more incentives to move from their attained position. A methodology has been developed to detect the presence and assess the magnitude of the parallel market economy, as well as to explain its behavior in a quantitative fashion. This methoodology is applied to Ghana, a country in Sub-Saharan Africa, where parallel market activities seem to be widespread and relatively open in the economy. In the first part, a reduced form equation of the black market exchange rate that is derived from the context of our model is estimated for Ghana. There is a definite negative relationship between the real official exchange rate and the black market rate in this case. By letting the real official exchange rate appreciate, the Government of Ghana has been losing an important amount of foreign exchange related to the exports that are now being smuggled out of Ghana instead of going through the official channels. This has meant an important reduction in the amount of foreign exchange allocated to imports and, therefore, an increase in the demand for smuggled imports in the economy. In all, the real appreciation of the official exchange rate seems to be very much related to the increasing importance of parallel market activities in the economy. The sescond part of the methodology focuses on the estimation of the size of the parallel market economy and its evolution in time. The approach emphasizes the fact that there is a demand for currency related to the activities of the parallel market economy. It is based on the methodology developed by Tanzi (1982) to estimate the underground economy in the United States. The yearly estimates of the parallel market economy seem to indicate a very clear trend: the government has been losing control over the economy as more and more transactions are being diverted to the parallel markets. The parallel market economy rose almost steadily to a 32.4 percent of the official GDP in 1982.