Can Ghana Avoid the Resource Curse? The Implications of Oil on Democracy and Economic Prosperity

Author: Cordelia Owusu, 2018.

“With the discovery of oil, Ghana is now presented with an important question: will its new-found oil reserves prove to be a blessing or a curse? The discovery of the oil reserves has given some the hope of economic prosperity, and others great apprehension”

Image from Wikimedia Commons under Public Domain. 

Ghana is regarded as a model for democracy in sub-Saharan Africa, and although there has been some political turmoil in the country, Ghana has not suffered from the civil wars that have plagued most African nations. Ghana has been able to consolidate its democracy by holding six separate elections where the exchange of power from one political party to another was peaceful (Moss & Young 2). In 2000 and 2008, the incumbent president accepted defeat and peacefully transitioned power to the opposition party (Brechenmacher). Additionally, during a highly contested election in 2016, Ghana proved once again that it was working to improve its democracy. For the first time in the country’s history, a sitting president was voted out of office (Cheeseman 92). Ghana’s numerous peaceful elections have not gone unnoticed; in the 2017 report of the Freedom in the World, which measures how countries conduct free and fair elections, Ghana received a score of 83 on a scale of 0-100. Therefore, according to this report, Ghana was categorized as a “free” country (“Freedom in the World Report”).

In 2007, oil was discovered in the Jubilee field in the Gulf of Guinea in the Western region of the country (Gyimah-Boadi 94). It is projected that the oil reserves contain approximately 4.5 billion barrels, which is modest in comparison to other national estimates in sub-Saharan Africa, with Nigeria at 37.2 billion barrels and Angola at 10 billion barrels (Gyimah-Boadi 94-5). Ghana’s oil reserves, which are located off-shore, are operated by the Anglo-Irish based company Tullow Oil and the Texas-based Kosmos Energy (Gyimah-Boadi 94). With the discovery of oil, Ghana is now presented with an important question: will its new-found oil reserves prove to be a blessing or a curse? The discovery of the oil reserves has given some the hope of economic prosperity, and others great apprehension. Considering the effect oil has had on the governance in Nigeria, Ghana’s fears could not be displaced. This paper will argue that the resource curse can be mitigated through strengthening Ghana’s democracy, empowering functioning institutions, and creating incentives for civil society organizations (CSOs) to promote increased transparency.

Case Studies of the Resource Curse: Nigeria and Angola

The fear that the discovery of oil could affect the peaceful life and democracy in Ghana raises important issues about democracy and economic prosperity in oil-rich countries. Many scholars have pointed to the relationship between poor governance and resource-rich countries. According to Hazel McFerson, the term “resource curse” was coined by Alan Gelb and associates, who did research in oil rich countries to assess the effects of oil on developing countries (336). Gelb concluded that the benefits associated with having natural resources have not advanced some countries, making them perform worse economically than their resource-poor counterparts (McFerson 336). For example, Nigeria during the 1970s, had increases in oil revenues that undermined the other exports, including peanuts and cocoa (Collier 39). An over-reliance on oil revenues caused a decrease in agricultural exports, hurting farmers’ economic livelihood (Collier 39). Paul Collier argues that in addition to the resource curse, “Dutch disease” occurs when exports cause a country’s currency to rise in value against other currencies (39). This results in other exports becoming uncompetitive (Collier 39). Collier argues that “Dutch disease can damage the growth process by crowding out export activities that have the potential to grow rapidly” (40). This analysis shows that when resources in a country are not well managed, this can worsen economic and democratic development in the nation.

Angola serves as another example of a resource-rich country that has failed to capitalize on its natural resources because of poor allocation. Jedrzej George Frynas and Geoffrey Wood argue that oil resources played a major role in prolonging and shaping the contours of the Angolan war “from funding the war to eroding the legitimacy of the state” (589). They explain that Angola failed to reach a well-developed democratic nation because the wealth from oil offered patronage for political networks and allowed the ruling elite to become wealthy without paying much attention to the needs of the general public (Fynas and Wood 596). Indeed, it appears that natural resources play a key role in the bad governance and corruption of many resource-rich African nations. Is Ghana’s democracy going to be resilient enough to survive the danger of the resource curse?

The Role of Civil Society

Researchers have shown that good governance and functioning institutions can help mitigate the adverse effects of natural resources. Democracy needs to be strengthened in order to prevent and reverse the negative consequences of the resource curse. Ghana has had a very stable democracy, which has produced a two-party political system (Gyimah-Boadi 95). The discovery of oil fortunately arrived under a democratic regime and during a time of greater awareness and understanding of the resource curse. In 2007, former president John Kufuor proclaimed that Ghana was going to excel vis-a-vis other resource-rich countries and learn from their mistakes. He affirmed, “even without oil, we are doing so well…with oil as a shot in the arm, we are going to fly” (“An African Tiger”). The optimism that Ghanaians shared about the discovery of oil meant that the country was ready to work together to strengthen its institutions in order to avoid the resource curse.

The presence of a strong CSOs gave birth to the Petroleum Revenue Management Act (PRMA), which was passed in 2011. This legislation was enacted to improve transparency and accountability in the oil industry (Gyimah-Boadi, 98). Based on Ghana’s advances in democracy, civil society’s participation in the creation of legislation to govern oil control was encouraged. Traditional leaders, clergy and the media formed a “citizen’s summit” and proposed transparency and accountability measures in the area of revenue management (Gyimah-Boadi 98). Another significant outcome of the PRMA was the procedures put in place to control how the revenues generated from the oil were distributed. The demands from the citizen’s summit included clear procedures for the handling of oil receipts between the Central Bank and the government, as well as a mandatory transfer of 30 percent of revenues into a stabilizing and future savings fund (Gyimah-Boadi 99). The PRMA also regulated that each fiscal year, up to 70 percent of revenue from oil should be transferred to the annual budget. The remaining 30 percent is to be split into two funds—the Ghana Stabilization Fund and the Ghana Heritage Fund (Buchberger 7). The Stabilization Fund was set up to “cushion against price shocks caused by the high volatility of the oil prices or by unexpected drops in the production of oil” (Buchberger 7). The Heritage Fund, on the other hand, is purposed “to serve future generations after the resources have been depleted” (Buchberger 7). These demands by citizens clearly showcase a step in the right direction towards ensuring government accountability and transparency. Civil society organizations, however, cannot function in the absence of the freedom of press. Gyimah-Boadi and Prempeh explain that “Ghanaians now have unprecedented access to uncensored news, commentary, and opinions from multiple sources, including international news outlets…[this] provides vast opportunities for public input into national decision making” (96). The media has aided the ability of CSOs to contribute to the advancement of the nascent oil company. Although civil society participation is not sufficient in providing accurate political representation and the protection of the rights of citizens, the development of PRMA demonstrates that the Ghanaian government is already making efforts to steer away from the resource curse and the impacts it has had on many other African countries.

Ghana’s Political Landscape and Its Effects on the Oil Economy

Ghana’s political system is characterized by a winner-takes-all system, which can pose a problem for the oil economy (Gyimah-Boadi 101). The winner-takes-all dynamic in Ghanaian politics ensures that decisions are heavily politicized and partisanship is the order of the day. Decisions are also made along party lines whereby the parties aim to serve the interest of their supporters. According to Christoph Buchberger, policies enacted by the government are “often political in nature, with only the potential benefits for the next election in mind” (11). As a result of these shortcomings, clientelism and patronage are at the heart of Ghanaian politics.

Moreover, as Gyimah-Boadi and Prempeh explain, the Ghanaian Constitution gives significant power and control to the presidency. These two authors explain that the party that wins control of the presidency and parliament, in essence, wins nearly absolute power (101). Buchberger also asserts that the president has extensive power, which is displayed in the president’s right to appoint judges and other officials to important senior positions (10). This was the case when the Jubilee Field was founded in 2007, and the ruling party at the time, the NPP (New Patriotic Party), spearheaded the project and implemented policies such as the setting aside of funds for future generations. However, when the NDC (National Democratic Congress) came to power in 2008, they reversed most of NPP’s work and went after contracts that would benefit the party (Gyimah-Boadi 105).

The Importance of Strengthened Institutions to Address the Resource Curse

Institutions also play a major role in how the resource curse of oil can be avoided. Weak institutions coupled with bad governance can be detrimental to governing and managing natural resources. Holding elections, which is a key element of a democracy, has also become a vehicle for public servants to misuse funds for personal gain (Siakwah 129). Pius Siakwah argues that when oil money is “injected into the economy, incumbent governments have more incentive to perpetuate their stay in power, while opposition parties also have interest to gain political power” (130). In essence, oil revenue can pose a challenge to the democratic process if the motivation for winning an election rests on control of oil money.

Furthermore, clientelism and patronage play a significant role in elections and facilitate many incidences of corruption. Collier sees these structures as poverty traps that undermine institutions (45). Patronage occurs in the form of party allegiance when individuals are awarded certain public service offices solely based on party affiliation (Buchberger 11). For Collier, “patronage breaks all the rules of how public resources should be managed…to finance patronage the government needs to embezzle public money out of the budget and into slush funds” (45). Indeed, during the 2012 election, the NDC, which was in power at the time, gave out gifts and money to its supporters (Cheeseman 95). Many people who supported the opposition party accused the NDC of using oil revenues to finance these extravagant gifts, including laptop computers. In his study, Siakwah found that reckless spending during elections has a negative impact on the local currency. Siakwah concluded that the “local currency depreciates because social services expenditure are used to consolidate clientele relations” (8).

Transparency and accountability also pose a challenge to Ghana’s democracy. Transparency International’s Corruption Perception Index, which examines corruption in the public sector, shows that in 2016, Ghana scored a 43 and was ranked 70^th; while in 2017, it scored a 40 and was ranked 81^st. Therefore, it is evident that corruption has been on the rise in Ghana. Ultimately, the country’s weaker institutions have allowed for corruption to foster (Buchberger 12). For example, parliament does not release public information pertaining to agreements in the oil industry (Siakwah 30). In addition, oil companies are also hesitant to release information regarding their operations (Siakwah 30). If the government lacks transparency, it risks losing the trust of its electorate. This was the case during the 2016 election, when the incumbent was defeated because the party took the vote of the people for granted. Nic Cheeseman explains that the electorate is willing to vote out a poorly performing government when they believe that their economic conditions are not improving (93). One of the recent primary objectives of the NPP is to root out corruption in all sectors. In January 2018, the government appointed a special prosecutor to investigate corruption charges. In order to ensure that there were no biases and this did not turn into a witch hunt, the special prosecutor was vetted by both the majority and minority parties in parliament (Citifm). President Nana Akufo-Addo stated, “[W]e expect the special prosecutor to discharge his duties vigorously with courage without fear or favour, ill will or malice, in accordance with the rule of law” (Citifm). Therefore, the government is making strides to gain back public confidence and attend to the needs of the electorate.

In Cape Three Points, the region where the oil was discovered, the community expressed great discontent with the handling of the oil revenues. The community believed that the discovery of oil would bring about increased prosperity in the region. Instead, the population faced high unemployment.  Fishing, which was a main livelihood in the area, was no longer profitable, as communities could not fish close to the offshore drilling site (Andrews 63). One resident lamented that the community expected that once the oil business commenced, the government would provide them with resources such as roads, electricity and health care (Andrews 63). Instead, the government provided no such services to this region.

The concern of this citizen shows the vulnerable position of Ghanaians, especially on issues relating to economic prosperity derived from oil revenues. According to a 2012 Afrobarometer survey, which measured public attitudes towards democracy, governance, the economy and leadership, most Ghanaians believed that the nation’s most pressing economic problem was unemployment (Afrobarometer vi). This discontent from citizens can prove to be volatile to the democracy. When communities are not able to voice their frustrations or take action to express their grievances, their continued frustration can cause a disruption to the social fabric of the society (Buchberger 9). Foreigners comprise the majority of the workforce in the oil industry, partly because most Ghanaians do not have the necessary training for these positions (Buchberger 9). As such, a long-term development plan, which effectively addresses the training needs of Ghanaians to benefit from these ventures, needs to be established (Buchberger 9). William Easterly demonstrated that, while a higher flow of foreign direct investment (FDI) can raise economic growth of poor countries (47), local communities must also feel connected to the projects and reap some benefits. The government should adopt a bottom-up approach, whereby the local community is integrated in these ventures.

Furthermore, institutions are an important part of the process in improving participation in the global economy. Economist Dani Rodrik states that “participatory democracy helps build better institutions that lay the foundation for sustainable economic growth” (166). According to Nathan Andrews, there is evidence that natural resources can help accelerate economic development when combined with the accumulation of knowledge and innovation (57). Ghana can escape the resource curse if the government follows the advice that institutional reforms should not be predicated on the assumption that there is a single set of institutions worth emulating (Rodrik 162). Leaders should strategize and come up with ideas that are conducive to what Ghanaians would like their market based economy to look like (Rodrik 162).

One way the government is mediating and steering the country clear from the negative effects of the resource curse is by setting aside funds for the future. When revenues from oil began to flow in, the government decided to create two funds that would set aside some of the revenue from oil production for future use. An example of how this initiative has worked is through the implementation of the Free Secondary High School initiative. In 2017, as part of a campaign promise, the NPP announced that it would fund this initiative with the Heritage Fund (“myjoyonline”). In this case, the government is allocating oil revenues towards projects that benefit the country as a whole. If these institutions are established, they can serve the interest of all citizens.

“Prevention is Better than Cure” – Steps to Mitigate the Resource Curse

The phenomenon of “rentier states” can be used to explain why solely depending on oil resources can be detrimental to the Ghanaian economy. McFerson explains that countries become rentier states when the government depends heavily on revenues from mineral resources extracted by foreign companies instead of relying on taxes or on production of other resources (344). As rentier states have little need for taxation, this reduces the government’s accountability to their citizens and fosters a system of corruption (McFerson 344). In short, “no taxation means no representation” (McFerson 344). The lack of representation of members of society in rentier states can be explained by the government’s failure to invest in development projects that create jobs and provide basic amenities, such as education. Another problem with relying solely on oil revenues is that the state budget becomes vulnerable due to the high volatility of oil prices (Buchberger 4). Falling oil prices can force countries to default on their debt, which in turn, contributes to a vicious cycle of economic instability (Buchberger 4).

Todd Moss and Lauren Young assert that rentier states can result in “resource rents [which] are ‘unearned income’ that reduce the state’s need for normal taxes, thereby diminishing its accountability to its citizen and making it dependent on a small group of oil companies” (7).  The World Bank notes that the Ghanaian government collects about 20-25 percent of GDP in taxes per year (Moss & Young 17). If this tax is taken away and the government begins to rely solely on taxes from oil revenues, it will undercut transparency and accountability that Ghana has worked towards. However, most importantly, “oil money” will profit just the elite, leaving many citizens in destitute conditions. Moss and Young develop a series of strategies that can help Ghana. They suggest that a direct cash distribution of oil revenues to citizens can be a potential way to protect Ghana’s political and economic gains from an oil curse (Moss & Young 1). For these authors, direct cash can allocate oil revenues in a more equitable, transparent and efficient way (Moss & Young 3). Moss and Young go on to explain that “handing cash directly to citizens and forcing the tax authorities to find ways to tax some of it back is not a cost but rather a benefit” (14). This approach can have a lasting impact on the living standards of citizens. This strategy can also provide Ghana with “a way to explicitly leverage oil dollars to do the opposite of the resource curse: to strengthen rather than destroy, the nation’s emerging social contract” (Moss & Young 15).

Conclusion

Indeed, the discovery of oil will serve as a test to whether Ghana has been able to consolidate its democracy and withstand the “curse” that comes with natural resource wealth. Many African nations that are resource-rich tend to fall into the trap of the resource curse because of bad governance, lack of transparency and accountability, and an absence of active participation by CSOs. The Ghanaian government is well aware of the resource curse and, in order to avoid it, is invested in strengthening its democracy through engaging CSOs and strategizing how to use this revenue to benefit society. As such, the curse or blessing of oil in Ghana rests on the effectiveness of government policy in redistributing oil wealth to benefit society as a whole, especially in poor and marginalized communities. The strengthening and inclusion of civil society can further help Ghanaians escape the resource curse. Although the inclusion and participation of CSOs has helped monitor the activities and funds generated by the oil industry, the voices and concerns of local communities, which are immediately affected, should not be displaced. Lastly, although Ghana is promoting norms and electing leaders democratically, there needs to be a strengthening of the checks and balances in the parliamentary system in order to reduce corruption and the mismanagement of resources.

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