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Warding Off the Resource Curse: How Ghana’s Political Institutions Help Manage Oil Wealth

Warding Off the Resource Curse: How Ghana’s Political Institutions Help Manage Oil Wealth

As global energy prices begin to recover from a four year slump, oil majors are shifting their focus towards oil and gas deposits in sub Saharan Africa. The African continent is rich in energy resources, and extractive industries play a prominent role in several African economies. At the same time, however, major energy producers including Nigeria and Angola suffer from underdevelopment, conflict, and varying degrees of corrupt governance. This is likely due to the resource curse, which describes how resource wealth undermines political, economic, and social growth. With strong empirical and real-world evidence to support the existence of the resource curse, observers may be worried about the growing oil industry in Ghana, a country often lauded for its healthy democracy. Yet Ghana continues to sidestep this expectation of instability, and its experience with oil highlights how strong political institutions can channel resource wealth into development funds, turning a curse into a blessing.

The Resource Curse: Too much of a good thing

Existing literature identifies several paths through which resource wealth undermines economic growth. When commodities account for a significant portion of exports, global commodity prices drive currency value, undermining other export bases. Fluctuating global prices also reduce the potential for long-term macroeconomic planning, as constantly shifting revenue bases undermine budgeting. Finally, resource rich states face much weaker incentives to raise productivity, reducing investment in education. Tellingly, Nigeria, Africa’s largest oil producer, continues to struggle with development and poverty reduction even as oil exports reached $34 billion in 2017.

Moreover, resource wealth appears to undermine good governance. Leaders in oil rich states often depend on patronage networks for support, weakening representative rule. These governments break the social contract; without the need to secure public support, and with it, tax revenue, they forego spending on public goods. Since Chad developed its domestic gas market with international funding in the early 2000s, notorious autocrat Idris Debby has bolstered spending on those security services which are personally loyal to him, while reducing his dependence on popular support for continued power.

Despite the strong body of evidence supporting the resource curse, countries like Botswana, Chile, Malaysia, and Norway stand apart from Nigeria, Venezuela, and Algeria. While both groupings hold significant resource wealth, the former have used their wealth to substantially reduce poverty and increase output as a direct result; the latter grouping struggles with corruption, poverty, and political violence. This disconnect points towards a new academic discussion regarding the role of political institutions in mediating economic outcomes, popularized by Acemoglu and Robinson’s Why Nations Fail. Acemoglu and Robinson argue that political and economic institutions exert feedback on one another, and are either extractive, in that they benefit the ruling elite at the expense of the public, or inclusive, in that they have low barriers to participation and provide collective benefits. Even within democratic and inclusive governments, specific types of political formation affect the management of resource wealth. Political institutions which promote political cooperation, distribute revenue to the local level, and maintain accountable institutions can ward off the resource curse, as seen in the case of Ghana.

Ghanaian Petropolitics

In 2007, the Ghanaian government announced the discovery of the Jubilee oil field in the Gulf of Guinea. With an estimated capacity of two to five billions barrels of oil, oil exports will generate approximately one billion USD in annual revenue for the Ghanaian government until 2032. The initial discovery resulted in tempered enthusiasm. Politicians expounded the benefits of oil, promising high rates of growth and increased government spending. Members of civil society, such as communal groups, community-based organisations (CBOs), national CSOs, and networks and coalitions, warned of the potential risks for corruption and environmental degradation. Given the literature on the resource curse, Ghana stands to lose significantly if governmental institutions fail to effectively manage resource wealth, with potential implications for economic and political stability.

As a model of post colonial political and economic success, Ghana is a stable democracy with competitive elections and a vibrant civil society. The two main parties, the New Patriotic Party (NPP) and the National Democratic Congress (NDC) hold similar levels of support, and the electoral process is bolstered by strong norms of accountability, as ineffective politicians are often voted out. The military is civilian controlled and independent media is prominent. To match its healthy political profile, Ghana also benefits from a robust economy, despite its dependence on commodity exports and agriculture for revenue. Ghana’s profile makes it a darling of the international business community, with FDI experiencing strong growth over the last three decades.

Ghana rapidly developed a complex legal framework to govern oil wealth in response to the 2007 Jubilee field discovery. Civil society groups, with the case of neighboring Nigeria in mind, put heavy pressure on both parties to develop a transparent governing body to oversee the management of oil export revenue, resulting in the creation of the Petroleum Revenue Management Act (PRMA). Under the PRMA, 70% of oil export revenue is allocated to the annual budget, where it is distributed into categorical grants across the four “pillars” of development identified by the PRMA: amortization of existing loans, infrastructure, agricultural modernization, and capacity building. The remaining 30% of funds are distributed between two sovereign wealth funds, the Ghana Stabilization Fund (GSF), which receives 21%, and services debts and hedges against price fluctuations, and the Ghana Heritage Fund (GHF), which uses the remaining 9% of funds to invest in economic diversification and maintain good credit standing. However, as Ifediora points out, the existence of sovereign wealth funds alone does not guarantee accountable resource wealth management. Instead, countries must avoid volatile political party competition, decentralize governance, and ensure strong mechanisms of accountability within and outside of government.

The first factor, party competition, determines the degree to which politicians in resource-rich states prioritize funding on long-term development versus partisan goals. In countries where fierce political competition , parties focus on delivering short term benefits to core constituents, undermining much-needed investments in infrastructure and modernization. Mohan and Asante characterize Ghana’s two-party system as a “competitive clientelist state,” as free and fair elections contrast with parties’ use of political office to dispense patronage. Moreover, the Ghanaian constitution concentrates power within the incumbent party, which turns elections into winner-take-all affairs. This system may exacerbate the risk of the resource curse. Given the current state of politics, it’s likely that the NPP and NDC would use oil revenue to spend on influential voting blocs, notably public servants, without making the investments needed to sustain development. While the PRMA should keep politician’s hands out of the money purse, both parties have raided special funds for mineral wealth in the past. In addition, the winner-take-all system undermines macroeconomic planning. When a new party comes into power, key civil service positions experience high turnover. With opposing ideological views of the management of oil wealth, the NDC and NPP will likely politicize key government organs involved in the process, undermining economic planning.

Another area of risk lies in the lack of decentralization of political power in Ghana. Government centralization determines the ability for resource wealth to be effectively distributed to sub-national units. Fiscal federalism is designed to channel wealth to local institutions, which are often more effective than the central government at spurring local development. Ghana’s unitary political structure is designed to centralize governance and weaken Metropolitan Municipal and District Assemblies (MMDAs), as MMDA’s are given little discretionary authority and are often controlled by nominees appointed by the ruling party in Accra. Oil wealth risks further centralizing political authority. As a small number of actors in a political system gain access to increased revenue, the risk of corruption increases, and the incentives for the government to pursue decentralization decrease. In the case of Nigeria, politicians in Lagos derailed early efforts at widespread fiscal decentralization in order to secure control over oil wealth. In the long term, even if Ghanaian politicians pursue development with their newfound funds, programs will likely be top-down and centrally driven, instead of the locally tailored development initiatives proven to be the most effective way to achieve poverty reduction.

The third and final area of focus is accountability. While volatile political party competition and centralized government increase the risk of a resource curse, a strong civil society can use accountability mechanisms to mitigate the worst outcomes. When oil was discovered in 2007, Ghanaian civil society responded with several demands. In March 2010, political and environmental activists established the Civil Society Platform on Oil and Gas to educate voters about their rights and expectations with an oil-exporting government, and to create linkages between politicians, oil companies, and communities affected by oil extraction. The Platform rallied the necessary political support to pass the PRMA and create the Public Interest and Accountability Committee (PIAC), which is a thirteen-member independent body which audits government oil-wealth expenditure. In response to attempts by political parties to secure control over the PIAC during the drafting process, the Platform used social media and rallies to ensure PIAC’s integrity. As a result, 90% of all Platform suggestions were incorporated into the final versions of the PRMA and PIAC. Yet, in terms of their operational capacity, the PIAC remains underfunded and the PRMA is occasionally flouted. The strength of these institutions doesn’t come from their formal capacity, which is weakened by top-down pressure, but from their bottom-up linkages to civil society, which can engage in activism on behalf of these bodies when political parties mismanage oil wealth.

A case for limited optimism

In summary, Ghana will experience nominal benefits from oil wealth. Due to the presence of sovereign wealth funds and civil society pressure, the worst effects of the resource curse on Ghana’s political economy will be avoided. On the economic front, Ghana will successfully avoid revenue instability and investment crowd out. Its diversified commodity exports and GSF serve as cushions, dampening the negative effects of price volatility. Investment crowdout is a low risk, since the GHF is committed to reinvesting into the agricultural sector, which is typically the first victim of currency valuation in oil-exporting nations. Ghana should invest more heavily into commodities with inelastic prices to bolster existing efforts within the GHF to keep the cedi’s value stable. On the other hand, the emergence of oil will require careful management of debt. The PRMA allows the government to use oil revenue as collateral for international loans, despite the best efforts of the Platform to get the provision removed. Given parties’ propensity to spend heavily before elections, and the ever shifting price of oil, the NDC and NPP risk raising the debt level. Since the discovery of oil, external debt has ballooned by 200% to $14.8 billion. On the political front, Ghana will see more volatile electoral politics, although the worst risks of corruption will be avoided thanks to the efforts of civil society groups. Incumbent’s access to oil revenue will make patronage more convenient and favor short-term spending. As elections become more polarized, independent institutions like the military and judiciary will be subjected to increased political pressures, already a growing issue in the status-quo. Centralized decision making reduces the chance that oil wealth will reduce poverty at the local level. If Ghana does move towards decentralization, the state should work with local civil society to create accountable institutions at the subnational level to ensure that it doesn’t end up exporting corruption to local governments.

Ghana represents an effective application of good governance to resource management.  Despite the volatile structure of politics at Ghana’s core, the worst effects of the resource curse will be avoided, thanks to a combination of strong civil society and a few highly effective institutions. While a wholesale accountable government is the best possible scenario for a resource-rich state, it is not the only way to achieve accountable resource management. World Bank research highlights how the creation of just a few highly-effective institutions, or “pockets of effectiveness” can mimic these effects on a smaller scale. These islands of good governance can channel the positive effects of inclusive political systems without requiring serious governmental reform. In Ghana’s case, these institutions include the independent agencies set up by the PRMA, supported by civil society. Ghana therefore supports the growing body of economic literature which highlights the important role of institutions in managing sustainable growth. Policymakers should use Ghana as an example of how to implement effective reform to staunch the risk of a resource curse by supporting civil society and few strong institutions. While Ghana’s party system and unitary politics entail small risks, realistic development programs should focus on high-impact support to a few effective institutions instead of seeking wholesale reform of a political economy.

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