My friend Henok Mehari sent me a link to this story from the BBC about the discovery of substantial oil reserves off the Ghanaian coast. He wanted to know whether I thought this was a good thing or a bad thing for Ghana.
It’s an excellent question. I’m not sure anyone has the answer.
There’s a theory in development economics called “the resource curse“. It’s an observation that countries with substantial natural resources often develop more slowly than countries with scarce resources. There’s several reasons why oil revenues might be a bad thing:
The “Dutch Disease” – revenue from natural resources increases wages and the valuation of a country’s currency, which makes it harder for industries to be competitive on international markets.
Unpredictable revenue – All commodities are subject to international price fluctuations. Unless you’ve got a monopoly on a commodity – as the South Africans did with diamonds for a few decades – the price may shift radically, making your economy subject to sharp peaks and valleys.
Failure to develop human resources – Countries that are rich in oil sometimes fail to spend enough money on education and training, assuming that the country will make money from resources rather than from the industrial or service sectors.
Corruption – There’s a lot of money in the oil industry, and much of that money makes it into the pockets of corrupt government officials. This is the fault both of the government officials and of the companies that elect to pay bribes.
Conflict – Countries with mineral reserves tend to have a great deal of conflict. Sometimes that conflict is ethnic and regional; other times it’s international, as with the conflict over minerals and timber in the eastern DRC.
There’s was a brilliant story broadcast by This American Life a few weeks ago about Ed Ugel, who bought lottery jackpots from winners, the vast majority of whom discover that winning the lottery leads to massive financial problems. Basically, when someone tells you you’re a millionaire, you start acting like a millionaire, even if lottery prizes are paid in small payments over twenty years.
It’s easy to imagine how this could happen to an economy.
Oil-rich African states haven’t exactly had an easy time of it. Nigeria has proven reserves of 30 billion barrels – vastly more than the 600 million discovered in Ghana – but the wealth from pumping 1.1 million a day hasn’t done nearly enough to alleviate poverty in the nation, especially in the regions where the oil is produced. Oil has funded a kleptocracy in Equatorial Guinea that has suceeded in enriching the ruling family while creating one of the most economically unequal societies in the world.
Looking at the problems of oil in Sub-Saharan Africa, the World Bank attempted to fund creation of a pipeline from newly discovered oilfields in Chad to Cameroon with strong constraints designed to ensure that oil funds would go towards education and economic development. When the power of Chadian president Idris Déby was threatened, he changed the petroleum law to eliminate a “future generations” fund and increase spending from oil monies on the military.
So will the same thing happen in Ghana? There’s reasons to think the Ghanaian government will be able to avoid some of the traps other nations have fallen into. Ghana is in excellent economic shape in comparison to its neighbors. It’s one of the very few nations in West Africa on pace to meet its millenium development goals and to halve poverty by 2015 – the percentage of Ghanaians living in poverty has dropped from 52% in 1992 to 35% by 2003. Economic growth has averaged 4.5% a year since 1983, and has been at or above 6% the last three years. This growth has had some connection to natural resources and commidities, including gold and cocoa, but has also included growth in tourism and service outsourcing. A stable, investment-friendly government has encouraged many diaspora Ghanaians to return home and start businesses. Friends from around the continent report a sense of excitement in visiting Accra and Kumasi, and a sense that the country is going through an economic revolution. At least one Nigerian friend is looking into acquiring Ghanaian citizenship…
Most economists believe that good governance has helped Ghana grow so rapidly the past few years. That good governance could help Ghana steer clear of some of the perils of the resource curse. Ghana has a long tradition of multiethnic society, with members of more than 40 tribes living together peacefully – if the benefits of oil wealth are distributed equitably, there’s a much better chance that the country will benefit, not suffer from this new development.
The best news about Ghana’s oil may be that there’s not a huge amount of it, and that it’s going to take a long time to get to it – Tullow Oil, which holds drilling rights to the field, tells the Ghanaian government that it could be seven years before the oil is flowing. And while the fields discovered are “one of the biggest oil discoveries in Africa in recent times”, it’s not going to turn Ghana into a producer on the scale of Nigeria. My personal hope is that Kufuor and his successor will be so successful in transforming Ghanaian economy independent of oil money that the natural inclination when oilfields come online will to be to maintain the same steady course.
Henok offers his thoughts on the issue as well.
Ethan,
I just found your wonderful blog. I will be tuning in often.
I’m leaving this comment in hopes you might be willing to join our campaign to reform US food aid. As you know, the US is the only major food aid donor that still is not moving away from in-kind food donations, which are a form of agricultural dumping that can undercut prices for poor farmers. We are hoping to change that, and add flexibility to the US program that would allow cash to be provided to purchase food from developing world farmers.
The campaign, included a short video and a web page, is here:
http://www.justforeignpolicy.org/issues/foodaid.html
My sources tell me they have had a standing committee of experts studying the impact of oil in several countries, and they are mapping out a strategy that would replicate the Norwegian example and avoid the Nigerian and Equitorial Guinea cases. Of course it is all on paper. Your story about Ghanaian expatriates moving back is true though. A buddy of mine who used to work at Citicorp as a Vice President resigned to become Assistant Managing Director of a new investment company in Ghana. And only last week a classmate of mine who set up his own law firm in Florida told me he is in the process of folding up his practice in order to set up a waste management company back in the hood.
AMEN! BTW, Ethan you will be pleased to note that as of 2006, the official poverty head count is 28.5%. Ghana will reach the MDG target next year!!!!!
The 2008 elections will be a turning point for the country, there is an impressive field to choose from. The oil fortunes of the country (positive or negative) will hinge on that!
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hear, hear! I like Kwesi A’s sources’ indicating we’ll go the Norwegian way, though…
“oh no!” is the first thing that crossed my mind when I read the news :-)
in one of these rare moments when the Egypt has an interesting model for it’s relatively tiny but still substantial oil reserves (or used to they are changing the rules).
a large portion of our oil production is sold locally at a fixed very low profit rate in order to help industry and reduce the costs of freight and transportation.
the system worked very well for 3 decades. most recently the increasing demand for hard currency has pushed the government to sell some oil and natural gas (not a popular decision since Israel is the customer).
the biggest problem at the moment though is an increasing number of private cars and the government insisting on subsidizing their oil at the cost of industry and freight. you see with the political situation being unstable the Mubarak regime does not want to anger the middle class, so people’s right to drive private cars and get cheap oil is not to be tampered with, even if it means all forms of public transport get to be more expensive, even if it means energy for everything from small street corner workshops to big factories suffer.
but the original plan was good and IMO Ghana should keep most of that oil for it’s own local needs.
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In a country where corruption is as deeply entrenched as it is in Ghana, expect looting on a never-before-seen scale to begin ASAP. May the soul of peaceful Ghana rest in peace.
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my friend,lets give thanks to God.As i have read in the above comments. with money and technology a country outreaches it economic goal. even before the discovery of this, more to come oil. smiles have swollen my mind. when the jatropha [SEED was prononced]capable to produce bio diesel. if the country can start with intense cultivation of this plant and mount AN automobile assm, plant for diesel cars, and more investment on[TRANING, PARTS INVENTIONS] then we shall be flying as the president said 600mil would be investment capital and the 40 years jatopha existence would be our gains into the new centry bioagrifuel prospects.
Thank God that Ghana has now discover some large quantities of oil and believe God that there is going to be more of this discoveries in the near years to come, because Ghana is a bless countries and the center of the world. Don’t forget we have the Greenwich Meridian Line and the Equater meeting in Ghana, that is why Ghana is the center of the world.
About the oil, why do people always say they are afraid because it might be a curse instead of a blessing.
Look, we have oil producing countries like Canada, Norway and the rest, who have been producing for years but have no problems. Why don’t people compare Ghana to such countries but always refer to Nigeria and other trouble nations when talk of Ghana oil discovery. God have a purpose why He in His wisdom has bless Ghana with this resource.
And I am sure as Ghana has been the leader in freedom fighting, democracy and now the leading economic nation in West Africa and some how Africa, She is also going leader nations in Africa, how to have oil and making it be a bless not a curse.
As we are going to vote is coming December, let vote for the people who can manager this oil resources well to the benefit of our nation.
God bless our homeland Ghana and make our nation great and strong.
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Oil in Ghana… Just as with the gold that was in the nation before, the oil will be mined by foreign companies and its benefits enjoyed more by the foreigner. EXPLOITATION
Jah has blessed us nada bad will happen GOD BLESS GHANA
Oh my gosh!!!!! was my reaction when i first heard that Tullow had discovered oil in Ghana.
Alot of negative as well as postive thoughts run to mind.Economist and analysts should start comparing Ghana’s oil find and what it will potentially do for the country, to countries like Norway etc instead of to Nigeria. Then again, i do not blame them. Alot of African countries and even other nations who have been blessed with natural resources are pooorer than the ones with no resources!!!!
Looking more on the bright side, we (Ghana) have been the most peaceful nation, in terms of politics. I think Ghanaians have learned from past experiences and are still learning from past experiences.
Hence, i urge all Ghanaians everywhere to pray that our president and his successors will put this phenomenon resource to benefit the country and its people. Ghana is and will be an example to alot of African countries and presidents if this discovery is put to good use.
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