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.