Double, Double Oil and Trouble

How will oil influence Ghana's development?
How will oil influence Ghana’s development?

In 2011, Ghanaian citizens viewed the discovery of offshore oil as a game changer for Ghana. The oil would provide an economic boost for the developing country and improve overall social welfare through increased revenues, jobs, and infrastructure projects. Yet, oil-led development is notorious for stagnating economic growth and harming overall development. This is known as the “Resource Curse”. Almost every African country attempting oil-led development falls under the curse. Take your pick of examples. There’s Angola, or Equatorial Guinea, or Nigeria. The World Bank even tried to break the curse in Chad and failed. Africa has yet to see a successful execution of oil-led development.

What factors contribute to successful use of oil as a means of development? Terry Karl attributes Norway’s success to strong governance and a diverse economy. Countries relying on oil for development need strong governance to avoid corruption and a misallocation of resources. You only have to look three countries over from Ghana to see an example of this. Nigeria is Africa’s largest exporter of oil, yet the general public sees almost none of the money. A diverse economy is necessary because of the fluctuating value of oil. If a country relies solely on oil its economy will directly fall and rise as the value of oil falls and rises. Look no further than Angola or Equatorial Guinea where oil and gas make up 98% and 95% of exports, respectively. Neither country has experienced economic stability or the developmental benefits of increased revenues.

Ghana has the politics tobreak the curse
Ghana has the politics to break the curse

The development community still remains optimistic with Ghana. Many look to Ghana as an example of effective democracy in Africa. Ghana ranked 63rd on the Corruption Perception Index, the 6th highest of all African countries. Elections run smoothly and, more often than not, citizens turn to the justice system instead of violence to resolve conflicts. Ghana extends its good governance to its use of oil revenues. It passed the Revenue Management Act in 2011 as a new approach to oil-led development. The Act promises government transparency in its use of the oil money, with 30% of revenues going to savings and 70% towards development projects. It establishes oversight, regulations, and benchmarks for revenue distribution that the government is accountable to present to the public.

Compared to its counterparts, however, Ghana is in a better economic position to benefit from oil-led development. At the time of discovery, Ghana had a relatively diverse economy. Its largest export was gold, at 46%, followed by cocoa products at more than 30%. Ghana also had trading partners throughout Asia, Africa, Europe and the Americas. Since oil production began Ghana’s exports have grown from $7.5 billion in 2008 to $13.5 billion in 2012, but only $500 million is from oil. Ghana’s economic diversity means oil is a form of extra revenue instead of the basis of the country’s economy.

Ghana's exports in 2008
Ghana’s exports in 2008

But Ghanaian citizens have yet to benefit from the oil revenues. The government made a promise to use the oil revenues for infrastructure improvements. But citizens have not seen the benefits of that investment. Is this another case of the resource curse? The government claims the reason citizens have not directly benefited is thanks to lower-than-expected revenues. Current oil production rates are half of what analysts expected but Ghana is working to improve its production capacity and could see $1 billion in revenues in the future. Perhaps this slow production rate is a blessing in disguise for Ghana. At full production Ghana’s oil will run dry in 20 years. At the current rate Ghana can instead find a way to refine its oil and use it towards other industries and create long-term economic benefits.

Ghana is still in the early stages of oil-led development but it is facing a crossroads. Will Ghana take advantage of its good political and economic standing and break the resource curse? Or will it succumb to the draw of high short-term revenues and become another cautionary tale concerning the pitfalls of oil discovery? Ghana’s success could serve as a model for future oil-led development, especially considering the recent oil discovery in Kenya and Uganda.

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