Wednesday, October 20, 2010

Ghana in the club of oil-producing nations

If all goes as planned, Ghana will begin commercial exploration of its new oil find in a month’s time. Can Ghana learn from the mistakes of Nigeria and other oil-producing countries in Africa?



Ghana is a cherished bride in international circles compared to its big regional brother, Nigeria. It remains a favourite of foreign donors and Western governments in a region often known for brutal civil wars, corruption and tyranny. With its growing economy and squeaky-clean image, Ghana is a frequently cited success story in Africa.

Praising the country during his visit in July 2009, United States president Barack Obama described Ghana as representing “a face of Africa that is too often overlooked by a world that sees only tragedy or the need for charity.” As president Obama acknowledge during the historic visit, “the people of Ghana have worked hard to put democracy on a firmer footing, with peaceful transfers of power even in the wake of closely contested elections. “

The story of Ghana and Nigeria - strong rivals when it comes to the game of football, and historical friends given colonial antecedents – is the story of a presumably performing small brother versus a non-performing big brother. It bears a resemblance to the relationship between biblical Cain and Abel, with the only exception being that, unlike the biblical story, no one is trying to kill the other.

For many from the two countries who have continued to interact over the years, because of the strong historical antecedence, it is sometimes easy to forget that two other countries (Benin and Togo) actually separate them.

Somehow, Ghana has a couple of things going for it: a thriving democracy, peace and security, the availability of basic infrastructure particularly electricity, and a stable educational system in which students who enter for four year degree courses actually spend four years without the fear of lecturers’ strike extending the years. These are Ghana’s golden spots. They are some of the edge it has over Nigeria, and the principal reasons, in recent times, why a number of Nigerians find the place endearing.

Imagine never worrying about generators at night or travelling around the Niger Delta or the south-eastern states in choice cars without the fear of being kidnapped. Oppositions rarely win elections in Nigeria, but in Ghana, it can be anybody’s game. The last presidential elections saw the dethronement of a ruling president’s party for the second time since the West African country returned to democracy in 1992, something that has never happened in Nigeria’s democratic experiment and doesn’t seem likely in the next presidential elections scheduled for 2011.

Ghana is a much united country compared to Nigeria; its centripetal forces are much stronger than the centrifugal elements. No part of the country has attempted secession in its entire post-colonial history. Kwame Nkrumah, the acclaimed pan-Africanist and founding father of the country, deliberately laid a foundation that ensures that ethnicity is under-played in Ghana’s politics. No politician campaigns on the basis of where he or she comes from and there is no debate as to which part of the country should produce a president.

These are some of the things that delight the West about Ghana. The question many are now asking, however, is: Can Ghana resist the resource curse as it joins the league of oil producing and exporting countries from next month? Discovered around the time of its 50th anniversary celebrations, Ghana’s oil reserves currently run to more than 1.8 billion barrels, expected to earn the country at least $1 billion a year between 2011 and 2029. That will add more than 25 per cent to government revenues which were just $3.7 billion in 2008.

Ghana’s oil reserves are not anywhere near Nigeria’s which is estimated at more than 38 billion barrels, but it is enough to transform its economy if well-managed. The proper management of the resources remains the critical challenge. The government has taken a number of steps. A series of bills that would: create a separate oil regulatory agency, mandate a greater role for local contractors, and increase the transparency of the country’s oil revenues, is currently making its way through parliament.

Oil smears reputation and the petro-dollar that comes from it increases the temptation to be corrupt, and often, the intense scramble for a slice of the wealth could sometimes stir conflict. Besides, the oil industry is highly concentrated and capital intensive. This means that oil-fuelled growth does not create jobs in volumes commensurate with oil’s large share of the economy. In Nigeria, oil accounts for more than 85 per cent of government revenues, while the sector employs less than five per cent of the country’s work force. Inevitably, this leads to high income inequity.

That, perhaps, accounts for why Juan Pablo Perez Alfonzo, Venezuelan oil minister in the 1960s, described oil in a most unpleasant manner. Oil, he said, was not black gold; it was the devil’s excrement. “Ten years from now, 20 years from now, you will see,” Alfonzo predicted in the 1970s, “oil will bring us ruin”. It was an oddball statement at a time when oil was bringing Venezuela unprecedented wealth – the government’s 1973 revenues was larger than all previous years combined, raising hopes that black gold would catapult Venezuela straight to First World status.

Today, he seems a prophet. When it hit the jackpot, Venezuela had a functioning democracy and the highest per capita income on the continent. Now, it has a despotic government and a per capita income lower than its 1960 level. Venezuela supplies the United States one fifth of the oil it consumes. Outside of Africa, Venezuela is a classic example of resource curse. A 1995 analysis of developing countries by Jeffrey Sachs, the renowned American economist, found that the more an economy relied on mineral wealth, the lower its growth rate. Venezuela isn’t poor despite its oil riches – it’s poor because of them.

"How could that be? For the same reason so many entertainers go bankrupt. Showered with sudden windfalls, governments start spending like rock stars, creating programs that are hard to undo when oil prices fall. And because nobody wants to pay taxes to a government that's swimming in petrodollars--"In Venezuela only the stupid pay taxes," a former President once said--the state finds itself living beyond its means.

A cycle begins. The economy can't absorb the sudden influx of money, causing wages and prices to inflate and the nation's currency to appreciate. That makes it harder for local manufacturers to compete. Incentives, meanwhile, become wildly distorted. When free money is flowing out of the ground, people who might otherwise start a business or do something innovative, instead, busy themselves angling for a share of the spoils. Why slog it out in a low-margin industry when some oil contracts could make you a millionaire? Thus, a doubly deadly dynamic: a ballooning public sector, a withering private one.

Oil is not an economy. Creative economic activities have spill-over effects that become self-sustaining. Oil spills only into a barrel --and from there usually into the hands of a favored few. That's the real reason Venezuela's productivity growth has been roughly half the Latin American average. Can Ghana avoid the curse? A few smaller countries--Malaysia, Norway, Mauritius--curbed its worst effects by spending slowly and using the money to diversify their economies."

Ghana must learn from Nigeria and other nations where oil has harmed economies rather than prosper them. But much more, it must learn from its own history. For more than a century, Ghana has depended on gold, yet, gold has added little to its economy. The gold producing communities today are environmental disasters. Besides, many young people who feel they are not getting their own slice of the gold wealth have tried to mine for themselves in some way. A good number of them have ended up dying inside their ‘galamsey’ gold pits.

Prospering from oil would mean using the wealth from it to diversify the economy. Imani, an Accra-based think-tank has proposed the separation of all oil revenue from Ghana’s current inflows into a special fund. “This ensures that governments are not slack in developing other areas of the economy and collecting taxes.” Spending it as part of the country’s annual budget, the body says, will bring Ghana the problems others have suffered from treating their oil revenue as another regular source of government income.

“Investing the revenue in infrastructural projects will soak up liquidity and prevent inflation whilst boosting national productivity and production, thus generating real growth. It will also have the effect of sequestering the revenue from the rest of our expenditures and thereby avoid the artificial rise in our currency value and the neglect of other industries.”

Renowned Venezuelan writer, Arturo Uslar Pietri, has the best description for how Ghana’s oil money should be handled – sow it. Pietri originated the phrase “sow the oil”. Ghana must sow the oil wealth so that politicians don’t plunder it. Some have described oil as the true enemy of democracy. What is presently happening in Pietri’s homeland and in Nigeria suggest that that assertion might not be wrong after all.


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