Will oil build or break Ghana’s democracy?

Image: Flickr, CIFOR
Image: Flickr, CIFOR

Will commercial oil production (due to begin later this year) build or break the back of Ghana’s democracy?

This may seem an unnecessarily inflammatory question, but history demonstrates that healthy caution is necessary in managing oil revenues. Ghana, however, has made history by hosting a series of free and fair elections in recent years. Twice the opposition party has won and the incumbent has stepped down in a display of due respect for democracy. This is groundbreaking progress as less than a handful of African countries have attained such a benchmark of democratic consolidation.

The resource curse literature strongly suggests that high quality economic and democratic institutions – in place at the point of discovering mineral wealth – can serve to optimise developmental progress (and so prevent a resource curse). These are analysed below.

Ghana boasts a strong civil society, and certainly the media offers a critical voice without fear of reprisal, both of which bode well for democratic consolidation.

Oil revenues are likely to peak within the next 7 years. On average, they are likely to provide approximately US$ 1 to 1.5 billion per annum for the next 15 years. Given that current government revenues are approximately $3.7 billion, the additional revenue is significant, which can be simultaneously perceived as a blessing and a limitation. Both civil society and aid organisations recognise Ghana’s lack of absorptive capacity, which renders it incapable of spending extra immediate revenue fruitfully. Oil prices tend to be volatile, thereby creating a difficult investment environment. Additionally, budget volatility will result from over-dependence on oil revenues. This greatly undermines planning, a key component of developmental success. These organisations are therefore particularly adamant about the need for a stabilisation fund that will: smooth the budget; contribute to a heritage fund; and enhance human capital, all of which would help to improve absorptive capacity and ensure optimal public service delivery.

There is, fortunately, a sober awareness that oil in itself will not shift the core structure of the economy. Capturing the gas released with oil extraction, however, could provide the necessary backbone to a sound industrial policy framework – one that will catalyse economic diversification. Oil exports have a tendency to falsely inflate the value of a country’s currency and so undermine the export competitiveness of other sectors (also known as ‘Dutch Disease’). With agriculture as the primary export earner and the largest employer, the implications of such a scenario are devastating. Thus, careful management is called for to ensure that gas improves the yield of the agricultural sector and that economic diversification builds on agri-business rather than undermining it.

Another major institutional concern is the delay in legislating the Oil Revenue Management Framework, which sceptics fear is an indication of the legislature’s weakness. Parliamentary oversight is an essential democratic function. Additionally, oil contracts are shrouded in legislative and contractual secrecy. Taken together, these factors may indicate that patronage networks are being established. If true, civil society has good reason to be concerned about democracy’s longevity. The reasons for the delay have not been publically communicated and communities are becoming agitated. Potential conflict is therefore not implausible. Conflict is often the precipitator of a resource curse. The greatest lesson, then, is that communities should have been far more widely consulted. If communities are presented with the opportunity to articulate what they want to accomplish with oil revenues, then they can create – and work to fulfil – their own expectations. The government has unwittingly allowed unmet expectations to germinate and fester.

It should also be noted, however, that the government faces numerous difficulties. First, there were purportedly genuine concerns with the withdrawn petroleum bill (which had been tabled in haste during the election campaign). Second, the government lacks negotiating skill, rendering it unable to bargain for stronger terms of trade. Ghana must, for instance, avoid ‘stabilisation clauses’, which multinationals use to avoid inconvenient legislation. Third, there is a vast array of political and business interest in Ghana’s oil, making it difficult for the government to know whom to trust. Transparency would help a great deal, although the neo-realist perspective still holds weight: Multinational corporations are far wealthier and more powerful than Ghana, and if they perceive that minimal transparency is in their profit-maximising interests, then government may acquiesce to their demands. This is especially true where immediate cash is tempting and negotiating capacity is weak.

In the final analysis, then, oil’s likely effect on Ghana’s democracy is ambiguous at best. It is unlikely to shake the core of democracy, although the dangers should never be dismissed out of hand. If its revenues are thoughtfully and creatively managed, however, it can strengthen democratic institutions and produce fruitful developmental outcomes.

21 Jan 2010