Ghana discovers oil, trouble ensues

August 3, 2014

One of the curious facts about country performance is the so-called resource curse: countries that have lots of natural resources grow more slowly, on average, than those that do not. How can that be?  

The reason, in the most striking cases, is that a flood of resource money leads to large increases in government spending and even widespread corruption. Tyler Cowen brings up the case of Ghana, which is turning to the IMF for help just seven years after the discovery of the Jubilee oil field. Let me quote from the May 2012 Global Economy final exam:

You have been asked to prepare a report on the West African country of Ghana, a former British colony that has been growing rapidly in recent years after a period of unusually stable politics. The Economist Intelligence Unit refers to it as a “robust democracy.” The World Economic Forum noted: “Ghana continues to display strong public institutions and governance indicators, particularly in regional comparison.”

The EIU’s Country Risk Report adds: (i) The December 2012 elections are expected to be close. The president, John Atta Mills, came to power promising accountability and transparency, but has struggled to maintain party unity while evidence emerges of financial impropriety of some government ministers. (ii) The victor faces a challenging policy environment, particularly the fiscal situation. (iii) Expectations among the population are high as production starts at the offshore Jubilee oil field. (iv) The government’s decision to allow use of 70% of future oil revenue as collateral for borrowing is cause for concern.  

You can see the signs of trouble — oil money, spent before it arrives, and hints of corruption. Over the past two years we’ve seen:

  • The National Democratic Congress maintained power in the 2012 elections with vice president John Mahama taking over as president.
  • There is nevertheless growing dissatisfaction with the government, fueled by accusations of corruption and the perception that the benefits of oil have not been fairly spread.
  • The government deficit widened further, in part from large increases in public-sector wages, and is now over 10% of GDP.
  • The currency has fallen 40% in the past year.

All this from the EIU (free from an NYU ip address). Despite this, Ghana remains a moderate risk. The EIU reports: “Fiscal management will remain challenging for the next few years at least, but the generally robust economic growth outlook and rising oil revenue” make the debt burden manageable.

Update (8/10): Nice piece from Quartz.

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