ADVANTAGES AND DISADVANTAGES OF THE ALTERNATIVES FOR MANAGING GHANA’S OIL REVENUE
Ghana’s recent discovery of offshore oil is seen by many as an opportunity to overcome persisting structural weaknesses and has raised Ghana’s prospects of becoming a front runner in African development. However, experiences from other African countries such as Nigeria and Zambia show that properly managing resource windfalls remains a challenge for many developing countries and that misguided allocation strategies can harm the process of economic development instead of accelerating growth. Cross-country evidence confirms that countries depending heavily on natural resources tend to have less trade and foreign investment, more corruption, less equality, less political liberty, less education, less domestic investment, and less financial depth.
Given this inherent risk, three positions for managing oil revenue inflows are discussed in terms of their advantages and disadvantages and to ascertain which strategy would best advance Ghana to the next high level of growth and productivity.
Strategy # 1: Invest the oil proceeds in infrastructure development
This strategy of investing Ghana’s oil proceeds in infrastructure to improve the level of infrastructure in the country in areas such as Information and communication technology, Energy, Transportation, Accommodation, Education, Health, Tourism and Agriculture, has the following advantages and disadvantages:
Facilitation of both intra regional and international trade: Physical infrastructure is essential for the smooth and cost-effective flow of goods and services within the economy and across borders. This will require physical, or “hard,” infrastructure, such as transport (roads, rail lines, airports, and seaports), energy (oil and gas pipelines, and electricity grids), and telecommunications (cross-border fiber optic cables); as well as facilitating, or “soft,” infrastructure, such as appropriate policies (e.g., trade facilitation policies such as effective border and customs procedures for smooth flow of people , services and goods into and out of the country); and, effective laws and regulations, systems and procedures; and institutions to make hard infrastructure work properly.
Open up rural areas for investment: Rural transport also has an important impact on the rural economy. Investment in rural roads and transportation results in reducing the cost of transportation of goods and passengers and tends to increase the share of farmers in the final realization of farm produce, thereby increasing their welfare. In rural areas infrastructure development has wide ranging impacts on individuals, households and communities both in terms of income and other quality of life indicators. There are both direct and indirect benefits from infrastructure development and it is important to consider the indirect benefits in decision-making about infrastructure projects. Education, for example, can affect income and health both of that in turn affect quality of life. There are also strong social benefits from infrastructure that need to be taken into account. Economic benefits such as increased income, employment, productivity gain, better income distribution and opportunity for diversification are obvious.
Productivity enhancement and job creation: The importance of developing infrastructure has long been recognized as central in promoting economic growth. Public infrastructure investments are closely linked to national output and in many countries to growth rates. Infrastructure is also viewed as enhancing the quality of life both through its effect on raising incomes as well as through providing access to goods, social services and information.
Deepen competition and create an enabling environment for the private sector to spearhead the country’s development: At the macro level, the stock of infrastructure is linked to a country’s competitive position and thus to investment and export earnings. Ghana‘s poor infrastructure emerged as by far the dominant perceived barrier to development in the most recent Enterprise Survey with some 49 percent of companies highlighting unreliable electricity supply as the biggest obstacle to growth. Access to water is also frequently cited by companies as an important constraint. Investments in increased power generation and distribution capacity as well as water availability have already been acknowledged as a priority.
Improve standard of living: In addition, infrastructure may offer indirect benefits on rural quality of life by allowing people greater access to social services such as health clinics or schools. Health benefits in terms of reducing mortality and morbidity are outcomes associated with the provision of safe drinking water and sanitation. This is an example of a social multiplier, because better health is not simply a good in and of itself but is also linked to higher incomes because healthier individuals have higher productivity and are more likely to be in the labour force. Similarly, if infrastructure investments allow children better access to schooling, improve their attendance or allow them to study more, this may lead to indirect, long-run benefits in terms of higher productivity or income.
Facilitation of poverty reduction: Various studies have shown that infrastructure investments can strongly influence agricultural productivity and non-agricultural employment particularly among the poor, which can lead to income and economic growth thereby reducing poverty (Ali and Pernia 2003). Empirical evidence also suggests that infrastructure projects help foster the growth of industrial clusters by lowering search costs and information asymmetries among product buyers and input sellers (Sonobe, Hu, and Otsuka 2004).
Although investing in infrastructure has the above mentioned benefits to offer, there are number of issues that limit the gains.
Many infrastructure projects are subject to governmental oversight and regulation. Often these manifests in the form of caps on earnings, or requirements that rate hikes must be approved by oversight agencies before implementation. This may unduly delay the development process.
Due to the length of time that most infrastructure projects take to materialized, the risk from changes in the political or economic climate have to be considered.
The sharp growth expected in infrastructure development may lead to a shortage of qualified project management talent and of sufficiently experienced firms.
Proponents of this strategy, such as the Bank of Ghana (2007, 2008), argue that government spending of mineral windfalls often leads to excessive Dutch disease effects, where exchange-rate appreciation and competition for domestic resources causes a reduction in the competitiveness of non-oil sectors.
Corruption further undermines effective spending. Monies meant for development projects such as infrastructure are often embezzled by corrupt official who go unpunished.
Strategy # 2: deposit the oil proceeds in an investment fund (Sovereign Wealth Fund)
From this perspective, the Norwegian model (essentially the saving of resource inflows in an oil fund) constitutes an important tool to phase in and out of oil-revenue spending and thus to support a balanced budget, a reduction in foreign debts, and the accumulation of savings for future generations (see, for example, Gylfason, 2007; Matsen and Torvik, 2005). Thus, the second option, which can be undertaken, is the creation of a national oil savings fund. Such a fund has a number of advantages.
The funds can help avoid rent seeking and corruption thereby creating the conditions for proper management of the resource revenue. Such schemes discipline expenditure as only money needed to fund non-oil operational and development items are injected into the economy. The cases of Alberta Heritage Saving Fund and Alaska Permanent Reserve Fund are worth mentioning.
Funds could improve fiscal policy impact during the time when prices are high. These considerations point to the case for some form of stabilization of the impact of natural resource prices on the economy, and an oil fund can be thought of as institutionalizing such a rule. It helps nations transfer surplus revenue from circulation to ensure monetary stability and, therefore, help nations to contain distortions due to excessive oil money. The Copper Stabilization Fund (Chile) provides an example.
If the funds are sufficiently protected from the external influence (including the political pressures), they are able to ensure that resource revenues of the country are saved for future generations. It is a natural vehicle to address the issue of saving for future generations. An oil fund can ensures that a proportion of revenues, over time, are invested in foreign assets, but with some component of this varying in the short- to medium-term in order to smooth the impact on the budget of sharp changes in oil prices as in the case of Government Petroleum Fund (Norway) and Revenue Equalization Reserve Fund (Kiribati).
Although at a macro level, the fund’s assets are often part of the general economy. Investing the fund’s assets abroad could prevent exchange rate appreciation as in the case of General Reserve Fund (Kuwait)
Despite the advantages mentioned above, creating an oil fund could have the following disadvantages. Firstly, funds are no guarantee of an appropriate fiscal stance and indeed are no substitute for sound fiscal and macro-economic management such as the Mineral Resources Stabilization Fund (Papua New Guinea)
Again, the rules of the management of the funds are constantly changing under political pressures as in the case of Investment Fund for Macroeconomic Stabilization (Venezuela)
Moreover, the existence of fund could create an artificial sense of security causing the need for real fiscal discipline to be abandoned as in the case of Foreign Exchange Reserve Account (Iran)
Furthermore, the existence of oil funds encouraged corruption and fraud as experienced by Petroleum Trust Fund (Nigeria)
More so, with oil prices following a random walk, one must be thinking of a pragmatic smoothing approach, not an optimal one. The nature of the world oil market does not allow governments to set up a confident set of rules relating to the management of stabilization funds.
Strategy #3: Give an annual stipend from the oil proceeds to every citizen of Ghana
The third option for sharing oil revenue is the direct cash distribution to citizens. In this option, cash is distributed directly to each citizen by the state. This is done in the state of Alaska in the US and the province of Alberta in Canada. This option has a number of advantages and disadvantages.
The method puts cash directly into the hands of the citizens, which in turn makes each recipient develop a stake in the oil industry. If Nigeria had used this method, the attacks on oil facilities in the Niger Delta might have been reduced.
The method also encourages governments to be transparent and accountable in the management of the oil sector as well as other state financial transactions relating to oil.
Thirdly, this method of distributing oil money increases government’s tax base, as more income tax is likely to be collected from the recipients of the oil cash.
Lastly, it can increase government popularity, or vice versa, depending on how this option is managed.
On the other hand, this option has a number of disadvantages. It can increase inflation as money injected into the economy through so many people is hard to control.
Secondly, for lowly educated societies like Ghana, it is hard to determine or to control what people spend their money on. A number may spend it on cheap and often worthless goods imported from abroad. This scenario can stifle the development of local effort, entrepreneurship and industries. That is probably why Middle East oil-rich countries are not as industrialized as the Asian Tigers, despite the money that oil has brought to the region.
Distributing money to citizens can also increase corruption as unfair distribution mechanisms can be put in place by officers with impunity.
This option can reduce government’s ability to fund services unless specific allocations for other government needs are catered for first. If not, this method of using oil revenues could end up as a spending bonanza such as what happened with Spanish gold stolen from the New World (the Americas) and oil in Gabon in recent years.
Lastly, the politics of managing such a popular scheme would be too difficult for a country that has not even developed a national identity or social security system for all.
The choice for Ghana’s accelerated growth
The author proposes that a hybrid strategy of strategy #1 and strategy #2 should be used to maximize the oil gains to the country for now and the future. However, strategy #1 should be implemented to develop the infrastructure base of the country to stimulate growth and take advantage of the economy-wide impact of infrastructure development. This should be immediately followed by creating posterity fund to accelerate future growth of the country.