Democracy Lab

Can Ghana's Democracy Save It from the Oil Curse?

Ghana is one of Africa's big economic success stories. But the discovery of oil has confronted it with some tricky problems.

The phrase "African oil" doesn't conjure up much in the way of positive connotations. The exploitation of the continent's oil reserves has led to Libyan petro-authoritarianism, the rampant kleptocracy of Equatorial Guinea, and the militarization of Chad (whose defense expenditures increased by 633 percent between 2000 and 2009). African oil has frequently ruined the countries that produce it, as the Financial Times has noted: "From the civil war battlefields of southern Sudan to the slums of Angola and the swamps of the Niger Delta, the discovery of crude has done little to improve local lives. Often, it has destroyed them."

This brings us to Ghana, a vibrant democracy that prides itself on having one of the best-developed governance structures in sub-Saharan Africa. Ghana entered its oil-producing phase with a strong civil society and government institutions firmly in place. Since the restoration of democracy in 1993, Ghana has developed a strong two-party system, strictly adhered to its two-term limit on the presidency, held five regularly scheduled free and fair elections, and peacefully transferred power between parties. A highly participatory democracy, Ghana boasts a strong and independent media, the rights to freedom of speech and association, civilian control of the military, and a strong rule of law.

Mindful of past disasters related to sudden oil affluence, Ghana's late President John Atta Mills urged early on that "those who are in leadership positions... ensure that [oil] becomes a blessing, not a curse." (In the photo above, an optimistic Mills visits an oil-processing vessel in 2010.) In classic democratic fashion, Ghana's government responded to widespread requests from the private sector, public bodies, and the international community by putting policies into place to channel the country's oil and gas earnings into sustainable and equitable development while assuring transparency in revenue collection and use. In 2011, the country's parliament passed the landmark Petroleum Revenue Management Act (PRMA), enshrining transparency of financial flows among companies and the government and establishing a Public Interest and Accountability Committee to oversee implementation of the law. Oil contracts are public, and the Ministry of Finance discloses payments received, barrels of oil production, and details of the country's new petroleum discoveries.

The PRMA succeeded in the sense that it averted the rampant personal corruption and keptocracy seen in other African oil states. The new revenues were not, however, channeled into sustainable development as the law intended. Instead, politicians increased patronage spending in an attempt to meet the rapid rise in public expectations fueled by the discovery of oil.

Such expectations were extremely high when Ghana began exporting oil in December 2010. Export earnings in the first quarter of 2011 were two-thirds higher than in the same period of 2010, and real gross domestic product (GDP) for 2011 was forecast to increase between 12 percent and 13 percent. Such expansion would have made Ghana's economy one of the five fastest growing in the world. More importantly, it was hoped that becoming an oil producer would quickly raise the standard of living for large segments of the population.

Reality quickly fell short of predictions. Ghana's oil endowment is modest: At current prices, it is roughly equivalent to about $75 per capita -- a fact poorly understood by the man-in-the-street. Thus, despite the added oil revenues, the government has had an increasingly difficult time managing public demands.

Consequently, a fall 2012 survey conducted by the prestigious Afrobarometer found that 63 percent of Ghanaians polled perceived the country's economic conditions to be "very bad" or "bad," despite several years of rapid, oil-driven economic growth. This figure showed a sharp deterioration from the previous Afrobarometer survey in 2008, when only 45 percent characterized economic conditions in such dismal terms.

The situation has continued to worsen, as evidenced by recent headlines in Ghanaian newspapers: "IMF mission warns of challenging times for the economy" (February 27, 2014), "What is the solution to Ghana's economic crisis: Prayer, proper planning, or both? (March 17, 2014), and "Ghana's economy in crisis: $20 billion squandered by government" (March 25, 2014). So has Ghana finally succumbed to the oil curse despite its promising start?

There is no question that oil is at the center of Ghana's economic problems, although at least some of the country's difficulties initially stemmed from the 2008 global economic crisis and the resulting fall in commodity prices. Growth rates are still respectable by most standards at 5.5 percent, but remain considerably below expectations. The value of the country's currency, the cedi, has dropped considerably compared to 2009. Inflation is above 10 percent and rising, and the government's fiscal deficits as a percentage of GDP are in the double digits, despite the continued inflow of oil revenues.

Ghana has always had a tendency to run large budget deficits -- especially in election years. With buoyant oil revenues on the horizon, the government committed a serious mistake: It failed to enact a fiscal rule restricting public expenditures in high revenue years. Such a rule can enable resource-rich countries to maintain remarkable budgetary stability in the face of volatile revenue streams, as Chile has demonstrated.

Instead, Ghana's tendency to overspend was reinforced by two pieces of favorable economic news that minimized initial concerns about the corrosive effects of oil. In 2010, the country's national income accounts underwent revision, or rebasing. Initial estimates by the International Monetary Fund suggested that Ghana's revised GDP might be up to 25 percent higher than was previously thought. The new and much larger GDP figure dramatically lowered Ghana's perceived debt burden (official debt as a percentage of GDP). Next, between January 2009 and July 2012, the Mills government quickly and remarkably brought the budget deficit down from 24 percent to 10 percent of GDP (pre-rebase figures), and inflation down from 20 percent to 10.68 percent.

Unfortunately, still further reductions in spending were imperative, but public expectations of an oil bonanza spiraled out of control and eroded the political will to enact them. Furthermore, because voters would interpret any fall in living standards as mismanagement of the oil revenues, the government felt compelled to maintain and even expand expenditures, the bulk of which (94 percent) were recurrent, patronage-type expenditures -- wages, salaries and other non-investment items -- rather than more productive, long-term capital and infrastructure investments.

In fact, revenues from the country's new petroleum industry were disappointing, with the majority of the early income going simply to cover the sector's costs. In both 2011 and 2012, Ghana's oil receipts fell well below budget expectations. In the second half of 2013, oil revenue received by the government suffered a further decline, from $391.9 million in the first two quarters to $176.3 million in the second two quarters.

Then, with the U.S. Federal Reserve keeping interest rates at extremely low levels, investors began pouring money into better yielding emerging market assets. As a democracy with excellent governance, Ghana found it easy to tap international capital markets at bargain rates by borrowing against anticipated future oil revenues -- an attractive alternative to fiscal restraint. The fortuitous flood of funds provided the perfect enabling mechanism for increased governmental borrowing.

Ghana's first 10-year Eurobond, issued in 2007 at the height of excitement over its oil potential, was four times oversubscribed. By 2012, collateralizing future oil revenues involved negotiating a $3 billion loan with the China Development Bank. This loan placed Ghana in the unfavorable position of having to sell its share of crude oil exclusively to the Chinese. All told, in 2012, Ghana attracted foreign direct investment of about 8 percent of GDP, an amount considerably below expectations. Investor concern over the country's deteriorating fiscal position, together with election uncertainties, were largely responsible for the investment fall-off.

In August 2013, Ghana floated a bond of $1 billion with a 10-year maturity potential at a yield of 8 percent. The yield was higher, and the excess bids were lower, than those in other African countries that issued Eurobonds earlier in the year, perhaps partly reflecting the deteriorating financial conditions. By April 2013, Ghana's initial (2007) Eurobond was yielding as little as 4.5 percent.

Clearly, taking on added debt to sustain expenditures has hit diminishing returns. The government's inability to tame widening fiscal deficits has led to deterioration in Ghana's debt ratios. The country's debt now represents just over half its GDP, up from 32 percent in 2008. An expanding current account gap has had a severe impact on the cedi, which has weakened more than 9 percent against the dollar so far this year, following a 24 percent slide in 2013. In a sign of waning market confidence, yields on Ghana's sovereign debt are higher than for any other African country with an actively traded international bond, at around 9 percent for its 2023 Eurobond and over 20 percent for domestic debt.

On October 17, 2013, Fitch downgraded Ghana's credit rating from B+ to B, warning that "policy credibility has been significantly weakened" due to the size of the budget deficit and the rising costs of servicing domestic government debt. Meanwhile, sharp rises in the price of fuel, water, and power have led unions to threaten strikes. Despite the government's best intentions, an oil-fueled vicious circle of unmet expectations, increased debt funded government expenditures, expanded current account deficits, falling cedi, rising inflation, deteriorating living standards, and further unmet expectations has set in.

On the one hand, Ghana's experience to date provides a cautionary lesson for the new East African oil producers (Uganda, Kenya, Tanzania, and Mozambique): Even well-governed democracies that go to great lengths to avoid the oil curse can stumble if the government fails to manage public expectations and practice budgetary restraint. On the other hand, Ghana's situation differs from the classic oil curse phenomenon, in which a surge in oil-financed public expenditures leads to a strengthening currency (i.e., Dutch Disease), contraction of the non-oil export sector, and the rampant corruption and erosion of democratic institutions. Ghana has not suffered the irreversible damage usually brought on by the oil curse. There has been neither massive deindustrialization nor the cancerous spread of personal corruption. The country's democracy is intact, public involvement and scrutiny are on the rise, and Ghana has at least a reasonable chance of regaining its luster in the next several years, with IMF guidance and assistance on proper stabilization and fiscal consolidation.

The role of stepped-up borrowing in the current crisis has to a sharp rise in public participation, with citizens groups pushing for fiscal responsibility legislation that would limit borrowing against future oil and gas revenues. If passed, such legislation could prevent future excessive borrowing that constrains the country's finances and jeopardizes the steady expansion of its economy. The increased public scrutiny, combined with the ability of the press and public to track oil revenue allocations, should also make it more difficult for the government to divert funds away from infrastructure and other productive capital investments to non-investment budgetary items in the future.

In the longer run, it is still possible that Ghana could become a model for the effective utilization of new-found petroleum generated wealth. Increasing involvement of organized civil society and the media have created the foundation for accountability and best practice procedures in the management of the country's oil resources. In fact, government efforts to improve transparency in the growing oil and gas sector, together with the country's progress in institutional development and apparent determination to correct and learn from its mistakes, might eventually turn it into a role model for other oil and gas producing countries throughout the developing world.



No More Empty Classrooms

More than half of all schools in the Central African Republic have closed due to bloody conflict. Reopening them -- and keeping them safe -- should be an international priority.

Humanitarian needs in the CAR, devastated by conflict since 2012, are enormous: Nearly half the population requires assistance, and relief organizations need $250 million to ensure they can reach those who need the most help. Millions of children are among those affected by the conflict. They have witnessed the killing of mothers, fathers, and other family members. Many have been targeted for recruitment by armed groups. Overwhelming numbers have fled without their families and are either residing in camps or hiding on their own.

Last summer, nearly half of the country's schools were closed. Almost half of the school year had been lost, and, mainly out of fear, seven out of 10 primary school students had not returned to their classrooms. More than 500,000 children had dropped out because of violence or displacement.

A representative assessment in February showed that 65 percent schools across the CAR remained closed. Many schools have only been able to operate for four weeks in the current school year. Hundreds have been attacked and looted or used as shelter by refugees, particularly in Bangui, the capital. Many schools are in urgent need of being repaired or rebuilt and re-supplied with learning materials -- a slow and expensive task, particularly in the least secure areas. 

Put another way, the CAR's education system is broken.

As in many conflict contexts, the combined effects of prolonged displacement, idleness, lack of opportunity to study, and daily exposure to violence have a dangerous knock-on effect on children's chances of ever escaping the cycles of poverty and conflict. Being deprived of education in proximity to violence and religious tensions is also explosive.

Responding to this wretched state of affairs is, not surprisingly, extraordinarily difficult and dangerous. Many teachers fled the country's most dangerous areas. Getting them back into schools requires that their safety be ensured and that they are remunerated for this physically and emotionally taxing work. It is also important, but challenging, to identify local and national authorities who can help reopen schools and keep them safe.  

The U.N. decision to send peacekeeping troops could make a critical difference in improving safety in the CAR's schools. But these troops are not scheduled to arrive until September. And even more is needed.

Rebuilding the CAR's schools should start with an international commitment to fund a sound recovery plan for education. The funding would support the training and retention of teachers and the rebuilding of basic structures that give parents the confidence to send their children back to school.

Indeed, the international community needs to focus now on injecting necessary resources into a seriously underfunded situation. Four months into 2014, the CAR's humanitarian appeal remains grossly underfunded. The education sector will need to receive $33 million throughout the year to keep up with immediate emergency needs.

Over the past five years, the Global Partnership for Education has facilitated education planning with many partners in the CAR and provided $37.8 million in grants to help build and rehabilitate almost 1,000 classrooms, train 1,500 teachers, and distribute more than 1.3 million textbooks. In addition, the Global Partnership has provided $3.7 million in accelerated emergency funding during the conflict to rehabilitate schools and support community teachers. More intensive engagement by the international community could build on these efforts and gains.

International partners, including U.N. agencies and both domestic and international NGOs focused on humanitarian issues, are in a position to launch small-scale initiatives to set up temporary learning spaces and makeshift schools in the worst-affected and most divided communities. This could help mitigate the dangerous impact of ethnic and religious violence. Most importantly, it would give children sanctuary away from the heart of the conflict and show them an alternative to violence through education. Safe education spaces, in other words, would keep them protected.

The international community must also help provide an equal learning opportunity to children from diverse ethnic and religious groups to lay the foundation for reconciliation among various segments of the population. Similarly, we have learned from other conflicts that coordination across the region is essential to ensure all children receive a foundation in education. In the case of the CAR crisis now, humanitarian partners need to be able to reach refugee children in neighboring countries.

The CAR's current plight is emblematic of the challenges other fragile and conflict-affected states face with regard to funding education: More than half of all the children out of school globally live in such conflict zones. Without sufficient investments of resources to keep the schools open, the CAR's children are at risk of losing their once-in-a-lifetime opportunity for basic education. On a larger scale, their society will be starved of the human potential it needs to thrive over the long run. Unless the international community steps up its investments in education there, the prospects are slim that the CAR will recover -- even after the violence and crisis ends.