Project Description

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

Ghana’s Economy has left an indelible imprint on the country’s social and political structures. Just as the presence of gold gave rise to the Asante confederacy and empire and attracted European traders and colonial rulers. Endowed with gold and oil palms and situated between the trans- Saharan trade routes and the African coastline visited by successive European traders, the area known today as Ghana has been involved in all phases of Africa’s economic development during the last thousand years. As the economic fortunes of African societies have waxed and waned, so, too, have Ghana’s, leaving that country in the early 1990s in a state of arrested development, unable to make the “leap” to Africa’s next, as yet uncertain, phase of economic evolution.

As early as the thirteenth century, present-day Ghana was drawn into long-distance trade, in large part because of its gold reserves. The trans-Saharan trade, one of the most wide-ranging trading networks of pre-modern times, involved an exchange of European, North African, and Saharan commodities southward in exchange for the products of the African savannahs and forests, including gold, kola nuts, and slaves. Present-day Ghana, named the Gold Coast by European traders.

When Ghana gained its independence from Britain in 1957, the economy appeared stable and prosperous. Ghana was the world’s leading producer of cocoa, boasted a well-developed infrastructure to service trade, and enjoyed a relatively advanced education system. At independence, President Kwame Nkrumah sought to use the apparent stability of the Ghanaian economy as a springboard for economic diversification and expansion. He began process of moving Ghana from a primarily agricultural economy to a mixed agricultural-industrial one. Using cocoa revenues as security, Nkrumah took out loans to establish industries that would produce import substitutes as well as process many of Ghana’s exports. Nkrumah’s plans were ambitious and grounded in the desire to reduce Ghana’s vulnerability to world trade. Unfortunately, the price of cocoa collapsed in the mid-1960s, destroying the fundamental stability of the economy and making it nearly impossible for Nkrumah to continue his plans. Pervasive corruption exacerbated these problems. In 1966 a group of military officers overthrew Nkrumah and inherited a nearly bankrupt country.

By the early 1980s, Ghana’s economy was in an advanced state of collapse. Per capita gross domestic product (GDP) showed negative growth throughout the 1960s and fell by 3.2 per cent per year from 1970 to 1981. Most important was the decline in cocoa production, which fell by half between the mid-1960s and the late 1970s, drastically reducing Ghana’s share of the world market from about one-third in the early 1970s to only one-eighth in 1982-83. At the same time, mineral production fell by 32 per cent; gold production declined by 47 per cent, diamonds by 67 per cent, manganese by 43 per cent, and bauxite by 46 per cent. Inflation averaged more than 50 per cent a year between 1976 and 1981, hitting 116.5 per cent in 1981. Real minimum wages dropped from an index of 75 in 1975 to one of 15.4 in 1981.

Tax revenue fell from 17 per cent of GDP in 1973 to only 5 per cent in 1983, and actual imports by volume in 1982 were only 43 per cent of average 1975-76 levels. Project ivity, the standard of living, and the government’s resources had plummeted dramatically, during these periods Ghanaian citizens  migrated out to neighbouring countries to avoid economic hardship, One of those countries been West African brother Nigeria were they engaged in menial jobs most popularly shoemaking to survive until the early 1980s when the J.J. Rawlings led regime restored parity and a sense of economic independence emerged in 1990 when most of them returned home to build on their new economy. That period gave credence to the popular Ghana Must Go.

The first discovery of crude oil in Ghana was at salt pound Beach in 1970. The exploration began in 1978 by a company known as AGRIPECTCO with the production of an average of 4,800 barrels per day. In 1983, Ghana National Petroleum Corporation (GNPC) was established to handle the oil exploration, production and distribution. By 1985, the production had reduced to 580 barrels per day. This negative development led to the shutting down of the oilfield as the cost of operation became higher than the generated revenue. It made no commercial sense to continue with the exploration process.

In the year 2007, Ghanaians burst into celebration mood as oil has been discovered in commercial quantity in another part of the country. The discovery was made by Tullow oil of the United Kingdom and the reserve was estimated at over 600 million barrels of light crude offshore. In no rush to explore this resource, foreign firms with the assistance of government engaged in series of test and analyses. The commercial production of the oil in Ghana started in late 2010 and has now reached a level of about 100,000 barrels per day, which is close to the planned targets. In 2011, the total volume of crude oil produced summed up to 24,195,895 barrels (66,290 barrels on average per day) as against the targeted 30,929,005 barrels (84,737 barrels on average per day). The deficit in production in relation to the target was mainly due to difficulties encountered in production at the Jubilee fields.

In 2012, there was an improvement despite the difficulties encountered in the first and second quarters of the year. An increase of about 8.9 per cent over the 2011 total produced volume of crude oil was achieved. The volume of crude oil produced in 2012 was 26,351,278 barrels and exploration continues. According to the government of Ghana, the country is expecting to expand its reserves within the next few years to around 5 billion barrels. Since production of oil started, oil revenues have become significant for Ghana’s public finance. In accordance with Section 48 (Act 815) of the Petroleum Revenue Management Act (PRMA), 2011, the receipts from crude oil are to be made known to the general public through publication of receipts. The first lifting of oil by GNPC on behalf of the state was in March 2011 and a total of 995,259 barrels was lifted. Throughout 2011, a total of four different lifting was undertaken which make up 3,930,189 barrels with a realized total revenue of US$444.12 million (GH¢690.26 million).

In 2012, five lifting’s by GNPC were again done with an average of 986,207 barrels and all together provided a total of 4,931,034 barrels. In 2011, total receipts from crude oil amounted to US$444.12 million, representing approximately 6 per cent of total revenue. In 2012, government received an amount of US$541.07 million as revenue from crude oil with a projected petroleum receipt of US$581.72 million for the fiscal year 2013. The major part of petroleum income is income tax. The additional oil entitlement and GNPC commercial profits are also considerable. The third and smallest component is royalties.

The country has since began the exploration, production and sales of crude oil and is currently earning millions of petrodollars as a result of the investment in the sector by government and licence fees. The hopes of Ghanaians have been raised to a high level because of this although few not to believe that it will positively impact on the economy. Ghana is known to be the world’s second largest of cocoa. It is also known to large deposits of gold, diamond, bauxite and manganese apart from oil. Van der Ploeg (2011) estimates that at its peak, production from the Jubilee field could generate up to 30 per cent of the government’s annual income, if oil is at $75/barrel. Ghana must harness its oil revenues to both promote sustainable economic growth and provide for future generations. As rightly noted by van der Ploeg (2011), Ghana’s PRMA appears weighted too heavily towards short-term spending.

Based on the above, the study critically examines the relationship between oil and National Development in Ghana 2007 and 2014

1.2       Statement of the Problem

Natural resources can be used to produce goods and services to better the lot of the people and nations. America and Britain for example have a lot of natural resources which have contributed immensely to their development. However, there seems to be greater consensus that the natural resources of many developing countries have turned out to be a curse rather than a blessing. Among the many reasons advanced over the years to explain the inverse relationship between natural resources endowment and economic growth are; that the mismanagement and misapplication of the resources from oil lead to falling prices of other product. Sachs and Warner (1995) provide evidence that resource-rich countries have lower economic growth rates than their resource-poor counterparts. Since this influential work, it is widely accepted that natural resource abundance is associated with poor economic performance. Typical examples of countries that have suffered this phenomenon include Sudan and Nigeria, which over the past fifty years have made several efforts to leverage resource wealth for development but had woefully failed in the process (Moss and Young, 2009).

Indeed, a large body of literature has emerged in economics and political science analysing the tendency that those countries with high levels of natural resources exhibit worse economic and political outcomes. Important theoretical and empirical studies have tried to understand why and how natural resources can become a “curse” for a country rather than a “blessing”. The literature on the “curse of natural resources” generally identifies a negative effect of natural resources on economic performance. Corden and Neary (1982); Gelb (1988); Auty (1990); Karl (1997); Sala-i- Martin (1997); Sachs and Waner (1999, 2001); and Gylfason (2001), among others, confirms the inverse correlation between economic growth and natural resource exports.

By far, the effect of natural resource wealth on the economy is associated with the appreciation of the real exchange rate, a phenomenon often referred to as “Dutch Disease.” The appreciation of the exchange rate arises due to the rise in the value of natural resource exports, which generally makes other (non-natural resource) commodity exports less competitive. The “Dutch Disease” is derived from an economic phenomenon observed in the Netherlands, where the discovery of natural gas reserves in the 1960s had severe effects on the Dutch manufacturing industries by causing the Dutch real exchange rate to appreciate. This appreciation of the real exchange rates makes the local manufactures less competitive in the international market, resulting in the gradual deterioration of the manufacturing sector. Fears of a “Dutch Disease” customarily assume that a sizeable inflow of Overseas Development Assistance (ODA) will exacerbate macroeconomic instability, namely, by raising inflation and appreciating the real exchange rate. Moreover, it is also assumed that growth will be impaired because exchange-rate appreciation will hamper the competitiveness of a country’s export sector (Rajan and Subramaniam, 2005).

According to Wunder (1997), the “Dutch Disease” fundamentally tells a story of sectorial reallocation in an open economy facing a foreign exchange transfer. An overvalued currency was the first identified symptom associated with the ‘Dutch Disease’ (Gylfason, 2001b). The natural resource boom and the associated surge in raw-material exports tend to drive up the value of the domestic currency in real terms. Since natural resource abundance is often accompanied by booms and busts, exchange rate volatility is highly likely. The unstable exchange rates create uncertainty that tends to hurt exports and capital flows, including foreign investment. Apart from the exchange rate volatility, the increasing currency value also means that the non-booming trade sector is no longer attractive to the workforce. As for that matter, labour turn to the non-tradable sector (such as services) and through an increase in the demand for non-tradable goods, the price of the non-tradable sector increases. This leads to a real exchange rate appreciation (Gordon, 2006).

It is important to note that the negative effects of natural resources are often contingent on the magnitude of the resource rent accruing to the state and how the revenue from these resources are used. As Morrison (2012) points out, it is not so much the discovery of natural resources per se that hurts economic performance but rather the revenue that these resources generate for the government and how these revenues are expended. As such, it is possible for natural resources to be a “blessing” and not a “curse” if the revenues fall into the hands of a competent and non-corrupt government. On that reasoning, there seems to be a very close parallel between the “natural resource curse” and aid effectiveness literatures, as both are important non-tax sources of revenue for governments in developing countries. Morrison (2012) provides a very cogent review of both stands of literature and draws interesting similarities between the effects of foreign aid and that of natural resources, for example, oil. What emerges from Morrison’s (2012) review of the most recent literature is encouraging – the recent literature has dispelled the notion that natural resources must necessarily be associated with a curse. Where the institutional environment is found to be of good quality, natural resources may not have negative effects and can even have positive economic impacts ( Hodler, 2006; Mehlum, Moene, and Torvik, 2006; Robinson, Torvik, and Verdier, 2006; Bhattacharyya and Hodler, 2009).

In the case of West Africa, Jalloh (2013) adds that part of the factors explaining the inability of the natural resources to transform most of the economies in West Africa include; high corruption in the public sector and the frequency of civil conflicts in resource rich economies. He opined that the natural resources of the region can only benefit its citizens if there is improved management of the resources and effective policies to reduce corruption in the public sector. Corollary, Brannon and Collier (2003) opines that the discovery of new natural resources greatly increases the risk of conflict in low income countries especially if the resource is oil. They also argue that a country that has 25 per cent of its GDP dependant on primary commodity exports has 33 per cent risk of conflict while one with 10 per cent dependency on primary commodity exports, only has 11 per cent risk of conflict. Several African countries have had civil wars linked to resource wealth, for example, Nigeria, Angola, Liberia, Sudan and Congo to mention but a few.

Joining the debate, Lawson and Tolchinsky (2014) observes that although Ghana has not yet reached full production in its main oil field residents of coastal communities in the Western Region have already begun to perceive negative social and environmental impacts from the industry, creating a risk of future social unrest. Job seekers have flooded the oil city of Takoradi, intensifying demand on urban infrastructure, particularly water and sanitation. Additionally, heavy-duty trucks carrying equipment have placed unsustainable pressure on roads infrastructure. The arrival of wealthy oil employees has caused real estate price to spike, and many complain about substantial traffic congestion in the city.

Despite oil production in Ghana, fuel price continue to increase to the disadvantages of the ordinary Ghanaian. As at 4^th April, 2014 fuel price had been increased by 7% (Boatang & Benti 2014). Almost a month after the recent fuel price increase, drivers and passengers continue to groan over fares in the Kumasi metropolis (Ghana News Agency 3^rd, February).

It is against this background that the confirmed discovery of oil and production in Ghana in 2007 has provoked urgent policy debate to ensure the optimal use of oil revenue, but most importantly, to ensure an effective management of oil wealth to improve development outcomes. While expectations are generally high that if well managed, the oil would increase the country’s revenues, reduced Ghana’s dependence on foreign capital, reduce Ghana’s over reliance on agricultural exports, increase the size of the economy, and increase the country’s international leverage, others have expressed fear about the possibility of Ghana going the way of her West African neighbour Nigeria, which has been tagged a prime example of the resource curse.

While, scholars like Tsui (2005) have argued that oil discovery and exploration play significant role in national development, Moses and Young (2009) propose that for Ghana to escape the damaging impact of oil on her development the revenue from Ghana’s oil should be invested on wealth creation and social goods that will enhance the quality of lives of Ghanaians.

In order to contribute to the growing body of literature on the likely effect of oil on Ghana’s national development, this study sets out to find answers to the following research questions:

1. Does the discovery and exploration of oil in Ghana accounts for high cost of living?
2. Does the discovery and exploration of oil in Ghana reduce the poverty level?

1.3    Objectives of the Study

            The general objective of this study is to examine the linkage between Oil and National Development in Ghana between 2007 and 2014. Specifically, the study aims to:

1. Investigate whether the oil discovery and exploration in Ghana accounts for high cost of living.
2. Evaluate whether the oil discovery and exploration in Ghana has contributed to alleviation in poverty level.

 

1.4       Significance of the Study

The impact of oil on national development has been the subject of intense debate in development literature since the publication of Michael Ross’s paper on the subject matter in 2001.One decade on, interest on the subject remains largely undiminished. In fact, the debate was recently intensified with the discovery of oil in Ghana in 2007. This study is the product of that debate. The major significance of this study therefore lies in its timeliness.

At theoretical level, the study seeks to contribute to the existing body of knowledge on the impact of oil endowment on national development with a view to enhancing understanding of the subject matter. This it will do by: critically re-examining the causal linkage between oil and national development.

At practical level, the study seeks to feed into the policy process by demonstrating to weaknesses of the proposals in extant literature and by proposing a more viable option. This will not only be useful to policy makers in Accra but also to policy centers in other oil-rich developing countries like Nigeria, which has been battling with the debilitating effect of oil on development outcomes since independence.

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