Knowledge Problem

Michael Giberson

A discovery of significant amounts of oil in Ghana has inspired a great deal of inquiry into how the country can avoid falling victim to the “resource curse,” the surprisingly low levels of economic development and weakening of political and social institutions sometimes associated with discovery and exploitation of valuable natural resources.

In a study, “Saving Ghana from Its Oil: The Case for Direct Cash Distribution,” Todd Moss and Lauren Young, of the Center for Global Development, assess economic and political conditions in Ghana and the prospects for the country avoiding the resource curse.  They recommend a variation of the “Alaska Model” in which oil royalties collected by the state are paid out directly to citizens.

From the report’s introduction:

In June 2007 a consortium of foreign oil companies announced a “significant light oil accumulation” at an exploration well in the West Cape Three Points license offshore West Africa. Ghana had found oil.

The economic implications were immediately obvious. Early projections suggested that Ghana could soon be reaping more than a billion dollars per year from this one discovery. Gold mining and cocoa, the major sectors of the economy for more than a century, would almost immediately be surpassed by crude. Not unlike a lottery winner who has to decide whether to keep a day job or go shopping, Ghana seemed to suddenly have a whole new set of economic choices. The political fallout was less obvious. Using the oil revenues wisely was a major theme of the 2008 presidential campaign, but there was also growing concern that oil could have harmful effects on the polity. While Ghana’s political classes have often felt in the shadow of Nigeria, there was also a strong sense of not wanting to repeat the mistakes of its giant oil-exporting neighbor.

The new government of President John Atta Mills now faces a set of demanding policy choices that will determine the future of the country. Ghana has about two years until the oil revenues begin to flow. Getting the framework right early is essential; once entrenched interests set in, changing the system becomes extremely difficult. The government is currently receiving a flood of advice on how to manage its new source of wealth, and especially how to avoid the so‐called “oil curse.” There are many good suggestions on the table that will enhance transparency, improve citizen oversight, and hopefully allow Ghana’s oil to benefit more than just a small elite.

[The article] draws out lessons from the experiences of Norway, Botswana, Alaska, Chad, and Nigeria, finding that one common characteristic of the successful models appears to be their ability to encourage an influential constituency with an interest in responsible resource management and the means to hold government accountable. [Moss and Young] propose direct cash distribution of oil revenues to citizens as the best approach to protect and accelerate Ghana’s political and economic gains, and as a way to strengthen the country’s social contract.

The authors suggest that Ghana is an ideal country to pursue a policy of direct cash distribution of oil revenues to citizens. The article provides summaries of the relatively successful approaches taken in Botswana, Norway, and Alaska.  Here is the Alaska discussion:

In Alaska, the Permanent Fund was set up almost immediately after oil was discovered in the 1970s as an investment base that would produce revenue even as future oil production decreased. The Fund’s principal cannot be spent without amending the state’s constitution by a majority vote of the population, and it must invest outside Alaska to help stabilize the state’s income. One of the immediate stimuli for the Fund was the public belief that Alaskan politicians had wasted a $900 million payment for exploration rights on unsustainable government programs. In 1982, the government instituted the Permanent Fund Dividend (PFD) program, a regular cash transfer of the Fund’s interest earnings to state residents, to give Alaskans an individual interest in protecting the fund (Fasano 2000). In recent years households have been receiving about 6% of their income on average from the PFD, as about US $1 billion per year is distributed among 600,000 citizens (Goldsmith 2002). The PFD is now a regularly anticipated component of household income, and most politicians consider it “political suicide to suggest any policy change that could possibly have any adverse impact today, or in the future, on the size of the PFD” (Goldsmith 2002). The dividend has been “extremely successful in creating a political constituency for the Permanent Fund that did not previously exist” (Goldsmith 2002).

The article contrasts these three relatively successful programs with “two obvious failures: Chad and Nigeria,” providing some elaboration on these points. The authors say the core justification for direct distribution of oil revenues in Ghana is to create a political constituency interested in responsible resource management:

Increased transparency provides useful tools but not immediate incentives for citizen action. In Norway, Botswana, and Alaska, resource wealth was well‐managed in part because institutions enabled groups interested in the sustainable management of oil wealth to influence policy. At the moment, Ghana does not have an interest group that will fill this monitoring and enforcement role.

Ghana can create just such a constituency by following a version of Alaska’s model of direct distribution. … Ghana needs [such a] system to give the entire population a sense of ownership over the fund’s revenues. In this way, Ghana can manufacture, from scratch, the constituencies that demand responsible resource rent management―and become more like Norway, Botswana, and Alaska, and less like Chad and Nigeria.

Direct distribution also increases the state’s dependence on its citizens. To get some of the revenues back, the state will have to tax them, and justify its taxes with public services. In fact, giving people more money will create additional incentives for the revenue authorities to improve tax collection. As we have suggested above―borrowing from Kaldor (1963), Tilly (1975), North and Weingast (1989), Ross (2004a), and Moss, Pettersson, and van de Walle (2008)―taxation is not just desirable, but essential to building a responsive state. Therefore, handing cash directly to citizens and forcing the tax authorities to find ways to tax some of it back is not a cost but rather a benefit of this scheme. [ed.: Emphasis in original.]

RELATED: The Fraser Institute has just released a study on a closely related topic, “Economic Freedom and the ‘Resource Curse’: An Empirical Analysis.”  A discussion on Seeking Alpha summarized the findings as:

The authors of the report, after considering new and existing data, come to the conclusion that whether a country benefits from natural resources depends largely on the integrity of its institutions and economic freedom — government bureaucracy, legal structure, property rights, monetary policies and international trade. Simply put, the higher the level of economic freedom a country enjoys, the greater the benefit from resources.

What’s more, the analysis suggests that a country with poor economic freedom isn’t necessarily stuck: according to the Seeking Alpha discussion, “the curse is turned into an economic blessing with relatively low levels of institutional development.”  Haven’t had a chance to read the Fraser Institute report, but it looks like a good complement to the Center for Global Development report on Ghana’s oil.