Society and Business Review
Emerging “Dutch disease” in emerging oil economy: Ghana's perspective
Kwasi Dartey-Baah Kwesi Amponsah-Tawiah David Aratuo
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Emerging “Dutch disease”
in emerging oil economy:
Ghana’s perspective
Kwasi Dartey-Baah, Kwesi Amponsah-Tawiah and David Aratuo
Department of Organisation and Human Resource Management,
University of Ghana Business School, Accra, Ghana
Abstract
Purpose – The purpose of this paper is to examine the Ghanaian economy within the context of its
macro-economic indicators and the performance of the agricultural sector against the backdrop of the
exogenous economic explanation of the resource curse. This is aimed at equipping policy makers with
the tools needed in identifying symptoms of the Dutch disease as it transitions from an agrarian to an
oil economy.
Design/methodology/approach – This is a research paper, employing quantitative and qualitative
data of the macro-economic indicators in the last ten years (2000-2010) and policy initiatives since the
discovery of oil in commercial quantities in Ghana. Furthermore, it also examines theoretical
perspectives of the Dutch disease as frames of analysis to gauge the existence of any symptoms of the
latter.
Findings – The paper questions a previous World Bank (2009) report classifying the Ghanaian
economy as already showing signs of the Dutch disease. The paper suggests that the macro-economic
indicators show resilience and stability of the economy which is necessary for growth. It is observed
that various government policies are aimed at improving agriculture inspite of the emerging oil
industry. The paper recognizes some areas of concern and recommends further studies to observe the
changes in dynamics when the “petro-dollars” begin to flow into the economy.
Originality/value – This is a pioneering work which seeks to provide early warning signals of the
Dutch disease in an emerging oil economy.
Keywords Resource curse, Dutch disease, Ghana, Oils, Gas, Gases
Paper type Research paper
Introduction
The efforts of the Government of Ghana from 2000 to 2006, through oil exploration
under the auspices of the Ghana National Petroleum Corporation (GNPC), yielded
dividends with the major discovery of oil in 2007 by a US based oil company, Kosmos
energy. The discovery is 75 miles offshore of Ghana, named the Jubilee field. Ghana’s
discovery is said to be one of the largest offshore find on the continent and estimated to
hold about 1.8 billion barrels of recoverable oil, and 800 billion cubic feet of natural gas
(Kapela, 2009). The first commercial production from the Jubilee field began in
December (2010). Furthermore, there had been another discovery by Tullow oil plc,
a UK based company, with many more discoveries envisaged.
The status of Ghana is expected to change from an oil importer to exporter and be
named among the league of oil exporting nations and perhaps a member of
Organization of Petroleum Exporting Countries (OPEC). The expected revenue to be
generated by government from the oil would potentially strengthened Ghana’s
The current issue and full text archive of this journal is available at
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Emerging
“Dutch disease”
185
Received 1 November 2011
Revised 11 November 2011,
5 December 2011
Accepted 6 December 2011
Society and Business Review
Vol. 7 No. 2, 2012
pp. 185-199
q Emerald Group Publishing Limited
1746-5680
DOI 10.1108/17465681211237637
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development initiatives and the “petro-dollars” will be essential in fueling the engine of
growth and the desired development yeaned for by Ghanaians. But on the contrary,
this seemingly and rather simplistic assumption may not be valid since the path to
development has eluded many other countries endowed with natural resource,
including oil and gas exports, in the past. Empirical evidence shows that natural
resource abundant countries in Africa have not done that well in terms of economic and
human development indicators (Palley, 2003). Nigeria’s economy has been in doldrums
with increasing poverty among its population inspite of the huge inflow of oil revenues
(Human Rights Watch, 2005). Gabon’ economy has stagnated with the presence of oil
revenue, while Angola ranks 166 out of a total of 177 in the United Nations Human
Development Index (Human Development Report, 2004). The notion of a negative
relationship between natural resource and socio-politico economic development does
not sit well with many; that instead of being a blessing, oil exports can become a curse
for some countries endowed with oil. Karl (1997) described these as “paradox of
plenty”. Paradox of plenty depicts the situation where a country benefits less from
more resource revenue inflow. Many reasons had been espoused for this murky
situation. In most of the countries that have experienced this phenomenon, natural
resources are viewed as lootable resources that provide the impetus for instability and
conflict (Collier and Hoeffler, 2004). A decline in terms of trade of primary commodities,
instability of international commodity markets, poor economic linkages between
resource and non-resource sector, and the “Dutch disease” are all part of the economic
explanation of why natural resource abundant countries can show such poor economic
performance in terms of growth and income redistribution (Ross, 1999, p. 298).
The resource curse syndrome is a phenomenon that describes the inability of natural
resource abundant countries to derive full benefits from its natural resource (Soros, 2007).
It epitomizes the fact that the resource which is a blessing becomes a curse due to some
intervening factors. These intervening factors which are economic, Political and social
underpin the phenomenon of the resource curse. It is the management or otherwise of these
factors which have significantly contributed to the fact that only few countries with
natural resource have been successful in reaping the associated benefits and the many
others that have failed, particularly in Africa. The economic factor is associated with slow
or negative economic growth due to what has been described as the Dutch disease. Many
authors have attempted to establish the linkages between natural resource (oil, diamonds,
and drugs) and economic performance (Palley, 2003). The absence of a strong and sound
economic base is said to have contributed to the poor economic performance of oil rich
countries, resulting in the resource curse syndrome.
The initial oil production from Ghana’s Jubilee field started from 60,000 barrels of oil
per day (bopd) and currently stands at 120,000 bopd. It is anticipated that daily
production will increase to 250,000 bopd by 2013. The field life of the Jubilee field is
estimated to be between 20-30 years. The IMF and World Bank estimated an annual
revenue flow of US$1 billion from the Jubilee field (Edjekumhene and Edze, 2010).
Commercial production in the Jubilee field commenced in December 2010 and by October
2011, the GNPC on behalf of Ghana has lifted oil four times, a total of 2,980,720 barrels
from the field. The revenue flow received from three of the liftings amounted to
506.0 million Ghana Cedis (US$337.3 million), (Full Budget Speech for 2011 Financial
Year, 2011; Full Budget Statement for 2012 Financial Year, 2012). It is projected that
as production increases the annual estimate of US$1 billion will be achieved.
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This paper therefore examines the Ghanaian economy as it transitions from an agrarian
to an oil economy against some key indicators in other to appreciate any symptoms of the
Dutch disease. In achieving this objective it reviews literature on the state of the field in
respect of the Dutch disease which is used as the frame of analysis. Additionally, it
examines the performance of the macro-economy before the first production of oil from
Ghana’s Jubilee field in December 2010, and the agricultural sector in particular to
determine the stability of Ghana’s economy and finally, analyses the “spending effect, and
resource reallocation effects” due to the emerging oil industry in Ghana.
The Dutch disease
The dominant economic explanation of the resource curse is the “Dutch disease”.
According to Humphreys et al. (2007) the Dutch disease is a shift from the hitherto
productive sectors such as agriculture and manufacturing to the non-tradable sectors
such as resource export and construction industry. The term is attributable to the 1960s
economic downturn of The Netherlands with regards to the manufacturing sector and
the North Sea natural gas discovery. This phenomenon generates two effects: the
“spending effect” which involves utilizing petro-dollars to patronize internationally
traded goods instead of domestic goods, and the “resource pull effect” which entails the
shift of labour and materials towards the natural resource sector (Humphreys et al., 2007,
p. 5). The cumulative effect of these is the distortion of the economy away from
traditional tradable goods production (agriculture and manufacturing), towards
non-tradable sector like construction. The inflow of resource rents results in the
appreciation of real exchange rate. This affects exports of these traditional tradable
goods and makes them less competitive in the domestic market (Humphreys et al., 2007).
At the same time, there is increase spending in the non-tradable sector (Duruigbo, 2005).
Similarly, there is a drive for movement of labour and materials to the non-tradable
sector, thereby increasing cost of production in the traditional tradable sector. This is
known as the resource pull theory. This impacts the economy adversely as a result of
loss of jobs, and human resource in agriculture and manufacturing, and poor
performance in these sectors. As a result of these, the condition of the poor remains
unchanged and may deteriorate in the midst of the inflow of “petro-dollars”. This may
create the condition for grievances which may be expressed through agitations, strikes,
resulting in general instability and conflict (Humphreys et al., 2007).
The issue of economic growth and natural resource has received some scholarly work
with divergent views on the role of Political institutions in generating or suppressing
economic growth, thus arresting or exacerbating the resource curse phenomenon. The
common denominator which has also been confirmed by empirical data is that most
resource abundant countries have performed poorly in terms of economic growth
compared with their resource poor counterparts. Bertine (2005, p. 202) posits that
economies of countries with abundant natural resources grow less rapidly than
economies with scarce natural resources. Natural resource abundant countries such as
Nigeria, Zambia, Sierra Leone, Angola, Saudi Arabia and Venezuela has been shown to
have a slower or no growth as compared with resource-poor Asian tigers like Korea,
Taiwan, Hong Kong and Singapore (Melhum et al., 2006). It has been established that
countries rich in natural resources on the average lag behind their counterparts with less
resources (Sachs and Warner, 1995, 1997a, b; Gelb, 1988; Lane and Tornell, 1996;
Gylfason et al., 1999; Auty, 2001; Stijns, 2002).
Emerging
“Dutch disease”
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The point of divergence in the “natural resource – resource curse” discourse lies
with the role of institutions in these natural resource abundance countries. While Sachs
and Warner (1995, 1997a, b) contend that institutions do not play significant role in the
resource curse debate Melhum et al. (2006) argue that institutions are decisive for
the resource curse. The former explained that the rent-seeking hypothesis that natural
resource abundance results in the deterioration of institutional quality in turn reducing
economic growth, cannot be empirically supported. They rejected the rent-seeking
approach in explaining the Dutch disease. The latter asserts that the quality of
institutions is relevant and important in transforming the natural resources into a
blessing or a curse. They emphasized that the differences in growth performance
among the resource rich countries is attributed primarily to how these resource rents
are distributed through the institutional arrangements (Melhum et al., 2006).
The significant role of institutions in the resource curse debate cannot be over
emphasized. Some scholars believe that the resource factor is not critical to the economic
demise in oil-rich countries as institutions. They also argue that the cause of economic
growth or the lack of it can be attributed to right and wrong institutions (Duruigbo,
2005). Empirical evidence shows that, some natural resource abundant countries have
witnessed significant economic growth while others have not. Melhum et al. (2006, p. 3)
described these two groups as growth winners and growth losers. The determinant of a
growth winner or loser is contingent on the quality of institution; which they described
as either grabber friendly or producer friendly institutions. Grabber friendly institutions
exist when rent-seeking and production are competing activities, and are characterized
with weak rule of law, malfunctioning bureaucracy, and corruption. It is particularly bad
for growth when it promotes unproductive activities. Producer friendly institutions on
the other hand prevails when rent-seeking and production activities are complementary,
and allow rich resources to attract entrepreneurs into production, leading to higher
growth.
Bertine (2005) submits that the growth of countries rich in natural resource
ultimately depends on the quality of institutions. Good institutions provide the ambient
environment for optimal operational performance and vice versa. Torvik (2009) argued
that good institutional apparatus stalls the negative effect of natural resource on
growth. Oil discovery is particularly viewed to be worse in countries without
developed institution (Karl, 1997). The Economist (2006) expressed the point that most
oil endowed countries used their wealth to develop the authority of the state instead of
the national oil companies. When these national oil companies begin operation without
strong institutions to regulate them, it results in corruption and inefficiency. This and
other factors underscore the success story of Norway, which had an efficient institution
long before Statoil commenced oil production. Generally, bad institutions enhance
corruption, or may create the incentive for the ruling classes to destroy institutions in
order to facilitate kleptocracy.
Macro-economic indicators
The Ghanaian economy for the last decade has been progressively performing quite well
even in the midst of the financial crisis. Ironically, it recorded one of its highest real gross
domestic product (GDP) growth of 7.2 percent in 2008. This however fell sharply by
3.1 percentage points to 4.1 percent in 2009, a situation attributable to the impact of the
global financial crisis. The real per capital GDP growth for the same period mirrored the
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fallen trend of 4.8 to 2.8 percent with a 1.9 percent population growth rate. In spite of the
fall in growth, the average yearly inflation was up to 19.29 percent in 2009, an increase of
2.83 percentage points of the previous year. The lending rate from the banks also
pummeled by 7.73 percentage points, from 25.02 to 32.75 percent (ISSER, 2010).
Notwithstanding the downturn between 2008 and 2009, the economic outlook for 2010
looked promising. The austere measures by the Government of Ghana for the past two
years via its tight fiscal and monetary policies yielded some positive results. Inflation
was down to a single digit of 9.6 percent by the second quarter of 2010. The budget deficit
(including arrears payment) that stood at 14.5 percent by the end 2008 declined to
10 percent by August 2010, and the current account deficit reduced to 8 percent of GDP
by the end of 2009 from about 21 percent of GDP in 2008. The prime rate from the Bank of
Ghana declined to 15 percent in August 2010, from 18 percent in 2009. These positive
developments have received some international acknowledgement. Fitch,
a London-based credit rating agency described Ghana’s economy as stable, with
a B þ rating which is indicative of a strong economy (Amoakos 2010, pp. 1, 3).
The management of public debt is crucial in averting the Dutch disease in Ghana’s
emerging oil economy. Improper management of public debt and servicing could have
negative consequences on macro-economic stability and growth in the short and
medium term. Ghana’s total debt continues to rise even after the Highly Indebted Poor
Countries (HIPC) relief in 2005. After a drop from 8,043 million Ghana Cedis
(US$5,363 million) in 2005 to 5,297 million Ghana Cedis (US$3,531.33 million) in 2006, the
total debt surge from 7,295 million Ghana Cedis (US$4863.33 million) in 2007 to
11,976 million Ghana Cedis (US$7984 million) in 2009, as indicated in Table I with its
attendant rise in debt servicing (ISSER, 2010, pp. 53-4).
This rising trend in Ghana’s debt can be detrimental to the economic fortunes of the
country if not effectively managed. The easy option of resorting to borrowing in
anticipation of the oil revenue is not sustainable particularly if Ghana is to avoid the
Dutch disease. Although borrowing is not bad per se especially when applied in
Item/year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Total public debt 5,121 5,608 6,846 8,442 7,804 8,043 5,297 7,295 8,542 11,976
Total debt service 390 418 513 619 539 623 691 677 1,177 1,605
External debt 245 187 292 341 285 361 388 355 694.7 855
Principal 187 139 213 256 192 261 298 256 497 538
Interest 59 48 79 85 93 100 90 98 197 317
Domestic interest 145 231 221 279 255 262 303 322 482 750
Percentage
Debt to GDP ratio 189 141 140 128 98 84 46 52 50 55
External debt: GDP ratio 160 121 112 107 77 65 22 26 25 30
Domestic debt: GDP ratio 29 27 29 21 21 19 24 27 25 25
Debt service to domestic
revenue 81 61 58 45 28 27 27 19 25 27
Debt service to exports 20 22 25 24 20 22 19 17 21 27
Loans to domestic revenue 38 44 15 23 18 20 18 13 14 22
Grants to domestic revenue 12 38 17 23 26 22 25 23 17 20
Debt service to GDP ratios 14 11 10 9 7 6 6 5 7 7
Source: ISSER (2009) and Government of Ghana 2010 budget statement
Table I.
Debt servicing and
prospects for
sustainability (Ghana
Cedi in millions),
2000-2009
Emerging
“Dutch disease”
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productive sectors of the economy for higher growth, however, it can destabilize the
economy if misapplied or captured by the Political elite. It is worth noting the linkage
of the upsurge of public debt from the year 2007, the year of discovery of oil.
With the US$1.5 billion Korean STX housing loan deal which is expected to build
30,000 houses for the security services and about US$17 million loans and grants
expected from China and Japan which was agreed in 2010. This trend is likely to
continue in anticipation of petro-dollars, posing potential problems for the stability and
sustainability of the emerging oil economy. This is against the backdrop of the risky
nature of the boom-burst cycle of oil prices. The debt servicing ability may be stalled
when oil prices dips, resulting in debt overhung (Murshed, 2010). Another worrying
development is the attempt by government to make some changes in the clause of the
proposed Petroleum Revenue Management Act that prohibits the use of petroleum
reserves account as collateral for debt or borrowing against petroleum reserves in other
to allow its use of future revenues as collateral for loan. This could be a recipe for
possible exploitation if this amendment is effected. According to Nankani and Allen
(2004, cited in ISSER, 2010), the empirical threshold of debt service to export ratio is
25 percent, which is 2 percent below debt service to export ratio for 2009. Ghana’s total
debt has significantly increased since 2007. According to ISSER, Ghana’s total
indebtedness increased from 7,295 million Ghana Cedis (US$4,863.33 million) in 2007 to
8,542 million Ghana Cedis (US$5,694.67 million) in 2008, further increasing to
13,355 million Ghana Cedis (US$8,903.33 million) in 2009, and 17,743 million Ghana
Cedis (US$11,828.67 million) by December 2010 (2011, p. 55). This trend seems to
continue into the first three quarters of 2011. Some economists have cautioned that
Ghana’s debt stock may reach 40 percent of GDP by the end of the third quarter of
2011, a condition that will be above the 37 percent of GDP of debt stock that sent Ghana
to HIPC. This depicts a gloomy state of Ghana’s debt situation and will require a
formulation of an effective and sustainable debt management policy if Ghana is to
avoid the negative effect of public debt burden.
A stabilized economy serves as a good foundation for accelerated and sustained
growth. The Ghana Cedi has appreciated against the major currencies; 0.1 percent
against the US dollar, 2.2 percent against the pound sterling, and 5.4 percent against the
euro (Budget Statement of 2011). As important as this may seem, how the economy will
respond to the inflow of “petro-dollars” without distortions is of much interest. Although
total revenue showed an increase of 24.9 percent over the 2008 figure (ISSER, 2010),
revenue mobilization generally continue to be a real challenge. The huge leakage in the
institutions and agencies mandated to collect these revenues need to be plugged, if this
challenge is to be addressed. Growing the Ghanaian economy will potentially increase
government revenue and this will require investment in productive sectors of the
domestic economy, particularly agriculture, to generate the needed growth. This growth
is essential to create the opportunity for investment of oil revenue instead of
consumption. Economic growth itself does not avert the resource curse until it is
translated into developments that impacts positively on the people of Ghana and
particularly the under privileged, marginalized and poor as asserted by Murshed (2010).
In distributing the bigger pie of growth to the poor, it may create inequalities that may
precipitate greed and grievances that are drivers of internal conflict (Ross 2004b, cited in
Murshed, 2010). Achieving economic growth may not be a panacea to the resource curse,
if it fails to engender development, benefit the poor, and reduce or eliminate
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societal inequality. Kakwani and Pernia (2000) argue that pro-poor growth should reflect
a disproportionate benefit in favour of the poor in the sharing of the national cake.
Agricultural sector performance
Agriculture continues to be the backbone of Ghana’s economy, and fundamental to the
prosecution of a sustainable development and poverty reduction agenda. This was
re-enforced by the Maputo declaration which enjoined African countries to allocate at
least 10 percent of national budget on agriculture. Ghana has recorded sustained
positive growth in per capital food production since the 1990s and efforts continue in
this direction. Expenditure for the agricultural sector, which is a percentage of total
government expenditure, has shown a steady increase from 1.36 percent in 2000 to
10.32 percent in 2008. This has reflected in the overall growth of the sector. The growth
rate in 2009 was 6.1 percent, an increase of 0.1 percentage points over the previous
year. Notwithstanding the progress in this sector, the economy remains vulnerable to
external shocks due to its narrow resource and export base (ISSER, 2010, p. 105). From
Table II it is clear that the agricultural sector undoubtedly remains the largest sector of
the Ghanaian economy contributing 34.5 percent to GDP in 2009, an increase of
0.6 percentage points of the previous year.
The main drivers of growth of the agricultural sector in 2009 were the performances
of two sub sectors; crops/livestock and cocoa (6.2 percent each) (ISSER, 2010). Cocoa,
timber and non-traditional agricultural exports provided the major foreign exchange
earnings for agriculture. Foreign exchange earnings from agriculture as indicated in
Table III, increased to US$2,197 million in 2009 from a 2007 figure of US$1,549 million,
with cocoa (84.9 percent), timber (8.2 percent), and non-traditional agricultural exports
(6.9 percent) as main contributors (ISSER, 2010, pp. 112-13).
It is notable that the investment and further development of the agricultural sector,
particularly on cocoa production is essential to avoiding the Dutch disease.
A characteristic of countries that have experienced the Dutch disease has come
about when there has been a shift of focus. The phenomenon of the Dutch disease
shows a shift of focus and concentration from the agricultural and manufacturing
Sector
Year / period Agriculture Services Industry
2002 39.5 33.0 27.5
2003 39.8 32.8 27.4
2004 40.3 32.6 27.2
2005 39.5 32.9 27.6
2006 39.3 32.9 27.8
2007 38.0 33.4 28.6
2008 33.9 31.8 26.5
2009a 34.5 32.3 24.9
Average
2002-2004 39.8 32.8 27.4
2005-2009 36.3 32.4 27.2
Note: aRevised as at June 30, 2010
Source: Ghana Statistical Service, Accra
Table II.
A sectoral contribution
to GDP, 2000-2008 at
constant 1993 prices (%)
Emerging
“Dutch disease”
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sectors to the resource export and construction sectors, resulting in economic
stagnation. A World Bank (2009) report described Ghana as having some of the
symptoms of the Dutch disease even before the flow of oil revenue. This position was
predicated on the moderately steady contribution of industry to GDP for the past two
decades. In this instance what the World Bank fails to acknowledge is the fact that the
economy of developing countries hinges on other sectors and not industry but the
assertion of Ghana already experiencing the Dutch disease cannot be taken lightly.
A scrutiny of Ghana’s economy in the light of the Dutch disease will be better
appreciated if focused on the agricultural sector which is the driving force of the
economy. The Government of Ghana seems to be demonstrating its commitment to
improving agriculture even in the anticipation of oil revenue. The policy of mass cocoa
spraying, the procurement of tractors for farmers groups on hire purchase in other to
mechanize agriculture, the presidential initiative of youth in agriculture, establishment
of the Buffer Stock Management Company, the establishment of the Savanna
Accelerated Development Authority (SADA), are manifestations of that commitment
leading to unprecedented feat for the first time in the 2010-2011 crop year by exceeding
1 million metric tons of cocoa harvest. This feat has been attributed to good agronomic
practices, payment of remunerative producer price, application of fertilizers, disease
and pests control, use of hybrid cocoa seedlings, and scientific research (Dzawu 2011).
Although this is encouraging, it is not without challenges. The SADA board is directly
under the supervision of the presidency. Even though it can be argued that this
arrangement may present some opportunities, it is inherently susceptible to Political
control which may not inure to the benefit of the ordinary people. Issues such as
curbing smuggling of the cocoa, creating ready market for the products, storage
facilities are being addressed.
No efforts should be spared in eschewing the temptation of over dependent on oil
revenues. Apart from shrinking the tradable sector, it has the capacity to lead to the
abrogation of the social contract with the people, restricting citizen participation and
enhancing Political capture of oil rents. The effect of this may include the widening gap
between the rich minority and the very poor majority with potential for resistance by
Agriculture
Cocoa & cocoa
products Timber
Non-
traditional
Non-
agriculture Total
Year/period $ % $ % $ % $ % $ %
2000 437 22.5 175 9.0 75 3.9 1,254 64.6 1,941 100.0
2001 381 20.4 169 9.1 82 4.4 1,235 66.1 1,867 100.0
2002 463 22.4 183 8.9 86 4.2 1,322 64.5 2,064 100.0
2003 818 34.9 174 7.6 138 6.0 1,182 51.5 2,297 100.0
2004 1,071 39.2 212 7.7 160 5.9 1,290 47.2 2,733 100.0
2005 908 32.4 227 8.1 151 5.4 1,516 54.1 2,802 100.0
2006 1,187 31.8 199 5.3 203 5.4 2,146 57.5 3,735 100.0
2007 1,103 26.3 249 6.0 197 4.7 2,646 63.0 4,195 100.0
2008 1,487 28.2 317 6.0 188 3.6 3,278 62.0 5,275 100.0
2009 * 1866 32.0 180 3.1 151 2.6 3,643 62.4 5,840 100.0
Source: Bank of Ghana, Accra and Ghana export Promotion Council, Accra, in ISSER: 2009
Table III.
Foreign exchange earned
by agricultural and
non-agricultural sectors,
2000-2009 (US$ million)
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the latter via demonstrations, strikes and or conflict. Diversifying the Ghanaian
economy by stimulating the agriculture, industry, manufacturing sectors, and
expanding the tax network to generate the needed revenue, in other to avoid over
dependence on oil revenues is undoubtedly the way forward.
The spending effect and the resource reallocation effect
The “spending effect” concept is premised on the upsurge of spending in the
non-tradable sector due to the uncompetitive traditional tradable sector, created by
exchange rate appreciation due to the flow of oil revenues (Humphreys et al., 2007).
Currently, the exchange rate of Ghana Cedi against major currencies is stable.
Although it is not clear how the yet anticipated “petro-dollars” may influence the
dynamics in the economy, probable speculations could be made based on two factors;
government expenditure trend prior to the discovery, and the high propensity to spend
in an oil economy. The total Ghana Government expenditure as a percentage of GDP
has been within the range of 32-38 percent for the period 2001-2006. After a
3.36 percentage points drop from 2001 to 32.34 percent in 2002, it has consistently and
gradually increased by between 0.5 and 2.3 percentage points annually to 37.70 percent
in 2006. Significantly, however, total expenditure as a percentage of GDP was up by
5.81 and 11.91 percentage points in 2007 and 2008, respectively. Given that the period
2003/2004 recorded the highest percentage point increase of 2.31 percent, high
expenditure associated with election years could explain the occurrence, but the oil
discovery and anticipated revenues could have driven the increment to that significant
level in 2007/2008 (Figure 1).
This feeds into the second factor which is the infectious nature of oil revenue to
government expenditure. The expectation of oil revenue can induce governments to
engage in profligate spending that creates huge current account deficit, budget deficit,
Figure 1.
Trends in government
payments (percent GDP),
2001-2009
60
50
40
30
20
10
0
To
ta
l P
ay
m
en
t (
%
 G
D
P
)
2001 2002 2003
Source: ISSER (2009) and Government of Ghana 2010 Budget Statement
2004 2005 2006 2007 2008 2009
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and public debt burden (when borrowed) which places an albatross of debt servicing
on the economy, thereby stifling development and growth. Although the 2009
government expenditure per GDP fell by a significant value of 15.39 percentage points
due to the tight fiscal policies of government, the implementation of the single spine
salary policy which is aimed at ensuring equity and fairness in public sector wages,
and the increasing labour demands on government poses a challenge on government
spending. It requires for government to improve its internal revenue generation
capacity, and link salary to performance and productivity. This is to prevent spending
oil revenue on remunerations and avoid the resource curse syndrome.
While the spending effect is yet to be visibly observed due to the absence of oil
revenue, the “resource reallocation effect” is visibly manifested. Oil companies and
service companies are inundated with employment applications. However, the
technical nature of offshore oil exploration provide little employment opportunities
upstream, but more in the downstream sector. There are reported cases of movement of
skilled and unskilled labour to the Western Region of Ghana, the region that borders
the Jubilee field. This exacerbates the existing unemployment problem in the area, as
the region has the highest unemployed youth, 44 percent of registered youth were
unemployed (GTUC/FES, 2009). It is not clear how this labour movement has
dislocated other sectors especially agriculture, but what is certain is that the pull of
labour was mainly from the huge unemployed pool, thus ameliorating any impact of
job loss. Another evolving dimension is the pull or attraction of huge foreign direct
investment into the emerging oil economy. The drivers of this pull may include the
stable macroeconomic environment and the oil resource among others. Countries like
India, Iran, Sweden, China and the Czech Republic have all expressed interest in
investing in various sectors of the Ghanaian economy. This potential capital injection
could stimulate and reinvigorate the economy and enhance growth. This could be a
positive development in avoiding the resource curse if the wealth generated is
employed in eradicating poverty, illiteracy and disease.
Institutions and economic growth
Beyond the economic explanation of the Dutch disease and the resource curse, there are
Political dimensions that shape the economies of natural resource rich countries.
The Political dimension finds expression in the institutional arrangements which
create the environment that facilitates the utilization of resources for economic growth
and development. Institutions have been defined by North (1990) as the rules of the
game and more formally as humanly devised constraints that shape human interaction
(Duruigbo, 2005, p. 18). Good institutions seek to hinder government expropriation and
enhance civil liberties (Acemoglu et al., 2001). It is the regulatory apparatus that stifles
fraud, anti-competitive behaviour, moral hazards, and creates those social and Political
institutions that ensures risk and social conflict reduction (Rodrik, 2000). The position
advanced is that natural resource rich countries characterized as growth losers have
deficits of good institutions (Duruigbo, 2005). The institutional set up in Ghana by the
time of first commercial oil production from the Jubilee field is examined under
regulations and the regulators.
The vituperations of the Ghanaian Political leadership suggest that the oil and gas
resource shall be a blessing and not a curse. They envisage that Ghana will be
among the few growth winners due to the presence of the oil and gas resource.
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The extent to which this rhetoric reflects the reality is unclear. What is certain however
is the nature of the institutional readiness for first oil production. The institutional set
up has attracted mixed responses in respect of its state of readiness. One school of
thought contends that the institutional arrangements by the time of first production is
sufficient and will evolve with time with changes made along the line. This position
is supported by government officials and its agencies. Another school of thought
argues that the institutional set up is not strong enough and requires pruning before
the commencement of first oil production. It is observed that civil society and academia
are split between these two views.
Issues have been raised with regards to the existing legislations regulating
operations in the oil and gas industry in Ghana. There was the tacit admission that the
existing legislations enacted in the 1980s were inadequate to address the challenges of
the emerging oil economy, hence the need for some pruning and additions to the existing
legislations. Inspite of this deficiency, commercial oil production commenced without
the full compliments of the required legislations. The petroleum exploration and
production bill and petroleum revenue management bill were in parliament, yet to be
passed into law when oil production commenced in December 2010. The National Oil
and Gas Policy, the whistle blower’s bill and the right to information bill were all at
various stages of the legislation process. This apparent legislative deficit poses a
challenge to the institutional arrangements with the potential of failing in its regulatory
function.
The existing legislations by the time of first oil production had inherent short falls.
These legislations were enacted during the military regime in the 1980s which
restricted the spaces of engagement and contribution by the general public. This lack
of wider consultation could starve the process of the diverse views that could enrich the
policies and bills. This raises questions about why oil production commenced in the
absence of these very necessary legislations.
The international oil companies (IOC’s) and the Political elite have appropriated
credit for the record time development of the Jubilee field. Beyond this accolade is the
possible rationale behind this speedy development and commencement of oil production
with deficient legislations. For the IOC’s, it reduces the cost of exploration and the
turnaround time for recouping their investment. The lack of sufficient legislations also
inures to their benefit, as it allows the IOC’s to use the advantage of information
asymmetry to the detriment of the host country. The contractual agreements between
government and the IOC’s for instance were kept out of public knowledge. The
operations and activities of the IOC’s are also shrouded in secrecy. This lack of
transparency enables the Political elite to be influenced to act in ways and make
decisions that benefit the IOC’s at the expense of the larger public. Although debatable,
some questions have been raised with the nature of the Government of Ghana
agreements with some of the IOC’s.
The Political elite have argued that there is no need for the full complement of
legislation before oil production commence. They contend that these legislations will
be improved with time as production progresses. This explanation may be a fac¸ade,
since the motivation may be the desire of the Political elite to have quick access to the
resource rents to consolidate and perpetuate their hold on power. It may also be a
deliberate attempt by the Political leadership to create the environment to enhance
corruption and facilitate kleptocracy.
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Another aspect of the institutional arrangements that require some attention are the
agencies of state charged with the responsibility of ensuring the adherence to the
legislations and regulating the oil and gas industry in ensuring that Ghana benefits
from the new found resource. These agencies include the Ministry of Energy (MOEN),
Environmental Protection Agency (EPA), GNPC, Ghana Navy, Ghana Police Service,
Commission for Human Rights and Administrative Justice (CHRAJ), Economic and
Organized Crime Office (EOCO). The presence of legislations is relevant only to the
extent that they are enforceable. Enforcement rest with the mandated agencies or
institutions of state mentioned above. Unfortunately, most of these agencies were
under resourced with logistics and human capital by the time of first oil production.
This could be argued as a rational Political decision to maintain a weak institution to
make it easy for corruption and kleptocracy to thrive. Central in this dynamics is the
presence of the oil resource which is subject to capture by the key actors. Against this
backdrop, the rhetoric of the Political elite in using the oil resource to engender growth
comes under serious scrutiny and raises doubt about their real intentions. Even though
gas arguably, provides direct benefits to the ordinary citizenry, the infrastructure and
platform for its production is yet to see the light of day. Further work is underway on
the institutional readiness in Ghana’s emerging oil and gas industry on the topic
“Rent-seeking Resource and Institutional Challenges in Ghana’s Oil and Gas Industry”.
Conclusion
Ghana’s discovery of oil in commercial quantities in 2007 and the the first commercial
production commencing in December (2010) from the Jubilee Field (Ghana’s offshore oil
field) has elicited a mix of joy and fear by Ghanaians. Joy because oil provides an
additional source of revenue for the country, and fear because the presence of oil could
negate economic growth, weakened institutions, enhanced corruption, weakened
democratic structures, and could result in violent conflict if not well managed as noted
in other African countries. As Ghana prepares to transit into an oil economy, the
government has promised to make the oil and gas resource a blessing and not a curse
as known to have happened in other parts of the world.
The major macroeconomic indicators are showing resilience and stability of the
economy even as Ghana increases its oil exploration operations. Inflation has been
brought down to single digit of 8.58 percent in December 2010 from 20.74 percent in June
2009 (Ahmed 2011, p. 9) fiscal deficit reduced to 10 percent, and a GDP growth of
4.1 percent. Ghana’s local currency, the Cedi has appreciated against the major
currencies and the prime rate has been brought down to 15 percent. Although this sound
economic base sets the tone for accelerated growth when the oil and gas revenue comes
on stream, the rising debt burden since the discovery of oil in Ghana could upset the
growth agenda in the short and medium term. It has been argued that achieving growth
is essential but not sufficient in averting the resource curse unless it translates into
development that impact positively on the poor. Proponents of the Dutch disease posit
that oil revenues causes appreciation of the currency which affects the competitiveness
of the traditional tradable sector. It is not certain how the economy will respond to this
challenge as its currency has appreciated even before the flow of oil revenue.
Another symptom of the Dutch disease is the distortion of the economy away from
agriculture and manufacturing to the oil sector. The study questions World Bank’s
designation of Ghana as already experiencing the Dutch disease on the basis that
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Ghana is an agrarian economy and not industry led. Agriculture continues to drive the
economy bringing in a foreign exchange of US$2,197 million in 2009. Government
interventions such as increases in producer price of cocoa, mass cocoa spraying
exercise, establishing the Buffer Stock Management Company to provide ready market
for farm products among others demonstrates its commitment to boost agriculture
production in spite of the oil discovery. This is a positive step in preventing such
distortions and avoiding the Dutch disease.
The spending effect and the resource reallocation effect that characterized the Dutch
disease were further interrogated within the emerging oil economy. Government
expenditure has shot up significantly since the year of discovery and the trend will
continue having regard to the colossal loans already contracted and those in the pipeline
for various developmental programs, including the increasing wage budget due to the
implementation of the single spine salary structure (SSSS). This spending effect could be
attributed to the infectious attraction to borrow in anticipation of oil revenue, thereby
increasing the debt burden with the potential to entrenching the resource curse in the
absence of a debt management policy. The resource reallocation effect is visibly
manifested with the movement of unemployed youth towards the oil and gas sector, and
the pull of foreign investment to stimulate growth and create employment.
All may not be well with institutional set up prior to first oil production in Ghana.
There seem to have been a conscious or unconscious but subtle attempt by various
governments at weakening institutions, particularly those mandated to ensure
transparency and accountability, in order to promote their parochial ends. The failure by
government to legislate appropriate laws and adequately resource key state agencies
that will play important roles in the oil and gas industry before production begins could
be part of the grand strategy to incapacitate these institutions to facilitate corruption and
kleptocracy.
Contrary to the claim by the World Bank that Ghana is already experiencing
the Dutch disease, the Government of Ghana’s continued effort at improving the
performance of the agricultural sector and an effective policy to manage her debts are
the key factors to avoiding the Dutch disease and in truly ensuring the blessing that oil
brings and not the often talked about associated curses. The stable economy and the
increase of foreign investment will facilitate growth for development. Clearly, Ghana
may be on track and should hopefully embrace blessings rather than curses, if
attention is paid to the rising debt stock and the institutional set up.
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About the authors
Kwasi Dartey-Baah is a Lecturer at the University of Ghana Business School. Kwasi Dartey-Baah
is the corresponding author and can be contacted at: kdartey-baah@ug.edu.gh
Kwesi Amponsah-Tawiah is a Lecturer at the University of Ghana Business School.
David Aratuo is an MPhil Candidate and Graduate Assistant at the University of Ghana
Business School.
Emerging
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