Avoiding the Oil Curse

How can Ghana avoid the kinds of corruption and conflict that often accompany higher oil revenues?

October 26, 2009

By Todd Moss

How can Ghana avoid the kinds of corruption and conflict that often accompany higher oil revenues?

Author

Todd Moss

Todd Moss is Vice President for Corporate Affairs and Senior Fellow at the Center for Global Development (CGD).

To: President John Atta Mills, Republic of Ghana

From: Todd Moss, Center for Global Development, Washington, D.C.

Your country has been a leader of Africa for much of the past 50 years.

Ghana has been a model of democracy and has admirably fought corruption. Economic growth has been high since the early 1980s, and poverty has fallen steeply.

But all this progress is under threat from the impending wave of oil receipts. By 2013, oil exports will overtake both gold and cocoa.

The “oil curse” has brought authoritarianism, conflict, corruption and poverty to too many countries. Your challenge is to put in place a system for managing oil income that protects and advances your country’s impressive gains.

Recommendations for a separate oil fund and increased transparency are good ones. But what separates the natural resource successes (Botswana, Norway, Chile) from the failures (Chad, Nigeria) is the presence of an influential domestic constituency that demands sound management and guards democracy.

Ghana does not yet have such a powerful bloc, but it can learn from Alaska’s experience. That U.S. state set up a special fund after politicians squandered oil revenues and, starting in 1982, began to pay dividends directly to residents as a deliberate check on state power.

The proposal

Ghana can use a similar approach by paying oil revenues directly to citizens. Ideally, this would be enshrined in the constitution via referendum or a 75% vote in parliament. The advantages of this plan are that it:

Puts cash directly in the hands of the people (estimated at $50 per citizen per year)

Builds a constituency for holding the government accountable

Creates new incentives for the IRS to expand the tax base

Will make your government immensely popular

You may hear these common objections to direct cash payments:

It reduces the government’s ability to fund services. But, direct spending by citizens is more efficient — plus the IRS will collect more through value-added taxes and other taxes. If necessary, you could set fixed ratios for other desired purposes (e.g., a 60% cash payout, 20% towards an infrastructure fund and 20% towards long-term savings).

The politics are too difficult. Whoever floats this idea will be hugely popular. Once established, it would be political suicide to cancel the payments.

It is too hard to implement. New biometric card and mobile phone technology make this both feasible and low-cost.

The conclusion

Ghana is at a critical moment in its history, but there is still time.

As a president who understands profoundly the importance of tax collection and sound management, you are ideally placed to put your country on a path to break the oil curse — and have Ghana once again lead Africa into the future.

Takeaways

As a president who understands the importance of tax collection and sound management, you are ideally placed to put your country on a path to break the oil curse.

The "oil curse" has brought authoritarianism, conflict and corruption to too many countries.

Alaska set up a special fund after politicians squandered oil revenues and, starting in 1982, began to pay dividends directly to residents as a deliberate check on state power.