Friday, April 11, 2008

Ghana, Next Victim of the Resource Curse?

The Washington Post today has a lengthy article in the A section about Ghana's new-found oil wealth:

Ghanaians are struggling for a way to grow one of Africa's most stable democracies into one of its most prosperous, while blunting the corrupting power that has made oil a curse for so many of its neighbors.

Oddly enough, I was just talking about the similar situation in Nigeria at dinner last night.

Many countries in Africa have abundant natural resources in the form of oil, gold and other precious metals, timber and diamonds and other gems. However, most of them also fall victim to the 'Resource Curse', the paradox by which countries with an abundance of natural resources tend to have less economic growth than countries without these natural resources. Primary causes include:

  • Conflict
  • Rentier State
  • Corruption
  • Distribution of Benefits (between state/investors, between state/citizens, between regions)
  • Distortion of Labor Markets/No Investment in Human Capital
  • Lack of Economic Diversification

While the last two are important, in Africa, the first four tend to dominate.

Sierra Leone is a classic example. Sierra Leone has a multi-ethnic, bi-polar demography. Out of twenty different ethnic groups, two, the Temne in the north and west and the Mende in the east and south dominate their respective regions and the other ethnic groups therein. In a majoritarian presidential system such as Sierra Leone’s, the ethno-political blocs are strengthened, becoming the final determinant of political access. Sierra Leone is also home to vast alluvial plains of diamonds. 'Mines' here are not the big, deep holes of South Africa and Botswana, but rather fields and rivers where diamond concentration is high.

From a paper I wrote at SAIS last year:

Despite the difficulty of controlling the mining and export of diamonds in an alluvial plain, the vast wealth [available] drastically increases the potential costs of losing. The unwillingness of either hinterland region to submit to another, or for either to submit to the Krios [descendants of freed British slaves] in the capital, diminishes in light of potential costs of relinquishing control of the diamond mines. Thus, while Sierra Leone is nominally a multi-party state and has held elections, the losers always fail to respect the outcome and constantly agitate to overthrow the government.

The Sierra Leonean state did not act reassert its control of the diamonds trade. Under [Siaka Stevens, President during the 1970s] Lebanese merchants gained control of some of the official diamond trade, and most of the unofficial trade. As cultural outsiders, they offered little threat to his political power, and also maintained vast international networks for trade. By virtue of his office, Stevens was able to grant mining and exporting concessions, for which the Lebanese supported Stevens financially.

Stevens’ course of action had two negative results. The first is that the Lebanese merchants eventually formed their own security forces to provide protection, and lessen their dependence on Stevens. However, because Stevens had weakened the military in order to prevent against military-led coups, he could not challenge the new paramilitary groups, often made up of gangs of poor miners. The second result was the chronic shortage of state revenue. By 1988, official exports of diamonds amounted to only $22 000. In contrast, Lebanese exports had an estimated value of $250 million. The result of the under-funding was that the state was unable to provide public services or investment, and lacked the resources to take action on problems of credit, debt management, or diamond, gold and commodities smuggling. The elites were unaffected by the precipitous decline of the Sierra Leonean economy during the 1980s, but the citizen population became restive. In 1985, Stevens handed off power to Joseph Saidu Momoh, who was welcomed as a source of change.

In 1989, Momoh tried to gain better control of the diamond industry. The government approved a proposal by the Dallas, Texas company Sunshine Broulle to take over the failing state diamond firm. Sunshine Broulle fielded security forces in an extensive and exclusive mining zone, which helped marginalize rival politicians running illicit mining operations. However, Momoh used Sunshine Broulle’s operations to spare the expense of building capable but politically risky institutions to enfold and undercut political rivals and collect state revenues. By relying on foreign firms who were dependent on concessions, the central government failed to develop its own capacity and so instead weakened its ability to withstand political challenges when those firms left, as Sunshine Broulle did in 1992. Additionally, local dissatisfaction increased each time outsiders were brought in to manage economic resources, thereby perpetuating the exclusion of the Sierra Leoneans from economic gain.

Ghana itself is no stranger to natural resource wealth, due to the concentration of gold veins in the Ashanti region, but again, most of those profits benefit foreign investors.

However, there is hope. Botswana provides a good model of a state and its citizens benefiting from natural wealth. From the same paper:

Diamonds were not discovered in Botswana until after independence. The government approached the negotiations with de Beers with the goal of negotiating fiscal arrangements which would yield maximum revenue in order to fund economic growth. Initially, negotiations favored de Beers, but as de Beers made more investments, it became less able to abandon its projects. Also, neither the government nor de Beers correctly estimated Botswana’s available resources, leading de Beers to commit to longer time frames than it originally envisioned.

The Botswana government is a competent bargaining agent and so while it began with one third of the shares of the operation, it used the discovery of new mines to renegotiate the original contract in the later 1970s, eventually controlling up to 60 percent of its mining operations. The revenues from the diamond mines provide substantial revenue with which to fund development projects. These include funding health facilities, schools; provide clean, pipe-borne water to every community, and otherwise raise the physical standard of living.

In addition to its bargaining powers, the government is also a competent macroeconomic manager. Despite the downturn in diamond profits during the 1980s, the government was able to initiate new development programs, including the Financial Assistance Program which aimed to shift manufacturing jobs from urban areas to the countryside in order to boost the rural economy. While the benefits of Botswana’s economic growth are still uneven, and the government receives widespread criticism in particular for its treatment of the San people of the Kalahari, Botswana now boasts a per capita income of over $3000, making it a middle income country, and one of the richest in Africa.

Botswana isn't nearly perfect, or even very liberal; through various cultural traditions and institutional choices, it has deliberately limited the effectiveness of civil society. The kgotlas system [a process by which the community nominally decides policy, but really serves as public relations events to consolidate support for the elites’ decisions] already diminishes the expectation of citizen participation by presenting tribal, and now government policy, as fait accompli. The provision of public services further reduces any need citizens might have to lobby the government. However, it is stable and developing, and is increasingly coming under criticism from indigenous groups, and progress continues to build a strong civil society.

Ghana is not a country I know much about, but it is stable, and seems to do well in international rankings. Of course, these aren't the only factors in play: there is no local hegemon to stabilize the region (and its neighbors don't have the most promising history), it is not as demographically homogenous as Botswana, and I really can't speak on the state-civil relations at all. But, with good management and democratic participation, much is possible. I'm cautiously optimistic.

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