Share the Oil Cash! Courting the “Devil’s Excrement”

Wed, 28 Oct 2009 Source: Idun-Arkhurst, Kobina

In the late 1960s, Venezuelan oil Minister Juan Pablo Perez Alfonzo, a co-founder of OPEC, looked at the easy wealth oil was bringing his country and saw ruin, not prosperity, in the future. He prophetically called oil the “devil’s excrement”, referring to the debilitating social decay associated with oil wealth.

Recently, the international development community have taken a keen interest in how Ghana manages its oil wealth, not least because Ghana has been a star pupil in Africa. If Ghana can pull it off again it will once more serve as a model in a neighbourhood, where oil has brought poverty and conflict instead of development. Ghanaians are also eager to learn from the pitfalls of oil wealth

And the policy proposals have started pouring in, one of the most recent from Todd Moss, Vice President for Corporate Affairs at the influential Washington-based Centre for Global Development (CGD). In a policy memo addressed to the President of Ghana, and published on CGD’s website and Ghanaian online news portals, Todd suggests Ghana adopt, by legislation, Alaska’s model of disbursing oil cash directly to its citizens “as a deliberate check on state power”. (The parenthesised part of the previous line exposes the ideological assumptions, not entirely baseless, that underpin Moss’ proposal, but I’ll unpack that in another article.)

As expected of a policy proposal, Todd lists the benefits to Ghanaians in general and the ruling government in particular. For the Ghanaian population: each, according to Todd’s estimation, will receive approximately $50 per annum. This should make Ghanaians patriotic enough to be interested in holding government accountable! For the Ghanaian government: it offers an opportunity to expand the tax base and, here is the catch, the ruling government will become “immensely popular” with the electorates.

How very tempting! But, hopefully, our politicians will not fall for it.

Todd carries weight among the developmentariat. He led a team of experts that helped Nigeria clinch a $30bn debt forgiveness agreement with the Paris Club in 2005. This was after a series of bad policies and mismanagement had squandered much of Nigeria’s oil wealth. He also directs the think-tank’s Emerging Africa Project. But Todd’s advice for emerging Ghana may not be sound enough, although he is genuinely concerned. Todd himself anticipates criticisms, such as below, and offers an alternative: 50-75% for direct cash transfers and the rest for other purposes “deemed desirable”. Below I discuss why on this occasion his advice, couched in sophisticated language and graphs, is not sound, as well as some implications of following a distribution-consumption policy.

Since Alfonzo’s observation, the problem of “oil curse”, of resource curse generally, has become widely known. There are two sides to the oil curse problematique, one economic, the other political. Todd acknowledges these but arrives at a not too sound conclusion.

Economic: The first is that easy rents tend to encourage slack, frivolous spending and self-indulgent practices instead of sound policies, such as investment in education, health, infrastructure and jobs. Often, the effect is to kill domestic production as inflated wages and prices eat away the competitiveness of local producers at home and abroad, leading to de-industrialisation. This is the so-called “Dutch disease”, named after the experience of the Netherlands following the discovery of natural gas there in 1959.

Recent studies suggest that the more dependent is a country on natural resources the slower its growth. But easy rents from aid money can have similar effects, especially where aid goes into redistribution rather than into investment, the theme of Zambian economist Dambisa Moyo’s Dead Aid. Moyo does not criticise all aid as many believe. She singles out Chinese aid for praise: it goes directly into projects like roads, schools, hospitals and railways. If we have our own money, we’re better off spending more, not less, of it on these. It will buy us enormous policy autonomy, even from the less intrusive Chinese.

For a country like Ghana with an already very vulnerable industrial sector, following distribution-consumption policies, such as advised by Todd, may decimate local industry. But Todd suggests that his proposal will help expand the tax base. Unless $50 a year can encourage investment it is difficult to understand this reasoning. Of course, we can spend more on imports which can be taxed. Not heavily, though, lest we’re blacklisted by powerful trading nations. Don’t forget we had had, at least once, to go back to parliament to scrap an important legislation to promote the domestic poultry industry for a similar reason. The best way to expand the tax base, to my mind, is to support growth in domestic economic activities. We’ll then have more areas to tax: consumption, income, enterprises.

Todd also suggests $50 each plus taxation will encourage Ghanaians to hold their government accountable. But the evidence from the Gulf States does not support this. Governments there are far less constrained by the people’s will, in part because they are far less dependent on taxing the people, which also vitiates Moss’ argument. Instead there is debilitative political patronage. This is not a productive “social contract”. There is a view that taxation promoted democracy and accountable government in Europe. But the European states were not dishing out cash to people then. If they had the means and did so democracy would not have evolved there the way it has.

In some ways, Todd’s proposal looks, to me, like the livelihood empowerment programme, the efficacy of which is very doubtful. A well-known Ghanaian industrialist once mentioned to me in an interview that the World Bank-sponsored poverty reduction programme amounted to nothing more than poverty redistribution. A policy-maker at the time admitted to the need to rethink that policy and noted the government had made their intentions known to the World Bank by changing the name of the programme from Ghana Poverty Reduction Strategy to Growth and Poverty Reduction Strategy! But he was honest to admit that unless we can generate our own revenues our growth ambitions would be circumscribed by the policy strictures of the Western development agencies.

I was therefore not surprised to hear later of the livelihood empowerment programme. Of course, as a party in power such a policy might have looked very attractive for election purposes. In his proposal, Todd Moss too seeks to tempt government with the electoral benefits of distribution-consumption policies. What Todd is, albeit unintentionally, calling for is “illiberal democracy” in which the ruling regime stays in power by simply buying votes with oil cash.

Political: Oil is associated with other lurid political pathologies: corruption, high levels of poverty and, in consequence, protracted conflict. Often lack of infrastructure and high levels of youth unemployment fuel conflicts: by providing hide-outs in undeveloped and impenetrable areas and aiding rapid rebel mobilisation. Those who believe that the recent oil discoveries in the Gulf of Guinea are offshore and will not be subject to similar attacks as in Nigeria’s Delta Region should first look at what is going on in the Gulf of Aden, where deprivation has emboldened jobless Somali youth to create a multi-million dollar piracy business with increasing criminal sophistication.

Can distributing $50 a year prevent without good education and sustainable jobs such desires? Could the Delta crisis have been prevented had the youth there been paid a paltry $50 each? I think not. $50 may help tame the masses, but only for a while. Soon, deprivation will embolden audacious impunity. Let’s not forget that oil is exhaustible and subject to boom-bust cycles, which means the government will not always be able to pay out the cash on demand. And the masses will not always stand behind the fence of oil wealth peeping through a knot-hole.

John M. Keynes once said “Successful investing is anticipating the anticipation of others”. The youth anticipate good schools and jobs. The old anticipate access to adequate and good health care. Our enterprises hope to thrive in an era of oil wealth. “Successful investing” is supporting infrastructure, entrepreneurship and economic diversification. Oil will bring revenues and policy space to achieve these. We should use both productively. To follow Todd Moss’ proposal is to court the “devil’s excrement” and it may come hot and destructive, even putrescent. My own view of oil is that it is the blacksmith’s tantalising hot rod. It can harm if handled with indecent haste. But it can, with care, be turned into a productive instrument. Oil should be an instrument, not an end, of wealth creation. Todd Moss’ short-cut will not lead to sustainable development.

Kobina Idun-Arkhurst. Email: kobkurst@gmail.com

Columnist: Idun-Arkhurst, Kobina