| Economic Trends in Ghana Essay
Ghana is one of the western nations in the African continent. It is considered as an icon of the most peaceful nation with the democratic leadership in the continent. The economic backbone for the country is oil exportation. However, it is also famous for production and exportation of cocoa. Like many other countries producing oil, its economy can be somehow affected by the fluctuation of oil prices. In trying to control the fluctuation of the prices, a number of oil producing countries joined together to establish the Organization of the Petroleum Exporting Countries (OPEC). The current members of the organization are twelve covering countries from Africa, Asia, and the Middle East. However, Ghana is not one of the members of OPEC.
Oil exploration and production in Ghana started in 1896; although, the first commercial release was in 1970 by Signal &Amaco Group. Vigorous research started in 1980 by Ghana National Petroleum Corporation (GNPC).Oil was discovered in central Ghana at Saltpond with estimated 4.9 barrels of recoverable oil reserves. The production at the Saltpond field began in 1978 with 4 800 barrels being produced daily. However, Saltpondwas closed down in 1985 when daily production decreased to 580 barrels per day. After the discoveries, the government of Ghana funded the explorations with the aim of owning the oil reserves. However, the government aim has not been attained due to the high cost of oil exploration. After closure in 1985, production resumed in 2000, and as reported by GNPC, production is at 600 barrels daily (Ghana National Petroleum Corporation 2009). In 2003, due to incurred levies and change in taxes, there was the incorporation of key international oil companies, such as Tullow, Kosmos, and Gasop. It was a precedent of the government of Ghana to take a less nation-centric approach, which allowed the introduction of private companies in 2001.
The coming of private sector investors led large quantity oil discovery in June, 2007, at the western coast of the country of Cape Three Point called the Jubilee oil field. The field has reserves of about 800 million barrels and upside potential of about 3 billion barrels (Commerce Ghana 2000). The first production rate currently targeted at 120, 000 barrels of oil every day and 160, 000 cubic feet of gas daily. Though production was going on, in 2008, Ghana used 56, 000 barrels daily compared to the 7400 barrels per day produced locally meant that Ghana exported 48, 000 barrels per day. However, Ghana is expected to be exporting approximately 64, 000 barrels of oil per day by 2010. There have been other discoveries of offshore fields, which will add up to the Jubilee Field. It has been estimated that the government will earn about $1 billion annually, especially from the Jubilee Field, and up to $3 billion by 2015, when offshore fields begin producing (GNPC 2009).
The expected influx of dollars from petroleum production, which will increase the government spending, has caused high elation levels allover Ghana, mostly the petroleum industry. However, this has some far reaching consequences since Ghana is a developing country, which lacks strong political and economic institutions to handle the growing petroleum sector, which can have more negative results than favorable ones to the country. This was witnessed in many other developing countries with substantial mineral deposit, such as the Democratic Republic of Congo where economic growth is declining, authoritarian government regimes and general civil and social hardships compared to nations with less or no such mineral prospects commonly called the Resource Curse. Ghana could find itself in such a state unless there is a transfer of petroleum ownership from the nation to private bodies, such as the privatization of GNPC. Additionally, employing the right managerial principles and models to be used in the exploration and management of oil for all the citizens of Ghana is equally beneficial. Maximizing the positive effects of the industry and minimizing the negative ones should be emphasized. This is due to the certain fact that the large revenue, which will be got from oil compared to the size of the Ghanas economy, will have a momentous effect. A significant increase in oil rents or new ones will change the economy to better statuses or worse ones. This is because expectations are usually high, but later disappointment follows. Since oil revenues have the capacity to benefit the economy much better, care should be taken since it also has the potential to make it worse than the situation before oil discovery.
This dissertation looks at the economic benefits, both positive and negative, that Ghana faces as an OPEC member. Also, better practices for attaining a sustainable economic growth and development from the oil industry have been discussed. Finally, recommendations are suggested based on the nations current economic situation.
OPEC influences in the marketing and pricing of petroleum product are felt by all the counties in the world. Petroleum is considered one of the core sources of energy in the world. Most of the countries use this resource driving the production and manufacturing industries. This study seeks to explore the impact of the Ghana subscribing to OPEC membership with a focus on the economic consequences. The policies that govern the organization (OPEC) and those governing production of oil and exportation in Ghana will be evaluated to determine the possibility of conflicts. Comparison will be drawn from those countries already members of OPEC with an aim of clearing out a reliable conclusion. Therefore, the researcher will give recommendations based on the direction of the consequences, whether more positive or negative.
The study will be beneficial as a foundation of evaluation in determining the course of action the country will be adopted. The challenges that Ghana has undergone in the process achieving economic development from oil exportation, bears enough facts of importance inclined on petroleum as a resource. Therefore, it is worthwhile to carry out an evaluation of the economic consequences of membership well before subscribing to the organization. According to Donovan (2008), power to control the economy of the world can be advantageous or detrimental depending on what side of the scale one falls. OPEC is criticized to be a cartel that aims at setting the oil prices with an aim of escalating benefits realized from the oil exportation. Given the control that the organization holds on oil exportation, Ghana may benefit or lose economically (The World Bank, 2009). Thus, this study has a profound impact to decision making concerning OPEC membership.
The broad objective of the study is to determine the economic consequences Ghanas membership in OPEC. In achieving this objective, the researcher has broken down the objective into four specific objectives:
To determine Ghanas economic trend in the last 20 years;To investigate the contribution of petroleum to Ghanas economy;
To determine OPEC economic policies and their applicability to Ghanas economy;
To determine the position of Ghanas oil capacity in comparison with the existing members.
The study aims to answer the following research question.
How stable or unstable has the Ghana economy been for the last 20 years?
What are the landmarks indication benefits of oil production in Ghana?
What are the key OPECs policies influencing the members economic progress?
Can Ghana compete effectively in marketing petroleum products with other OPEC members?
This research just like many other studies has some factors that may hinder arriving at the required quality and level of objectives. These factors cannot be influenced by the researcher since they are beyond the capability, but their influence can be regulated by mode of study approach adopted. A crucial limitation to this study is the availability of secondary data. In most African countries, accessing the rightful information is a problem due to the limited number of research, which has ever been done. In this case, getting the critical information may pose a considerable challenge. In this connection, the researcher will use data from world bodies, related data from the neighboring countries, relevant journals, websites, and government documentations. Another limitation encountered in preparing this dissertation is limitation of time. Gathering adequate information requires ample time to consolidate the data and information accessed to arriving at a reliable conclusion. On top of this, cost factor is proved to be another limitation. The researcher requires adequate funds for information gathering and compiling the report.
Delimitations are factors that the researcher set to influence boundaries of the study. They help in reducing external influences to the study. Moreover, setting delimitations enhances manageability of the study reducing cases of covering so many areas, which may end up confusing both the researcher and the reader. In this connection, the scope of the study will be determined by the following limits. Firstly, the area of study concern is one country, Ghana. This will help the researcher focus on the relevant material and information on this country in achieving the study objectives. Secondly, the economic trends in Ghana will be considered for the last thirty years (from 1982 to 2012). This will ensure that necessary data for comparison will be easily accessible and available.
The researcher observed all the ethics in research by ensuring that the rightful procedure is observed. Authority will be sought where necessary, while sources of information will be acknowledged. Where privacy and confidentiality are factors to consider, the researcher will accord them paramount consideration.
Most social scientists describe the resource curse to explain the paradox of plenty, which is experienced in most economies with rich resources. Countries with substantial deposits of natural resources like oil mostly do badly in the economic development and governance compared to those with struggling resources (Sach & Warner 1995, p. 65). It is not surprising that, in spite of the large wealth and opportunities associated with oil, such blessings are most of the time a hindrance than a boost to a balanced and sustainable development. As Sach & Warner (1995) pointed out, natural resources exploitation has helped in improving the living conditions of the people but has failed to create a self-sustaining growth. Apart from growth failures, there are high chances of weak democratic development (Ross 2001), civil war (Humphreys 2005), and corruption (Sala-i-Martin 2003).
There is a considerable difference on the outlooks of natural resource among oil-rich countries (Weisbrot et al 2006). Oil-rich countries, especially those that are developed, have done considerably better than their counterparts in the developing world. This is the case with Nigeria and Indonesia, where 30 years ago, both countries had almost the same per capita income which depended much on oil revenues. Currently, Indonesias per capita income is nearly four times that of Nigeria (Ross, 2003). What has Indonesia done right that Nigeria has not? The most profitable way to make oil resource permanent as explained by Hannesson (2001) is by investing in high returning assets like basic infrastructure. Weisbrot et al (2006) goes further to argue that diverse effects of resource wealth on well-being can found within a country, as countries with rich resources, like oil, most of the time are victims of high levels of inequality even if their performance is better. Wealth from oil resources mostly is in the hands of a few corporate organizations and public elites which lead to rent-seeking activities (Sarraf & Jiwanji 2001). The wealth created from oil has, thus, been to their advantage as they use some uncertain ways.
This section will be devoted to the available literature from different secondary sources. This will involve information from journals, websites, and documentation of the past researches. The literature used will include both empirical and theoretical literatures. Combining the two enhances the quality of the study since they supplement each other.
Economic advancement is affected by several factors, such as political stability, technological advancement, energy sustainability, environmental impacts, and market stability. Energy stability in Africa follows political influences in the order of increase in impact to economic stability. In Ghana, the main source of energy is electricity followed by petroleum. The country has been politically stable over the last decades facilitating a sound economic growth.
It is an intergovernmental organization consisting of 12 countries from Africa, Asia, and America. These countries share a common factor in that they all depend on petroleum as the main resource to spearhead their development. The revenue generated from petroleum is used to support the countries infrastructure, health care, education, offering employment; political stability and almost every sector of living are banked on petroleum and its products exportation. The organizations operation is guided by three objectives. The organization seeks to understand the petroleum policies of the member state and come up with a means of safeguarding both the member countries and the organization’s interest. The organization is also determined to prevent unnecessary fluctuation of oil prices; thus, maintaining a stable market for their product (petroleum). Moreover, the organization aims at promoting economic stability among countries consuming petroleum and its products, thus improving market stability.
The organization was established in 1960 by five founder members including Iraq, Iran, Kuwait, Saudi Arabia, and Venezuela. The membership increased to the current number with the latest country joining the organization in 2007. Joining the organization requires support of at least 75 % of all the Full Members, in addition to full approval of, all the five Founder Members. In addition to this, the country intending to join this organization must portray same interest to those of the organization. There are three categories of membership in OPEC: founder member, full member, and associate members. Founder members are the five countries members that were involved in establishing the organization in 1960 at Baghdad. They include Iraq, Iran, Kuwait, Venezuela, and Saudi Arabia. Full members include those countries that have subscribes fully to the organization, while associate members are not qualified to full membership, but are accepted members of conferences.
The functioning of the organization is guided by several units of leadership including the Head of Delegation, Secretariat, Board of Governors, Economic Commission, and Ministerial Monitoring Committee. These units of leadership and administration meet occasionally to discuss the progress of the market trends. The members of conferences decide on a number of factors including setting the limit, quota for each countrys exportation to ensure consistence in the availability of oil in the market. It is in these conferences that the countries determine the prices scale for petroleum and its products, thus controlling oil prices fluctuation. The quantity of oil produced by the OPEC members accounts for 60% of oil traded in the international market. Though the organization does not control oil market, it significantly influences the market trend through modification of the quantity of oil production and exportation.
According to the OPEC official website (http://www.opec.org), the organization does not set the oil prices. What it does is to prevent fluctuation of oil prices in the market by restraining increasing oil exportation. However, the website affirms that the organization had the mandate to control the oil prices between the 1970s and 1986. The price control is currently regulated by a number of organizations, such as the New York Mercantile Exchange, the International Petroleum45 Exchange in London, and the Singapore International Monetary Exchange.
There have been minimal changes in the policies since 1986. The superiority of the OPEC in controlling oil market was achieved through formulation of policies that were motivated by strong hegemony of western oil companies. During the period between 1960 and 1970, the economic development of the OPEC members increased drastically as the countries gain control over oil prices. According to Al-Farhan(2003), a numbers of factors lead to this enormous achievement. Increased inflation that resulted in fluctuation of oil prices motivated the members of OPEC to formulate policies that could cushion their economy from unstable currency. The countries were also affected by instability of the international economy and cash liquidity (Al-Farhan 2003, p. 7). Increased demand of oil in the world was also a motivator in establishing policies that will prevent unregulated hiking of oil prices. It was a concern that some oil producing countries could have taken an advantage and monopolized the oil trading.
Pollution from oil products has been a topic of concern for many years. Most countries have laid down policies to prevent environmental pollution emanating from petroleum products. Currently, almost every nation is moving toward green economy where the energy sources are more environmentally safe and those that promote social justice equity. OPEC is a core supporter of policies that promote sound environmental. According to the organizations official website (http://www.opec.orgn.d.), the organization is dedicated to promoting members and consumer countries policies that aim at solving community needs in maintaining an environment is concerned of the welfare of the future generation.
A significance concern of the organization is the taxation levied on petroleum and its products in the name of production greenhouse gases. The organization expresses concerns where some of the countries impose heavy taxation on petroleum while at the same time promoting coal produced locally. Ideally, coal produces a lot of carbon dioxide compared to petroleum of the same mass quantity. Logically, the taxation is that meant for government revenue other than reducing greenhouse effect, which leads to global warming. The organization supports researches aimed at addressing the issue of global warming with a focus on social benefits.
Another concern that the organization is significantly promoting is the issue of locating sources of higher quality oil and gas products. This will help the countries to reduce the levels of environmental pollution. This will also help in lowering the refining cost and the level of waste products disposal. On the same footing, the organization is promoting the moves to ensure that the products are cleaner, through using better mode of extraction, transportation and refining processes. The organization has also laid down plans to promote the development among the developing nations, especially those that rely on petroleum as the main source of energy. It is enhanced through the creation of stable market, environmental safety and social responsibility programs.
Petroleum being the main source of energy in the world has the potential to dictate the economic trends in the world. OPEC members occupy a larger capacity of petroleum reserve of about 81%. The fact that the members export about 60% of the total crude oil in the international market also offers the organization potential to control the worlds economy. Moreover, the ability to control the volume of oil exported is a key issue in determining the economic development of the countries economy. For instance, during the Gulf Crisis, the world economy was affected by the organization stepped in to increases the production of oil and its exportation to the international market. This intervention prevented upsurge of oil prices.
One of the economic policies that the organization has put in place is supporting consistency of the economic development among the members and consumers of petroleum. This is facilitating by the idea of appreciating steady supply of energy in affordable and reasonable prices. It should be noted that the prices set are meant to benefit both the producer and the consumer. Therefore, an analysis of demand and supply is consistently carried out by OPEC to ensure that the prices conform to interests of both parties. However, some of the consuming countries end up benefiting at a higher level that the producers through increased taxation of petroleum and its products. It has been a considerable factor of concern among the OPEC members, since they impose taxation at an affordable rate to even those developing countries, yet the developed countries use that opportunity to increase their revenue correction. OPEC operates on non-discriminatory oil taxes with the aim of promoting a stable market. The organization has an economic commission, which is involved in forecasting and analyzing the market nature. The commission has the mandate of ensuring that the economy of the beneficially parties is not swayed by changes in prospect, in the petroleum market.
OPEC has a policy which aims at the increasing production rates whilst decreasing the oil prices. This policy has been described by Al-Farhan (2003) as having two core goals which could oppose each other raising a conflict of interest. The member state has to promote it developmental interest using the revenue generated from marketing petroleum and its products. On the other hand, it has subscribed to a treaty of maintaining and promoting economic advancement globally. To some extent, the country may be in a fix where it has to forego personal interest in the name of safeguarding global interest. Some of the OPEC members have expressed concern of effects that this policy holds. For instance, Saudi Arabia initiated the Oil Price War in 1986. This war was started after realization that some members were not honoring the allocated quotas in exportation of oil. Therefore, some members were benefiting more from the market and the quota system than others. Thus, non-members, who are controlled by OPEC policies, were benefiting relatively better that their comparable OPEC members.
Another policy that proved the power of the organization was imposed in 1973-1974 targeting at neutralizing the Israel-Arab political conflict. The policy imposed sanctions on powerful nations forcing them loosen their policies regarding the conflict. This policy led to drastic rise in oil prices in the international market. Since then, the political influence of the organization has been well illustrated. Consequently, the magnitude of influence that the organization can impose on the economy of the industrialized countries and the world at large could not be overlooked.
In addition, the organization recognizes the need to maintain the price of the oil at low levels, which will maintain the demand scale high. As much as the countries can control the export of oil in the international market, they still need to retain their consumers. Hiking the prices can lead to chasing current and potential consumers away, thus losing the grip in the oil market. America has been the chief consumer of oil from these countries, but this is a mutual relationship since these countries rely on Americans technology and other imports.
OPEC has been a steady, fast organization on areas of development among the member countries and associate consumers (OPEC Secretariat 2010). The organization recognizes the need to fight with poverty in elevating the living standards of the developing nations. In this respect, during a summit held in Algiers in 1975, all members voiced out their solidarity in assisting the poor nations to step up their development projects. This step led to the inauguration of the OPEC Special Fund, later named the OPEC Fund for International Development (World Bank Inspection Panel 2000). This fund targets non-members, the consumers of OPEC petroleum. It aims at financing projects with an objective of helping the nations realize full economic and social developments.
The fund has been directed to areas of primary needs, such as health care sector, basic education, infrastructure development, as well as sanitation and rural improvement projects (OPEC Secretariat 2010). Despite the fact that the organization offers the support with or without expecting pay back, the government of the targeted nation holds the key to decision making. It is the government and the local individuals within the areas that the projects have been initiated that determine the best suited project. This ensures that the country will benefit and avoid cases of projects that do not suit the community. The government identifies the priority projects and seeks OPECs approval and funding.
The scope of OPEC funding reaches beyond development project; it encompass humanitarian assistance in cases of catastrophes. OPEC has offered food aids to a number of countries affected by natural crises, such as earthquakes. In addition, it is also contributed to other international developments bodies, such as the International Monetary Fund (IMF) among others (International Monetary Fund 2009). These approaches are all motivated by the notion of reducing poverty. According to the organizations official website (http://www.opec.org/opec_web/en/50th_anniversary/82.htm), the total amount of funding contributed to the OFID exceeded US$ 11,682, which was used in over 123 countries. These countries are mostly those in the category of the underdeveloped and developing nations.
These development projects support the existence of OPEC as not just a cartel involved in setting the oil pricing. It is more than an oil interested organization. Indeed, OPEC members assistance to rejuvenate the economic development, environmental sustainability, and advancement in social justice, and equity is highly outstanding (OPEC Secretariat2010). According to IMF statistics (2011), some of the countries contributions are comparatively high than those of the rich nations in the world in respect to nations per capita income. A good example in this case is Saudi Arabia, which uses four percent of its national budget to support poor nations development.
For a long time, Ghana economy has depended on agricultural production. It has ample natural resources, such as gold, timber, tuna, aluminum, manganese ore, petroleum, and diamonds. These resources form the core exportation together with agricultural products, such as cocoa and horticultural product. These estimates suggest the country minimally draws it exports revenue from the petroleum products.
According to Obeng (2009), by the year 2009, cocoa, gold, and timber had accounted for the largest portion; 43, 24, 11 percent respectively. The Gross Domestic Product (GDP) per capita had US$ 380 by the year 1992 (http://www.mongabay.com 2012.). By the year 2005, the countrys GDP per capita had been US$400 (Obeng, 2009); while the current estimate is at US$3256.8. The current Gross Domestic Product growth rate is at 8.7% recoding 5% drop from that of 2011. By the year 2011, the population below the poverty line had been approximated at 27.41 %. The country records a low level of unemployment (3%), among the Western African countries. According to IMF estimates of the year 2011, the countrys exports are valued at $13.16 billion compared to import value of $14.18 billion.
Table I. Ghanas Gross Domestic Product.
GROSS DOMESTIC PRODUCT (000000 GHANA CEDIS)
Source: International Monetary Fund Website, 2012.
The country has laid down strategies aiming at improving the quality of life among its citizens. This is included in the vision 2020. In this strategic plan, the government also aims at promoting the rate of economic development to a greater deal, establishing a microeconomic stability, reducing the percentage of individual living below the poverty line, enhancing social equity and justice, and promoting foreign and local investment. These projects will help incredibly in lifting the level of economic development of the country to a great deal. The political atmosphere is of immense vitality in achieving this advancement; the country has to ensure that there is political stability.
There are crucial endowments that come with the oil production to the citizens of oil producing countries, mostly when there are the right mechanisms and measures employed to manage this resource. Some of the micro-economic and macro-economic benefits of oil to the people of Ghana are discussed below.
Performance, structure and behavior of the economy, nationally and regionally, are what entail macro-economics. It incorporates wide issues about the economy such as fiscal policy, economic growth,, and inflation (Driscoll 2001, p. 9). Here, we shall look at the benefits of oil discovery to the Ghanas economy in three facets of: Gross Domestic Product (GDP), foreign exchange, and fiscal expansion.
The Ghanas GDP has recently tripled leading to it being classified as in a group of countries with a middle income (African Economic Outlook 2010). In fact, the Ghanas real GDP grew from 4.7% in 2009 to 5.9% in 2010 showing the strength of the economic growth over recent past years. More is even expected in 2011 and 2012 where 12% and 11% are estimated respectively from the revenues got from oil production. This has been promoted by the countrys democratic and social environment stability which attracts and increases investors confidence to invest in the country.
However, a weak fiscal position, such as large domestic payment arrears (African economic outlook 2010) and delicate external balances, pose a threat to such investors confidence. Also, the GOG has adopted a single spine salary policy which seeks to look at the pay inequalities and variations, as well as increase transparency and equity amongst the public sector; a project that requires a high budgetary allowance that may hinder macro-economic stability.
Continuous high levels of investments in public infrastructure, manufacturing industry in accordance with well-organized policies on oil revenue management will lead to a firm and sustainable investment. Also, providence of skills and knowledge to the large unskilled labor force in the relevant fields will help reduce both underemployment and unemployment faced in the country. Lets look at each of the three aspects of macro-economic benefits experienced in Ghana.
According to Modern Ghana online (2009), the Jubilee field will at first produce 120,000 barrels of oil daily and later double that to 240,000 barrels per day providing an average of $5 billion from oil, in addition to the countrys national GDP. The GDP will shoot from $18 billion to an approximate $23 billion from 2010 to 2011, which will be an increase in the growth rate by 28% (The World Bank 2011). This will also raise the per capita income and provide more prospects of the GDP growth with the discovery of more oil fields.
The World Bank (2009) estimates that about $1 billion of revenue will be generated directly to the GOG from foreign exchange on oil export and more from money brought in to cater for domestic expenditures and other purchases. Such transactions will improve the cedi, Ghanas local currency, by preventing its depletion through continuous exchange rates, as well as its appreciation in regard to radical trading countries. This will also help minimize the countrys current accounts deficits.
The $1 billion will inspire, fiscal budget, expansion and give room for fast spending on development projects, social utilities, and amenities without destabilizing the macroeconomic operations. Furthermore, fiscal expansion will reduce government borrowings from banks and financial institutions, and loans will be more readily available to the private industry, which sums up to more economic development.
This entails attitudinal variations that the oil industry will have on individual firms, household, and consumers through the creation of job opportunities and spending.
It is quite clear that direct and indirect jobs will be created easing Ghanas unemployment challenges. Dynamic means of encou
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