Petroleum Subsidies Have Worked to Research Paper

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Perhaps even more important to the current issues is the fact that the Ibrahim Index of African Governance, with ranks African governments on the ability of those governments to deliver needed goods to their people.

This index ranks Ghana relatively high on human development and safety and security and human rights protections. Again, it is important to stress that such political assessments are also economic ones. The fact that Ghana ranks fairly low on sustainable economic development is a direct result -- at least in part -- of economic subsidies. It is this particular point of its assessment that reveals one of the effects of petroleum subsidies in Ghana.

Despite the fact that Ghana has twice the average per capita income of the poorer countries in the region, it is a very poor country by Western standards. Nearly 30% of the population live on less that the international poverty line (the equivalent of $1.25 a day). The poorest citizens are primarily women from the northern parts of the country. Such women are among the least likely to be helped by a petroleum subsidy.

Ghana's per capita income has barely doubled over the past half century.

The government's current economic priorities include macroeconomic stability, private sector competitiveness, human resource development, and good governance and civic responsibility.

In general, the FBI finds that the government has practiced "sound macro-economic management," which, along with consistently high prices for its major export products gold and cocoa, helped sustain GDP growth in 2008 and 2009.

Key to the country's economic policy on petroleum products is the fact that in 2007 an oilfield that may contain up to 3 billion barrels was discovered.

This would seem to be a fact that would reduce the costs of petroleum products, which should benefit all the population. However, this is likely not to be the case. While the current subsidies are biased slightly in the direction of redistributing wealth upward, the expansion of the oil industry has the potential to make society far more radically unequal. This is a brief explanation of the economic complexities that occur when a subsidy on a vital product is lifted.

African nations have a very poor record of using income from oil revenue: No African nation has a truly good history of good economic policy vis-a-vis petroleum. A snapshot of the ways in which African governments have used oil revenue to enrich a very small percentage of the revenue going to the population at large and most of it used to enrich the government itself. This record of corruption is reflected in a series of letters to the BBC the say after it reported Ghana's announcement of the oil find. The following letters are representative:

I am happy for Ghana and pray this discovery doesn't bring disunity in the country just as in the case of Nigeria. In Nigeria the money realized from this oil had not been used for the development of the country rather it had gone to the pocket of few, selfish individuals (leaders).

Ishaya Nubunga, Taraba, Nigeria

I work for Chevron and I am Ghanaian. I have seen oil mismanaged in Nigeria, Equatorial Guinea and Angola. Why should Ghana be any different? After all look how we have managed our other natural resources like gold and diamonds... The reality is that all or most of the revenue will be lost through corruption, mismanagement. Thank God for oil - I don't think so. I would trade this for zero corruption, less brain drain, better management any day.

Anonymous

Ghana is indeed a blessed nation. However their leaders should not make this discovery of black gold as a means to enrich themselves as most of our previous and some of our current African leaders are doing. God bless Ghana and its people.

Brinsley Johnson, Freetown, Sierra Leone

Let's hope Ghana does spend the oil money on roads and hospitals, not on palaces and armies as in most oil states.

Steve, London, UK

The view from Nigeria and other oil-rich African nations is not optimistic. Given the higher-than-average degree of transparency of recent Ghanaian administrations and its rational response to the reduction of subsidies, there is some hope that Ghana will be able to absorb its new wealth with a greater-than-usual degree of grace. Thus, once again, economic policy in this area will only be successful when married to successful political policy.

Truth to the People

When the Ghanaian government determined in 2004 and 2005 that it could no longer continue the petroleum price subsidies at the same rate, government officials prepared carefully for the announcement that fuel prices would increase by 50%. This was a major shift in economic policy. The following summarizes the process that the government used:

In 2004, when it became apparent that world oil prices were unlikely to come down much and that Ghana could not maintain for long its policy of subsidizing petroleum products, the government launched a poverty and social impact assessment (PSIA) for fuel.

Guided by a steering committee of stakeholders from ministries, academia, and the national oil company, the PSIA was completed in less than a year. By the time the government announced the 50% price increases in February 2005, it could use the PSIA findings to make its case for liberalizing fuel prices to the public -- including the fact that the price subsidies most benefited the better-off.

This underscoring of the fact that the subsidies were benefiting wealthier members of society was key in helping the poorer people accept the fact that they would be paying more for their own fuel.

While the poorer people would be aware of the price that they themselves were paying, they would also be comforted -- for such is human nature -- they had been made aware by the government that the middle class and the wealthy were suffering more than they were. The wealthier members of the society would bear the greater burden in terms of higher fuel costs, but they were also the ones most able to bear these increased costs and were no doubt constrained from too-public complaints about the increases because they did not want to underscore had long they had been benefiting from the subsidies.

The government acted as transparently as possible in reducing the subsidies, and this too should be seen as a hopeful sign for the country's economy as it shifts increasingly towards oil production. The government also worked in ways to protect the poorer members of society by reducing the effect of higher prices in other ways:

The mitigation measures, transparent and easily monitored by society, included an immediate elimination of fees at government-run primary and junior secondary schools and a program to improve public transport. While the trade unions remained opposed to the price increases, the public generally accepted them, and no large-scale demonstrations occurred.

Ghana has been able to make the bridge from highly subsidized fuel prices to a much freer economy in this sector, using transparency and government aid to the poor to make the process as democratic and humane as possible. What will happen in the future -- in other words, will Ghana become another Nigeria? -- is impossible to know.

Bibliography

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factbook/geos/gh.html?

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and Public Health, 2001.

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