The nexus of oil production, democracy and economic diversification in Ghana

Despite the significant economic benefits enjoyed by resource-rich economies in Africa, there are mixed results as to the impact of natural resource endowment because of their disproportionate effect on poverty eradication and economic development in Africa, the achievement of which is the goal of developing economies. A weak private sector that relies heavily on primary output, a burdened fiscal environment, and underdeveloped infrastructure contribute to the continued poverty in the majority of African nations. These elements feed off of one another, producing a vicious cycle that keeps the area underdeveloped. While some literature attempt to explain the negative relationship between natural resource endowment and economic performance using “resource curse” or “paradox of plenty”, this study aims to contribute by evaluating the nexus among oil production, democratic and policy space, and economic diversification in Ghana with the general objective seeking to assess the relationships among oil production, democratic space, and economic diversification in Ghana. The multi-disciplinary approach provided a platform of identifying elements that are critical in governance, understand the interlinkage and feedback loop among various political, economic and governance disciplines. Specific objectives were as follows: i) To examine the factors that determine oil revenue in Ghana. ii) To investigate the extent to which oil revenue affects economic diversification in Ghana. iii) To assess the extent to which Government Policy affects the relationship between oil revenue and economic diversification in Ghana. iv) To evaluate the extent to which Democratic Space affects the relationship between oil revenue and economic diversification in Ghana.

The methodology was anchored on the Dutch disease and Infant Industry arguments, Endogenous and Neoclassical growth theories, Infant industry and Entropy and dimensions of Economic. Regression analysis was used to investigate the causal links and feedback effect among oil and gas rent, macroeconomic indicators and the extent to which democratic and governance indicators moderate the process on one hand and the combined effect of governance and oil rent on economic diversification on the other. Given their robustness, the Autoregressive Distributed Lag (ARDL) model was applied in the event cointegration is established. While Dynamic factor model was applied if cointegration was not present.

The study established the following key findings: macroeconomic factors such as investment and trade have a strong positive effect on exportation of oil and gas, while the same factors and also impact on economic diversification process. Second, the findings support the existence of the resource curse in Ghana because oil and gas rent revenue have an adverse effect on manufacturing, health and agricultural sectors. Further analysis shows that, while political stability plays a significant role in facilitating economic growth but this does not translate to diversification of non-resource sectors. Lastly, there is evidence to show that effectiveness of government policy plays a partially mediating role on the relationship between oil rent and diversification of non-resource sectors. To this end, the study concluded that there is need to build strong and independent public institutions that are transparent, politically accountable and efficient service delivery. In addition, investment in political economy requires expansion of the democratic space and enhancing the ability of law enforcement agencies is vital for sustained growth. Effective strategies for diversification will consequently be based on a careful evaluation of economic conditions and drivers of growth and establishment of and effective and progressive political environment.