Kwame Nkrumah University of Science and Technology

Department of Silviculture and Forest Management

EFFECTS OF RESOURCE RENTS (ECONOMIC

RENTS) ON GHANAS PRESIDENTIAL ELECTIONS

OFORI KWASI JULIUS

November 2016
INTRODUCTION

Many scholars have argued paradoxically that the availability of natural resources tends to
hinder development. A key reason behind this hindrance may lie in how natural resources
affect politicians incentives. For example, they may lower accountability by easing taxation
(Madhavy 1970; Huntington 1991; and Morrison 2007), increasing repression (Caselli and
Tesei 2011) or allowing leaders to buy the opposition (Acemoglu et al. 2004). Alternatively,
they may exacerbate redistributive demands, leading the elite to maintain autocracy (Boix
2003).

Ghanas governance of its natural resource wealth is critical to its development prospects.
Natural resources dominate Ghanas economy: in 2013, gold, petroleum and cocoa exports
accounted for 70% of total exports. However, and despite being portrayed as a relatively
democratic, well-governed and prosperous African country, Ghana has yet to show the
capacity and commitment to manage natural resources in ways that support inclusive
development.

NATURAL RESOURCE RENTS

Resource rent is the total revenue that can be generated from extraction of the natural
resource less the cost of extracting the resource. Collier and Hoeffler (2009), also define
natural resource rents as the difference between the unit price of resources and their unit cost
of extraction, multiplied by the volume of resources extracted.

Rent is attributable to the scarcity of the resource. It is used to calculate the value of the stock
of a resource, which is necessary for economic assessment of state of natural capital and
decisions about resource management

ELECTIONS

Elections are the formal decision-making process by which a population chooses an

individual to hold public office. Elections have been the usual mechanism by which modern
representative democracy has operated since the 17th century. Election may fill offices in the
legislature, sometimes in the executive and judiciary and for regional and local government.
It provides the essential mechanism by which stakeholders determine candidates with the
potential to manage and distribute the resources of the state. Election can also be viewed as a
conduit through which these candidates can control a considerable amount of power. As key
as elections may be in modern democracies it requires a lot of resources to sustain and carry
out effectively.

ELECTION-RESOURCE RENT NEXUS/LINK

The process of seeking for political power and in some cases retention of same induces a lot
of stress on political coffers which governments seek out a number of mechanisms to resolve.
Since the outcome of election is by and large a product of the public reaction to government
actions or inactions, a critical source of this stress is the desire of governments to pursue
agenda that it considers keen to public interest and that might allure to its political benefits.
Governments faced with this delicate balance of satisfying the electorate and at the same time
retaining political power in the face of stiff opposition is placed in a conundrum which
requires mostly resources to address. Thus in resource endowed countries it is safe to agitate
that rents from resource provide the needed respite to governments. Higher natural resource
rents increase the value for politicians to stay in power, and hence, the return on activities that
shore up political control like political budget cycles. Second, higher natural resource rents
increase the likelihood that the incumbent will be challenged. To stay in office, the incumbent
will spend more resources on activities that secure his position. This can be done in
unproductive ways, such as repression or buying off potential opponents, or in productive
ways, such as reducing the level of distortionary taxation (Ascher 1999; Robinson et al.,
2006; Bueno de Mesquita and Smith, 2010).

Again the election resource nexus plays out in two major ways, first by influencing who
annexes power and secondly who retains power.

WHO COMES INTO POWER

First, resource rents can be channelled to finance party activities of the ruling elite through
the provision of logistics, machinery and even personnel. Such resources could be used to
finance and support politicians from parties that are aligned with their political agenda or
intimidate and threaten politicians from non-aligned parties. These forces will reduce the
degree of electoral competition by reducing individuals willingness to run for elected office.
Backing favoured candidates within the aligned party may reduce competition within the
favoured party, while threatening potential contenders from other parties may also reduce
competition across parties. Together, these effects should correspond to a reduction in the
overall number of candidates running for office.
Second, armed groups could be employed to manipulate the electorate to gather votes for
their favoured candidates. They usually intimidate voters to keep them away from the polls,
or threaten the security of electoral officials. Both the reduction in candidates and
manipulation of voters will in turn, affect the efficacy of the electoral mechanism.

Thirdly Ghana has made an explicit commitment to use oil revenues to catalyse socio-
economic transformation and to overcome regional inequalities. However, oil revenues have
so far been spread too thinly to achieve structural economic change and expenditure patterns
show that the poorer and more deprived regions continue to be marginalised with allocations
frequently driven by electoral calculus, undermining prospects for inclusive development.
National elites continue to channel resources through the Mineral Development Fund to
traditional authorities, even though there is evidence that the resources are used for personal
gain. This mechanism allows political elites to secure the loyalty of chiefs to facilitate access
to mineral-endowed land, which ruling coalitions relying on to perpetuate their stay in
power. The mechanism is much less effective, however, in fostering local development and
inclusion.

Furthermore, Increase in public sector expenditure leading up to elections, example increase

in government spending on wages and salaries, capital expenditure etc.

Moreover, Ineffective contract negotiations can arise as a product of financial support offered
by the multi-national companies which fund the activities of political parties.

However, Inequitable distribution of resources due to electoral pressure mounted on the

political elite by people within resource endowed areas for greater share of rents to the
detriments of the state at large, example demands made by some residents at salt pond in the
central region agitating for their share from the salt pond offshore crude oil producing
company(citifmonline.com)

The incumbent of a country which is rich in natural resources not only faces a strong
incentive to remain in power, natural resource rents also enhance the possibilities for the
incumbent to use fiscal policy for that purpose. In many countries more than 80 per cent of
the revenues from the exploitation of natural resources go straight into the coffers of the
national government (Deacon, 2011). If rights to exploit natural resources are given to the
private sector, governments can only benefit from higher natural resource taxation, export
tariffs or extraction fees (Burness, 1976; Boadway and Flatters, 1993; Heaps and Helliwell,
1985). Natural resource rents offer the government an avenue to maintain reasonable levels of
public services or to reduce taxes during the campaign without exposing the fiscal cost. As
natural resource rents are hidden from the public eye, especially when the natural resources
are extracted by government-owned enterprises, they offer an alternative mechanism for non-
transparency that facilitates Political budget cycles.

WHO RETAINS POWER?

Natural resources may also affect institutional outcomes through the actions of those who are
already in power. A number of theories posit that the presence of these resources will
entrench leaders. Other accounts of entrenchment have emphasized that office holders can
spend resources repressing their opponents (Caselli and Tesei 2011) or buying out the
opposition (Acemoglu et al. 2004) these accounts of entrenchment imply that leaders who are
already elected to office, will in turn, remain in office. It can also serve as an alternative
pathway for reducing political competition and promoting political selection.
Resource booms allow officials to buy off political support through light taxation and
increased spending, particularly on patronage (Madhavy 1970; Huntington 1991). Patronage
effects are critical in demonstrating that the desire to stay in office leads politicians to
inefficiently expand public sector employment during resource booms.

CONCLUSION

The core purpose of the state is to provide public goods. The capacity of the state to affect
this is greatly influenced by the availability of resources. Again the provision of public goods
plays a crucial role in determining the outcome of elections. Politicians seek to capitalise on
this to perpetuate their incumbency thus this paper has attempted to demonstrate that rents
from natural provides several avenues through which elections outcome can be heavily
influenced. It has been shown amongst others that clientelism, vote buying, poor contract
negotiations etc. Therefore the availability of resource rents provides strong political
incentives seek and retain power.
REFERENCES
Andersen, J., Aslaksen, S., 2008. Constitutions and the resource curse. Journal of
Development
Economics 87, 227-246.
Arvate, P.R., Avelino, G., Tavares, J., 2009. Fiscal conservatism in a new democracy:
Sophisticatedversus nai ve voters. Economics Letters 102, 125127.
Ascher, W., 1999. Why Governments Waste Natural Resources: Policy Failures in
Developing Countries. John Hopkins University Press, Baltimore.
Boadway, R., Flatters, F., 1993. The taxation of natural resources: principles and policy
issues.
World Bank Working Paper WPS 1210.
Bornhorst, F., Gupta, S., Thornton, J., 2009. Natural resource endowments and the domestic
revenue effort. European Journal of Political Economy 25, 439-446.
Burness, H., 1976. On the taxation of non-replenishable natural resources. Journal of
Environmental Economics and Management 3, 289-311.
Brollo, F., Nannicini, T., Perotti, R., Tabellini, G., 2010. The political resource curse. NBER
Working Paper 15705. National Bureau of Economic Research.
Bueno de Mesquita, B., Smith, A., 2010. Leader survival, revolutions, and the nature of
government finance. American Journal of Political Science 54, 936-950.
Collier, P., Hoeffler, A., 2009. Testing the neocon agenda: Democracy in resource-rich
societies.
European Economic Review 53, 293-308.
Deacon, R.T., 2011. The political economy of the natural resource curse: A survey of theory
and evidence. Foundations and Trends in Microeconomics 7, 111-208.
Franzese, R., 2000. Electoral and partisan manipulation of public debt in developed
democracies,
1956-1990, in: Strauch, R., Von Hagen, J. (Eds), Institutions, Politics and Fiscal Policy.
Dordrecht, Kluwer Academic Press, pp. 6183.
Franzese, R., 2002. Electoral and partisan cycles in economic policies and outcomes. Annual
Review of Political Science 5, 369421.
Heaps, T., Helliwell, J., 1985. The taxation of natural resources, in: Auerbach, A.J.,
Feldstein,M. (Eds.), Handbook of Public Economics Vol I, Chapter 8. Elsevier, Amsterdam,
pp. 421-472.
Huntington, S.P., 1991. The Third Wave: Democratization in the Late Twentieth Century.
University of Oklahoma Press, Norman.
Klomp, J., de Haan, J., 2013. Political budget cycles and election outcomes. Public Choice
157, 245-267.
McGuirk, E., 2013. The illusory leader: natural resources, taxation and accountability. Public
Choice 154, 285-313.
Nordhaus, W., 1975. The political business cycle. Review of Economic Studies 42, 169-190.
Paldam, M. (2004). Are vote and popularity functions economically correct? in Rowley,
C.K., Schneider, F., (Eds.), The Encyclopedia of Public Choice, Kluwer Academic:
Dordrecht, pp.4959.
Robinson, J., Torvik, R., 2005. White elephants. Journal of Public Economics 89, 197-210.
Robinson, J.A., Torvik, R., 2009. A political economy theory of the soft budget constraint.
European Economic Review 53, 786-798.
Robinson, J.A., Torvik, R., Verdier, T., 2006. Political foundations of the resource curse.
Journal of Development Economics 79, 447-468.
Rodrigues-Filho, S., Verburg, R., Bursztyn, M., Lindoso, D., Debortoli, N., Vilhena, A.M.,
2015. Election-driven weakening of deforestation control in the Brazilian Amazon. Land Use
Policy 43, 111-118.
Rogoff, K., Sibert, A., 1988. Elections and macroeconomic policy cycles. Review of
Economic
Studies 55, 1-16.
Shi, M., Svensson, J., 2006. Political budget cycles: Do they differ across countries and why?
Journal of Public Economics 90, 1367-1389.
Tornell, A., Lane, P.R., 1999. The voracity effect. American Economic Review 89, 22-46.
Torvik, R., 2002. Natural resources, rent seeking and welfare. Journal of Development
Economics 67, 455-470.