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This paper analyses the evolution of fiscal and monetary variables in Ghana, from the discovery of oil in 2007 through to 2014. It documents the deterioration of fiscal and monetary discipline over this period, which resulted in a rebound of debt, a deterioration of the external balance, and a decrease in public investment. The paper goes on to analyse the potential causes of this deterioration, including the political economy context, and the fiscal and monetary institutional framework. The suggested causes include the politics of Ghana's dominant two-party system. Finally, the paper discusses what Ghana could have done differently to avoid the various damaging effects associated with the oil discovery. It does not aim to provide specific fiscal policy recommendations for Ghana, but rather to give an empirical account of Ghana's experience that may be useful for other countries that discover oil.

AbstractThe combination of poor institutions and erratic macroeconomic policy, as measured by the volatility of fiscal policy, is associated with slower growth. We show that macroeconomic policy is more erratic in countries that are rich in natural resources, especially minerals and fuels, and in those that receive large aid inflows. Poor institutions also play a role. Although Africa is a major receiver of aid and exporter of natural resources, this is not purely an African phenomenon. Output volatility is not associated with slower growth after controlling for institutions and the volatility of fiscal policy.

The procyclicality of fiscal policy that is prevalent in developing countries and emerging markets is well known. Its explanation is less clear. Recently, social inequality and the combination of corruption and democracy have been suggested as alternatives to the traditional explanation of these countries' exposure to boom-bust cycles in international credit markets. Differences in methodological approach are also partly responsible for diverging empirical results. In this paper, competing hypotheses are tested on a comprehensive set of measures of the cyclicality of fiscal policy. The evidence for corruption and democracy is stronger than for social inequality or net foreign debt, but the interpretation of this result is less obvious, since the index of corruption is closely correlated with poor credit ratings. In OECD countries, by contrast, the cyclicality of fiscal policy largely reflects the strength of automatic stabilizers.

Using data from 1980 to 2004, we show that greater fiscal policy volatility acts as a transmission mechanism for the resource curse. Resource exports dominate political and institutional variables as determinants of fiscal policy volatility, with fiscal policy volatility being a significant determinant of growth. The existence of a resource curse is confirmed, in the sense that a higher ratio of natural resource exports to total merchandise exports is associated with significantly slower per capita GDP growth. There are no statistically significant differences between the effects of point-source and diffuse resource exports.

Front Cover -- Contents -- Acknowledgments -- About the Authors -- Abbreviations -- Overview -- What Should We Know about the Extractive Industries Sector? -- Notes -- Organization of this Volume -- Chapter 1 Defining Sector Policy Objectives -- The Extractive Industries Value Chain -- Improving Revenue Mobilization -- Generating Extractive-Based Economic and Social Development -- Note -- Chapter 2 The Economics of the Extractive Industries Sector -- Accounting for Physical Stocks: Resources, Reserves, and the Economic Interpretation of Ore -- Theory of Rents and Valuation of Subsoil Assets -- Structure of Energy and Mineral Markets -- Notes -- Chapter 3 Institutional Framework -- Mandates and Coordination -- Role of the Sector Ministry -- Roles of the Ministry of Finance and Revenue-Collecting Agencies -- Role of the National Resource Company -- Roles of Other Ministries and Government Agencies -- Note -- Chapter 4 Investment and Production Cycles -- Characteristics of Extractive Industry Investments -- The Mining Cycle -- The Oil and Gas Cycle -- Chapter 5 Extractive Industries Policy -- Policy and Regulatory Frameworks -- Sector Financing, Ownership, and Liabilities -- Mineral Legislation, Regulation, and Contracting Regimes -- Establishing and Maintaining a Geodata Information Base -- Mineral Rights Cadastre -- Overview of Extractive Industries Tax and Royalty Regimes -- Enhancing Competitiveness and Productivity -- Note -- Chapter 6 Monitoring and Enforcing Contracts: Legal Obligations and Institutional Responsibilities -- Legal and Contractual Regimes -- Building Transparency and Accountability in Contract and Revenue Management -- Monitoring and Enforcing Fiscal Regimes for the Extractive Sector -- Environmental Safeguards: Financial Sureties for Decommissioning -- Social Safeguards: Community Foundations, Trusts, and Funds.