Oil can be a curse to poor nations

oil2Oil is a curse. Natural gas, copper and diamonds are also bad for a country’s health. Hence, an insight that is as powerful as it is counterintuitive: poor but resource-rich countries tend to be underdeveloped not despite their hydrocarbon and mineral riches but because of their resource wealth. One way or another, oil – or gold or zinc – makes you poor. This fact is hard to believe, and exceptions such as Norway and the US are often used to argue that oil and prosperity for all can indeed go together.

The rarity of such exceptions, however, not only confirms the rule, but shows what it takes to avoid the misery-inducing consequences of wealth based on natural resources: democracy, transparency and effective public institutions that are responsive to citizens. These are important preconditions for more technical aspects of the recipe, including the need to maintain macroeconomic stability, manage public finances prudently, invest part of the windfall abroad, set up “rainy-day funds”, diversify the economy and ensure the local currency does not reach too high a price.

It all sounds sensible, and with Brazil, Ghana and others soon likely to become big oil players, we can expect to witness some rare test cases of these recommendations.

Unfortunately, for most underdeveloped countries, these suggested defences are as utopian as the larger goal they are supposed to help achieve. Countries that already have all these institutional strengths need not worry about the resource curse. For the rest, like an autoimmune disease, the curse undermines the ability of a country to build defences against it. Concentrated power, corruption and the ability of governments to ignore the needs of their populations make the curse hard to resist.

Juan Pablo Pérez Alfonzo, Venezuela’s oil minister in the early 1960s and one of the founders of the Organisation of the Petroleum Exporting Countries, was the first to call attention to the problem. Oil, he said, was not black gold; it was the devil’s excrement.

Since then, Pérez Alfonzo’s insight has been rigorously tested – and confirmed – by economists and political scientists. They have documented, for example, that since 1975 the economies of underdeveloped resource-rich countries have grown more slowly than countries that could not rely on the export of minerals and raw materials. Even when resource-fuelled growth takes place, it rarely yields growth’s usual full social benefits.

A common trait of resource-based economies is that they tend to have exchange rates that stimulate imports and inhibit the export of almost everything except their main commodity. It is not that their leaders fail to realise the need to diversify; in fact, all oil countries have invested massively in other sectors. Unfortunately, few of these investments succeed largely because the exchange rate stunts the growth of agriculture, manufacturing, tourism and other sectors.

Then there is the intense volatility of the exported commodities. In the past 24 months, for example, oil shot up from less than $80 per barrel to $147, then fell to $30, and again moved up, to $60 by mid-2009. These boom-and-bust cycles have devastating effects. The booms lead to overinvestment, reckless risk-taking and too much debt. The busts lead to banking crises and draconian budget cuts that hurt the poor who depend on government programmes. Additionally, oil-fuelled growth does not create jobs in volumes commensurate with oil’s large share of the economy. In many of these countries, oil and natural gas account for more than 80 per cent of government revenues, while these sectors typically employ less than 10 per cent of the workforce. This increases economic inequality.

Perhaps even more significantly, the oil curse nurtures bad politics. Because governments of such countries do not need to tax the population to amass giant fiscal revenues, their leaders can afford to be unresponsive and unaccountable to taxpayers, who in turn have tenuous and often parasitic links with the state. With their ability to allocate immense financial resources pretty much at will, such governments inevitably grow corrupt.

Once in power, such oil-rich governments are hard to dislodge, spending vast public resources to buy out or repress political opponents. Statistically, an authoritarian oil country is far less likely to move to democracy than a resource-poor autocracy. Oil-rich governments in developing countries spend two to 10 times more on their militaries than poor or middle-income countries, and are more prone to go to war. Most oil-exporting countries that do not have strong democratic institutions before they start exporting crude create an inhospitable environment for democracy.

This explains why the sovereign wealth funds, oil-stabilisation funds and other solutions tried by resource-rich countries to avoid the effects of volatility, fiscal excess, indebtedness, export-inhibiting exchange rates and other ill effects rarely work. They get raided before the rainy days or are squandered in poor investments.

So, is all hope lost for poor countries with rich natural resources? Not quite. Chile and Botswana stand out as success stories on continents where the resource curse has otherwise wrought havoc. How they were able to protect themselves is still a mystery. Unlocking the secret of their escape from the resource curse could spare millions from the devil’s excrement. But nobody has done it yet.

Credit: Moisés Naím

Source: FT

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