Turning The Natural-Resource Curse Into What It Should Be – A Means To National Prosperity
John O. Ifediora.
It is the irony of human nature, and indeed the incentive mechanism inherent in social institutions, that some societies less endowed by nature strive harder to improve their collective lot, and in many instances succeed in achieving their development objectives more frequently than their counterparts with more favorable allotments of natural resources. And if necessity is truly the mother of invention, then the sorry economic conditions of many resource-rich African nations may not be so ironic after all. When it comes to wasted wealth, and the problems that bedevil poor countries that are rich in natural resources, especially oil, there is plenty of blame to go around. Economists have long observed that such countries tend to do badly. In a study in 1995, Jeffrey Sachs, now of Columbia University in New York, showed that the resource-rich grow more slowly than other poor countries—even after such variables as initial per capita income and trade policies are taken into account.
The usual explanation for this is “Dutch Disease”, named for the hardships that befell the Netherlands after it found North Sea gas. When a country strikes hydrocarbons, a sudden inflow of dollar-denominated revenues often leads to a sharp appreciation in the domestic currency. That tends to make non-oil sectors like agriculture and manufacturing less competitive on world markets, thus leaving oil to dominate the economy.
Experts have offered fixes for the economic aspects of this “curse of oil” for a while. Some governments have used stabilisation” policies: when oil prices are high, revenues are set aside; when prices fall, governments use the funds to cushion the blow. A related idea is to park part of the proceeds from resources in offshore “funds for the future”. In theory, such funds would not only help spread the wealth over several generations, but also help avoid over-appreciation of the local currency. Some countries even disburse some oil revenues directly to every household, thereby ensuring that ordinary folk see tangible benefits.
These are fine ideas in principle, and in developed countries they even work to some extent. Officials in oil-rich Alberta and Alaska are now handing out potfuls of cash to households. But charges of wasteful government spending and cronyism abound. It has been suggested that a new Iraqi government could disburse oil bounty to its citizens too, but doing so properly in a country where the poor do not have bank accounts will be tricky. Norway has an offshore oil fund that is often touted as a model for developing countries. Yet even the virtuous Norwegians have been raiding it for politically popular causes.
In developing countries, such raids are the rule rather than the exception. Zambia set up a stabilisation scheme to manage mineral exports; but as prices soared in the 1970s, the government dropped it—and years of pain followed when prices fell again. Venezuela set up a fund for the future, “El Fondo de Inversiónes”, in 1974, but was soon raiding the kitty. An orgy of domestic spending left the country with a herd of white-elephant projects, huge foreign debt and declining social spending.
Michael Ross, at the University of California at Los Angeles, argues that oil-rich countries do far less to help the poor than do countries without resources. He points to evidence that oil and mineral states fare worse on child mortality and nutrition, have lower literacy and school-enrolment rates and do relatively worse on measures like the UN’s “Human Development Index”.
Why? Economics offers some answers. Unlike agriculture, the oil sector employs few unskilled people. The inherent volatility of commodity prices hurts the poor the most, as they are least able to hedge their risks. And because the resource is concentrated, the resulting wealth passes through only a few hands—and so is more susceptible to misdirection.
This misdirection points to another explanation for the oil curse that is gaining favour: politics. Because oil money often flows directly from Big Oil to the Big Man, as Africa’s dictators are known, governments have little need to raise revenues through taxes. Arvind Subramanian of the IMF argues that such rulers have no incentive to develop non-oil sources of wealth, and the ruled (but untaxed) consequently have little incentive to hold their rulers accountable.
Some argue the Persian Gulf has escaped the oil curse. True, access to health care and education in the Gulf did improve (though booming populations in places like Saudi Arabia are eroding those gains). And a few countries, such as Qatar and the United Arab Emirates, have tried to diversify their economies. But a study by Mr Subramanian suggests that the Gulf’s oil has rotted democratic institutions. Rachel Bronson of the Council on Foreign Relations, a think-tank in New York, points as evidence to life before oil. When the Saudi ruling family needed tax revenues, it consulted the merchant classes in Jeddah, so there was some mild democratic participation. The arrival of vast oil wealth, she argues, wiped out the power of the merchants, and made it easier for the royal family to quash democracy.
Another recent political argument is that resources fuel civil war. An analysis by Paul Collier of Oxford University suggests that for any given five-year period, the chance of a civil war in an African country varies from less than 1% in countries without resource wealth to nearly 25% in those with such riches.
Mr Subramanian concludes that economic factors like the Dutch Disease and corruption alone do not explain the oil curse. He maintains that the problem is weak institutions. George Soros, a financier who has set up charities to work on this issue, agrees.
Making oil transparent
The good news is that international initiatives are starting to shine a cold light on the murky business of oil. Tony Blair is promoting the Extractive Industries Transparency Initiative (EITI), a voluntary effort involving governments and oil majors. George Soros is backing the “Publish What You Pay” campaign, which demands more aggressive disclosure. Even big oil companies, long accused by activists of propping up dictators with bribes, are joining the transparency bandwagon.
As with the issue of global warming, BP is the oil major making the most public noise—and Exxon Mobil apparently the one most opposed to change. Ask senior executives of both firms what they think of the oil curse, and their answers are strikingly different. Graham Baxter at BP says “the curse of oil is a problem that BP recognises, and we have a part to play in helping our hosts deal with this wall of dollar-denominated cash coming into their fragile economies.” But André Madec of Exxon says: “We don’t like to call it the oil curse, we prefer ‘governance curse’. We are private investors, and it is not our role to tell governments how to spend their money.”
Yet the two firms’ actions are not so different. BP may be vocal on the issue, but after getting burned in Angola (it published information about its oil bid and got a bitter rebuke from government officials) it no longer strays far from the pack. And Exxon, for all its gruff talk, is at the heart of a controversial project aimed at monitoring the revenues generated by the new Chad-Cameroon oil pipeline. The money is deposited in offshore escrow accounts and scrutinised by an oversight committee representing parliament and civic organisations. It is also involved in half a dozen countries participating in the EITI.
How far can transparency go? Mr Sachs sees no reason why government oil contracts should stay secret. Companies and governments have usually engaged in a conspiracy of silence about contractual terms, signing bonuses and other rake-offs. But things are changing. The western oil majors (though not state-run goliaths in China and India) are coming to see more transparency as inevitable or even desirable. As Mr Madec puts it, Exxon wants oil revenues to “go to the people rather than accounts in Switzerland” as it helps secure his firm’s “licence to operate”. In other words, it reduces the risk of boycotts and bad publicity.
The World Bank now seems keen: “Countries have no justification for secrecy,” insists Rashad Kaldany of the bank’s International Finance Corporation. “All of these agreements will be made public in future.” And the IMF is already leading the charge: it required Equatorial Guinea, Angola and other recalcitrant countries to open up their oil accounts or risk ostracism.
The best news is that more poor-country leaders are coming to the view that transparency is best. The fledgling oil states of São Tomé e Príncipe and East Timor are eager participants in the EITI. Some two dozen in all have joined up. Nigeria’s recent participation is encouraging the rest of West Africa, Mr Soros reckons, just as Azerbaijan’s involvement has shamed Kazakhstan and other neighbours into cleaning up their act.
Mr Kaldany thinks the effect will spill over from oil to other resources. The push for greater disclosure is, he says, already leading to demands for greater transparency in the power, water and construction sectors. If push really comes to shove, natural resources may yet become what they should be for some of the world’s poorest people: a blessing.