A FOREIGN POLICY SPECIAL REPORT

The Devil’s Excrement: Can oil-rich countries avoid the resource curse?

but what if the best and only solution will be to:

KEEP THE OIL IN THE SOIL?

Looking back at 2013-2016 (SV – January 2017)

OPTION A

BY MOISÉS NAÍM | SEPT. / OCT. 2009

Oil 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 United States are often used to argue that oil and prosperity can indeed go together.

The rarity of such exceptions, however, not only confirms the rule, but also serves to clarify 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 the more technical aspects of the recipe, including the need to maintain macroeconomic stability, prudently manage public finances, 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 a recent book edited by Jeffrey Sachs, Joseph Stiglitz, and Macartan Humphreys, Escaping the Resource Curse, synthesizes the consensus about what countries beset by the combination of rich subsoil and poor institutions should do. As Brazil, Ghana, and others are soon likely to become major oil players for the first time, they will provide rare real-life test cases of these recommendations.

Unfortunately, for most underdeveloped countries, the suggested defenses are as utopian as the larger goal they are supposed to help achieve. Countries that already have all these institutional strengths need not worry. For the rest, like an autoimmune disease, the curse undermines the ability of a country to build defenses against it. Indeed, we’ve learned in recent years that concentrated power, corruption, and the ability of governments to ignore the needs of their populations make it hard to do what it takes to resist the resource curse.

Juan Pablo Pérez Alfonzo, Venezuela’s oil minister in the early 1960s and one of the founders of OPEC, was the first to call attention to the oil curse. 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 a slew of economists and political scientists. They have documented, for example, that since 1975 the economies of resource-rich countries grew at a slower rate than countries that could not rely on the export of minerals and raw materials. And even when resource-fueled 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’s not that their leaders fail to realize they need to diversify their economies. In fact, all oil countries have invested massively in the development of other sectors. Unfortunately, few of these investments succeed, largely because the exchange rate stunts the growth of agriculture, manufacturing, or tourism.

Then there is the intense volatility of the commodities that these countries export. In the last 24 months, for example, oil shot up from less than $80 per barrel to $147.27, then fell to $32.40, and again moved up, to $59.87 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 programs. To make matters worse, governments faced with a windfall of revenues feel pressure to launch plans that are larger and more complex than their bureaucracies can handle. Inevitably, the overambitious projects end up generating enormous waste and are often abandoned once revenues drop.

What’s more, the oil industry is highly concentrated and capital intensive. This means that oil-fueled 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 percent of government revenues, while these sectors typically employ less than 10 percent of the country’s workforce. Inevitably, this leads to high income inequality.

Perhaps even more significantly, the oil curse also nurtures bad politics, and herein lies its autoimmune nature. 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.

This explains why the many sovereign wealth funds, oil-stabilization funds, and other solutions tried by resource-rich countries to avoid the effects of volatility, fiscal excess, indebtedness, export-inhibiting exchange rates, and other problems have rarely worked. Such funds either get raided before the rainy days or squandered in poor investments. Almost no resource-exporting country has been able to prevent its exchange rate from undermining the international competitiveness of its other sectors.

Once in power, oil-rich governments are deadly hard to dislodge. They stick around by spending their vast public resources to buy out or repress their political opponents. Statistically, it is far less probable that an authoritarian oil country will transition to democracy than that a resource-poor autocracy will. Oil-rich governments spend two to 10 times more on their militaries than countries without oil and are more prone to go to war. Most oil-exporting countries that do not have strong democratic institutions before they start exporting crude inevitably create an inhospitable environment for democracy.

One promising new idea is to force multinational corporations to be more transparent about their contracts, investments, tax payments, and revenues in poor countries. The premise is that more transparent information will curtail the ability of unaccountable politicians to use national resources as if they were their own. Not all multinationals are accountable and willing to play by these rules, however, and it takes more than the threat of posting a report on the Internet to stop a deeply entrenched kleptocracy from stealing.

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 wreaked havoc. Their experiences confirm what we know is needed to inoculate a country from the oil curse. But why they were able to do so is still a mystery. Answers such as “good leadership,” “strong governance,” and “reliable institutions” only serve to mask our ignorance. Unlocking the secret of what enabled these two poor countries to successfully lift the resource curse can spare millions from the devil’s excrement. But nobody has done it yet.

Source: FP

OPTION B

REVISED Version – Three Years Later, Reflecting and Learning

 Three years later and we ask ourselves should we really ask oil producing countries to avoid hydro carbon development to the maximum extent possible, or should we better ask governments to keep the oil in the soil?

Why Should we Ask African Governments to Keep the Oil in the Soil?

“If governments are determined to implement their climate policies [eg. Paris Agreement], a focus on efficiency, although important, will not achieve absolute reductions. According to the UK’s Carbon Tracker Initiative and the Grantham Research Institute on Climate Change, part of the London School of Economics, the world’s ‘carbon budget’ is about 1.000 gigatons (Gt CO2) between now and 2050.

Total proven international fossil-fuel reserves already contain about 3 times as much carbon, according to the International Energy Agency’ ‘World Energy Outlook’. Most of the reserves are owned by governments or state energy firms; they could be left in the ground by public-policy choice, i.e., if governments took their own policy objectives seriously. Exploring and exploiting new sources of fossil fuels now means to propel CO2 emissions above 550 ppm. It is an irresponsible waste of money, and policy is called upon to stop this squandering of resources.

Oil and gas extraction, and coal mining, even using the most modern techniques, will always be dirty business. There is no ethical, environmental or social justification for mobilising reserves with above-average environmental and social impacts, including deep sea oil, tar sands, or fracking for shale gas, destroying riverine delta ecosystems and other wetlands, densely populated farmland, biodiverse forests or coral gardens.”

Source EJOLT