Avoiding the Curse of the Oil Rich Nations

From The New York Times

By Tina Rosenberg

Every nation wants to strike oil, and after it happens, nearly every nation is worse off for it. It may seem paradoxical, but finding a hole in the ground that spouts money can be one of the worst things that can happen to a country.

Oil-dependent countries, writes the Stanford professor Terry Karl, “eventually become among the most economically troubled, the most authoritarian, and the most conflict-ridden in the world.” This phenomenon is called the resource curse.

Oil is the world’s most capital-intensive industry, so it creates few jobs. Worse, it obliterates jobs all across the economy. The export of oil inflates the exchange rate, so whatever else a country manufactures is less competitive abroad.

Oil concentrates a nation’s economy around the state. Instead of putting resources into making things and selling them, ambitious people spend their time currying favor or simply bribing the politicians and government officials who control oil money. That concentration of wealth, along with the opacity with which oil can be managed, creates corruption.

Petro-dependence also leads to conflict. The conventional wisdom used to be that grievances were the cause of conflict, but that ended after the economists Paul Collier and Anke Hoeffler found in a series of ground-breaking studies that more important was the opportunity to grab oil or other commodity resources. They showed that if a third or more of a country’s G.D.P. came from the export of primary commodities, the likelihood of conflict was 22 percent. Similar countries that did not export commodities had a 1 percent chance.

If a government can finance itself through the profits on oil, it needn’t collect taxes. Let me suggest that this is not a good thing. Taxes create accountability — citizens want to know how the government is spending their money. Substituting oil revenues decouples government from the people. The list of the world’s worst-governed countries today features many that are dependent on the production of oil: Nigeria, Angola, Chad, Venezuela, Libya, Equatorial Guinea.

The big exception is Norway, which had the foresight to become wealthy and democratic before striking oil. As almost all the world’s untapped oil reserves now lie in the developing world, Norway is not likely to have much company.

Do these countries have a way out of the resource curse?

Todd Moss, a senior fellow and vice president for programs at the Washington-based Center for Global Development, believes they might. He points to an unlikely source of inspiration: Alaska. The state of Alaska is bound by law to put at least a quarter of its revenues from oil into the Alaska Permanent Fund, which was established in 1976. The money is invested and each year, every resident of Alaska gets a share of the dividends; for consistency, the amount is calculated using an average of the fund’s earnings over the past five years. The dividend check is considered taxable income. Last year, the check was for $878. In 2008, the high point, every Alaskan got $2,069.

These payments stimulate the economy and reduce income disparities. They have contributed (pdf, p. 12) to a large reduction in poverty in Alaskan Natives, the state’s poorest group.

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