Oil: The paradox of plenty

Sep 17, 2008 Editorial

It appears that, at long last, some serious exploration of the vast oil potential that the U.S. Geological Survey assures us lies off our coast is about to begin, with major players like Exxon getting into the act.

After the favourable settlement of the boundary dispute with Suriname, Sir Shridath Ramphal, who has been so prescient in matters of the international economy, including the EPA, had pointed out: “Oil has been a mixed blessing where its gains are not sensitively managed, but there are models of best practices from which Guyana can benefit (and) as we stand poised on the cusp of that new time, it is not too early to prepare for the challenges it will bring.”

We point out some of the challenges to be faced, taken from a Catholic Agency for Overseas Development (CAFOD) policy paper:“Countries endowed with an abundance of natural resources seem unlikely candidates for chronic, deep poverty. Surely, oil revenues provide a route out of poverty for their populations?

But the reality is the opposite. Natural resource revenues in poor countries are associated with worsening poverty, corruption and conflict, and authoritarian government lacking in transparency, accountability and fairness.

Taken as a group, less developed countries that depend on oil exports have seen living standards drop dramatically. Countries without petroleum resources grew four times more quickly than those with petroleum resources between 1970 and 1993, although the resource-poor countries had half the savings of the resource-rich countries in 1970. Oil-rich countries are ‘among the most economically troubled, the most authoritarian, and the most conflict-ridden states in the world today.’“

The management of a massive influx of oil revenues poses serious challenges for any government, but especially for those without strong democratic and accountable institutions. Power and resources in oil states become concentrated in the hands of the state, encouraging citizens to make their living through ties with the government.

This practice, known as ‘rent seeking’, reduces the incentive for other forms of productive activity. “In some states, counter pressures do not exist to push vernments to develop economic strategies which are not oil-dependent, or oversight mechanisms for oil revenue management. Incentives from outside the country encourage oil dependence.

Some oil companies are willing to make secret deals, and Northern governments sometimes form strong alliances with authoritarian leaders. “The World Bank and the International Monetary Fund (IMF) routinely encourage development strategies based on the comparative advantage of petroleum.

And they support lending to deeply indebted oil exporters when it is clear that debt only supports unproductive activities and prolongs the ability of government to mismanage oil revenues.Oil development often brings an initial boom: higher per capita income, more employment, better nutrition and health, and more and better infrastructure. But boom usually soon turns to bust as rent-seeking and mismanagement of resources, and sometimes volatile oil prices, too, undermine the positive outcomes.

The negotiating position of poor host governments is weak. Only a few very large and powerful oil companies have the technology to extract off-shore oil. This means oil companies drive hard bargains over the percentage of oil profits accruing to them, often winning greater shares than they have been able to in other parts of the world.The more a country depends on natural resources, the worse is its growth performance. Oil dependence hurts development for the following reasons:

The promise of oil wealth creates a ‘boom mentality’ – governments create grandiose plans, work ethics are undermined and productivity sinks. Public spending increases dramatically, because governments expect massive revenue increases (which usually turn out to be less than expected).

“The quality of public spending declines. Money is wasted on corruption, as government officials accept bribes in return for awarding benefits, such as import quotas, industrial licences, and access to foreign exchange. “Foreign debt rises as governments borrow to cover shortfalls in expected oil revenues.

Other sectors of the economy, such as manufacturing and agriculture, decline as a result of oil dependence. “Finally, income from oil replaces tax revenues, thus removing the need for government to account to people for how it spends their money.”Forewarned is forearmed.

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Oil: The paradox of plenty

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