Petroleum economies and their discontents

As we contemplate the shift towards an oil economy in Guyana, we would do well to take note of petroleum’s impact on other countries and, perhaps, learn from their mistakes. In general extractivist economies have fared poorly during the last half-century. Repressive petro-kleptocracies in Africa and the Middle East and the current turmoil in Venezuela are vivid reminders of how often a “resource curse” seems to accompany the exploitation of oil. In many cases it overwhelms the society and ushers in corruption, reckless spending, and a political culture that squanders opportunities to build infrastructure. Hardly ever do governments use oil revenues to strengthen other sectors of the economy in preparation for a post-petroleum future.

Consider Angola. In 2007, President José Eduardo dos Santos visited the United Nations general assembly for a US-led Anti-Kleptocracy initiative. At the time, despite large mineral and petroleum resources, Angola was one of the most corrupt countries in the world. Between 1997 and 2002, Human Rights Watch estimated that US$4 billion of state oil revenue had been misappropriated. (Swiss banks later reported that at least US$600 million of the country’s oil revenues had been traced to accounts used to bribe high-ranking officials, shell companies, and middle men.) Meanwhile, 70 percent of the Angolan population earned less than US$4 a day and its infant mortality rate (184 deaths per thousand live births) remained the highest in the world.

Nearly ten years later, little had changed. In 2016 Angola scored 18 out of 100 on Transparency International’s Corruption Perceptions Index; Angolans had a life expectancy of 55 years, fewer than 0.17 doctors and 0.8 hospital beds per thousand people; the national literacy rate hovered around 70%. Income distribution was still badly skewed, and the country was ranked 152 worldwide in terms of per capita GDP. Reasons for the lack of development were not hard to find. Earlier this year, for example, Vice President, Manuel Vicente was charged in Portugal with corruption and money laundering – including a US$810,000 bribe to one former prosecutor. The charges stemmed from Vicente’s time as head of Sonangol, the national oil company, between 2009 and 2012 – a post currently occupied by Isabel dos Santos, the outgoing president’s daughter.

It could be argued that the complex legacy of a civil war complicated Angola’s oil economy, but in nearly every other oil-dependent developing nation similar evidence of corruption and mismanagement abounds. In Saudi Arabia – which has the world’s largest proven oil reserves – per capita income declined from US$28,600 in 1981 to a mere US$6,800 twenty years later. Over the last four decades, similar patterns are noticeable in Nigeria and Venezuela, and to a lesser extent in Algeria, Angola, Congo, Ecuador, Gabon, Iran, Iraq, Kuwait, Libya, Qatar and Trinidad and Tobago. One study that examined the per capita GDP of OPEC members between 1965 and 1998 found that it decreased on average by 1.3% per year compared with an average 2.2% increase in non-petroleum countries during the same period.

The “resource curse” has been attributed to many factors; a few deserve special attention: oil price volatility – which wreaks havoc on governments’ budgetary discipline; stronger national currencies – which make non-petroleum exports much less competitive; inadequate skills transfer to local workers, and the failure to use oil revenues to bolster other parts of the economy. Terry Lynn Karl, a Stanford professor of political science and author of The Paradox of Plenty: Oil Booms and Petro-States, notes that while there are intelligent responses to all of these issues (commodity stabilization funds, investments in human resources, greater transparency, better tax policies), these require “capable states and relatively high levels of governance” to succeed. In their absence, as was the case in Mexico, Venezuela and many other parts of the Americas, petrodollars will instead fuel a corrupt and bloated bureaucracy and create a state that “looks powerful but is hollow.”

Gloomy outcomes are not, of course, inevitable. Norway and Canada, among others, have used oil revenues to improve infrastructure and develop other sectors of their economy. But many of these countries already had strong institutions and fairly advanced levels of governance, and transparency. Trinidad, which has now squandered the profits from two separate natural resource booms, is closer to what we should expect if we cannot reform our institutions in time. But even if we do create a national oil company comparable to Petróleos de Venezuela S.A. (PDVSA) – a byword for efficiency and independence in the 1980s and 90s – sustained vigilance will remain essential. PDVSA’s performance plunged soon after president Chávez replaced its senior management with cronies and its unravelling helped to sow the seeds for much of the current chaos in Venezuela.

What seems to matter more than the size of an oil find, or its current and projected value, is how scrupulously governments prepare themselves for the sudden influx of wealth. Those that share it judiciously, develop other sectors of the economy and modernize infrastructure and labour, tend to do well. Those that hoard it, or use it to shore up existing elites and social and political divisions, tend to fail, and waste what might have been a transformative moment in the histories of their young nations. Before the oil starts to flow, it is still up to us collectively to determine which of these paths we will take.


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