Twenty five years ago, the economist Jeffrey Sachs found that economies which rely on the extraction of natural resources tend to develop slower than those that don’t. Since then governments have tried to offset the “curse of oil” through stabilisation funds for, or investments in, industries displaced by petroleum. Oil revenues, for example, strengthen the local currency and tend to affect agriculture and manufacturing sectors adversely. But even the most enlightened schemes for anticipating the shocks of an oil economy founder if corrupt or inefficient bureaucracies remain in control of the collection and disbursement of the new funds.
It is easy to underestimate the challenges of governance. In Canada – currently ranked fifth in the U.S. News 2019 Best Countries Rankings, based on perceptions about the transparency of business and government practices – the government is struggling to contain a scandal which arose over a deferred prosecution arrangement with SNC-Lavalin, a company charged under the Corruption of Foreign Public Officials Act. Between 2001 and 2011 SNC-Lavalin allegedly used Can$48 million to bribe Libyan officials. If that can take place when a company in one of the world’s most carefully policed business environments makes foreign investments, imagine what happens in places whose transparency ratings are significantly worse: Qatar (45), Saudi Arabia (59), Mexico (74), Angola (76), Iraq (79), Nigeria (80).
Even if corruption is set aside there is still plenty of evidence that even developed democracies are poorly equipped to handle complex economic shifts and the adjustments they require. Despite painstaking deliberations, both the 1994 North American Free Trade Agreement and the 2016 Trans-Pacific Partnership contained flaws that could easily – and, in NAFTA’s case, rapidly did – become significant political liabilities. Britain’s exit from Europe offers even more compelling evidence of how embarrassing a government’s ill-preparedness can be during such transitions. When addressing the Commons Northern Ireland select committee, former Brexit Secretary Dominic Raab was pressed into admitting that he had not read the entire 32-page Good Friday agreement either before or during Brexit negotiations. When asked to clarify his evasive answers, Raab joked: “It’s not like a novel where you sit down and you say: do you know what… this is a cracking read.” If that is how senior officials function in a country which, for two consecutive years, has led Forbes annual list of the Best Countries for Business, it is safe to say that expectations elsewhere should be modest.
There is also the difficulty of vetting the foreign investments that flood into newly thriving economies. Earlier this week, for example, Transparency International reported that anonymous corporate entities own billions of dollars in Toronto’s housing market. Three years ago a similar report found that half of the most desirable real estate in Vancouver belonged to shell companies, trusts and non-beneficial owners. Yet again, neither of these findings bode well for countries with less robust mechanisms for transparency and accountability.
Discouragingly, misgovernance now seems more the rule than the exception, particularly within our part of the world. Three of Brazil’s last four presidents have been impeached, arrested or imprisoned on corruption charges. Four former presidents of Guatemala have also faced corruption charges from CICIG (Comisión Internacional contra la Impunidad en Guatemala) a UN-backed panel of prosecutors which targeted criminal entities within the country. (Six months ago the current president shut down the commission which was then investigating violations within his own campaign.) Even closer to home, there is the example of Venezuela’s state-owned consortium, PDVSA. In 2015 the U.S. Treasury stated that an Andorran bank Banca had laundered around US$2 billion which had allegedly been embezzled from PDVSA. As the Venezuelan economy has faltered PDVSA has also proved an easy target for foreign investors. According to the Washington Post Russia has now acquired major holdings in five oil fields and owns 30 years of future production from two of Venezuela’s natural gas fields.
Governance, then, is not a luxury that we can address when our economy is bolstered by oil. In fact it may well be the single most important factor in determining whether petroleum will distort and harm, or restore and improve our economy during the next few decades.
