The petroleum and poverty paradox

Logic says that petroleum-rich countries should be rich. The oil-producing, less-developed nations that reaped a bonanza during the past few years of sky-high oil prices ought to be sitting pretty even as crude prices experience a free-fall today. However, things aren’t that simple. Venezuela, for instance, thanks to mismanagement of its oil windfall, is suffering high inflation, a drop in petroleum production, and is talking of possible austerity measures, even though it is the Western hemisphere’s largest oil exporter.

In fact, history shows that oil and natural gas reserves frequently can be a bane, not a blessing, for poor countries, leading to corruption, wasteful spending, military adventurism, and instability. Too often, oil money intended for a nation’s poor lines the pockets of the rich, or is squandered on showcase projects instead of productive investments.

A classic case is Nigeria, the eighth-largest oil exporter. Despite half a trillion dollars in revenues since the 1960s, poverty has increased, corruption is rife, and violence roils the oil-rich Niger Delta. The term “Dutch Disease” was coined after the Netherlands’ economy weakened following the 1960s discovery of natural gas, thanks to a rising exchange rate and a fall-off in manufacturing. Even OPEC countries are not immune. As a group, their per capita gross national product actually dropped from 1965 to 1998, one study found. This “resource curse,” as economists call it, curses America, too. It worsens global poverty, which can be a seedbed for terrorism, it empowers autocrats and dictators such as Saddam Hussein.

What can we do to reverse the resource curse? A new report I commissioned from the Senate Foreign Relations Committee staff, “The Petroleum and Poverty Paradox”, offers some answers. There is no simple cure, of course. But where leaders are ready to face the problem, outsiders can offer important incentives and advice. One key prescription is to promote stronger anticorruption measures and more openness, or transparency.

The World Bank and the International Monetary Fund have launched efforts to improve accounting and transparency of extractive industry revenues, to make it harder for officials to hide corruption. An especially promising development is the Extractive Industries Transparency Initiative (EITI), a voluntary program which certifies that participating countries, and the oil companies operating there, are honestly accounting for funds flowing into their coffers. The G-8 and UN have praised the EITI and its work.

Yet action falls short. The G-8 countries should back their transparency words with deeds. They could, for instance, require that their oil and mining companies publish country-by-country data on royalty, tax, and

other payments as part

of routine financial reporting. International assistance to resource-rich countries should focus on improving revenue management and fighting corruption. Small amounts of aid money could thus help channel large amounts of countries’ own funds toward poverty reduction. Oil and mining companies can be part of the solution by voluntarily disclosing their payments to countries where they operate. The US, whose attention to transparency often appears sporadic, should vigorously back these efforts. — The Christian Science Monitor