(Editor’s Note: Excerpted from a briefing paper available in full at www.fpif.org/papers/03petropol/development.html .)
The gap between the promise of petroleum wealth and the perversity of its performance is enormous. Study after study demonstrates that, as a group, countries dependent on oil as their leading export have performed worse than other developing countries on a variety of economic indicators; they have performed worse than they should have given their revenue streams; and poverty within their borders has been exacerbated rather than alleviated over the past two decades.
The scramble for African oil has raised expectations that petroleum will boost the standard of living of exporting countries in the Gulf of Guinea. As Ed Royce, the Chairman of the Subcommittee on Africa of the U.S. House of Representatives says: “African energy is critical to African development. It provides a revenue streamÖto break the cycle of poverty that plagues the continent.” In West Africa the hopes of people watching new pipelines built through their communities or seeing the impressive installation of offshore platforms can be palpably felt. They believe that oil will bring jobs, food, schools, healthcare, agricultural support, and housing. “We were told by the company that we would have a new school, with books, and electricity and water,” a Cameroon village chief reported. But these hopes are not likely to be realized if new African oil producers repeat the dismal performance of other petro-states.
This briefing paper examines the disturbing record of oil-exporting developing countries and their failure to reduce poverty and deliver on the promises of oil. It examines the “paradox of plenty” characterizing these countries, drawing on specific examples from Africa.
The lived experience of oil-exporting countries over the past several decades tells a story which differs radically from the promise of petroleum. When taken as a group, all “rich” less developed countries dependent on oil exports have seen the living standards of their populations drop–and drop dramatically.
For most countries, including Algeria, Angola, Congo, Ecuador, Gabon, Iran, Iraq, Kuwait, Libya, Peru, Qatar, Saudi Arabia, and Trinidad Tobago, this development failure has been very severe, plunging real per capita incomes back to the levels of the 1970s and 1980s. For a few, most notably Nigeria and Venezuela, the failure to develop has been catastrophic; in these cases, real per capita income has plummeted to levels not seen before 1960. In Nigeria, which has received more than $340 billion in oil revenues, more than 70% of its population lives on less than a dollar a day, 43% lack sanitation and clean water, and infant mortality is among the highest in the world.
Even more worrisome, the gap between the expectations created by oil riches and the reality produced is a dangerous formula for disorder and war. Countries that depend upon oil exports, over time, are among the most economically troubled, the most authoritarian, and the most conflict-ridden states in the world today.
Negative development outcomes associated with petroleum and other minerals are known as the “resource curse.” Essentially, this refers to the inverse association between growth and natural resource abundance, especially minerals and oil. Countries that are resource poor (without petroleum) grew four times more rapidly than resource rich (with petroleum) countries between 1970-1993–despite the fact that they had half the savings. The greater the dependence on oil and mineral resources, the worse the growth performance, a finding that has been confirmed by economists in the World Bank and International Monetary Fund.
Under the current policy environment, here is how oil dependence hurts development:
> Oil booms raise expectations and increase appetites for spending.
> Governments dramatically increase public spending based on unrealistic revenue projections.
> Booms decrease the quality of public spending and encourage rent-seeking.
> The volatility of oil prices hinders growth, distribution and poverty alleviation.
> Booms encourage the loss of fiscal control and inflation, further hampering growth, equity and the alleviation of poverty.
> Foreign debt grows faster in oil-exporting countries, mortgaging the future.
> Non-oil productive activities, like manufacturing and agriculture, are adversely affected by the oil sector in a phenomenon called Dutch Disease.
> Petrodollars replace more stable and sustainable revenue streams, exacerbating the problems of development, transparency, and accountability.
The record of oil-exporting countries to date pro-vides a powerful lesson for assessing the prospects for poverty alleviation in countries dependent on oil revenues. The message is clear: If oil is exploited as it has been in the past, that is, if revenues continue to lack transparency and accountability in their management, the results seem only too evident–and too grim.
If oil booms are to produce better results in Africa, the Caucasus, and other oil-dependent regions and countries, cycles of excess profiteering, rent seeking and boom-busts must be broken–or not permitted to start. For this to occur, powerful actors need to change some of their standard operating procedures. Had all the major players in the oil story behaved differently earlier–had international companies, their home governments, and banks insisted upon fair shares for poverty-stricken oil-exporting countries, transparent contracts, and transparent and fair revenue management, had governments and domestic private sectors been required to be more accountable to their publics, and had publics been more organized and informed–then the outcomes could be different. Oil revenues need to be closely monitored and fairly shared in order to turn them into positive development outcomes, hence the importance of campaigns to “Publish What You Pay” and to bring transparency and fairnes s to the industry. If the incentive structure currently surrounding huge oil rents is not changed, business as usual will continue. And the consequences for the poor will continue to be disastrous.
(Terry Lynn Karl is Professor of Political Science and Senior Fellow, Institute for International Studies, Stanford University. Ian Gary is Strategic Issues Adviser for Africa with Catholic Relief Services. They wrote this paper for Foreign Policy In Focus (online at www.fpif.org).)