Sunday, November 04, 2007

Resource Curse

Most often, nationalization [of oil and gas resources] is a reaction to the idea that the thief is a foreign company. For populist leftists, El Petroleo es Nuestro! — the oil is ours — is an alluring slogan. Now as the record high price of oil has made exploitation worthwhile even in places that are remote or geologically complicated (Chad comes to mind), more underdeveloped countries have to choose what to do with their oil. Those that have long held oil must decide how to spend the incomprehensible amounts of money oil is now bringing them.

Historically, almost every country dependent on the export of oil has answered this question in the same way: badly. It may seem paradoxical, but finding a hole in the ground that spouts money can be one of the worst things to happen to a nation. With one or two exceptions, oil-dependent countries are poorer, more conflict-ridden and despotic. OPEC’s own studies show the perils of relying on oil. Between 1965 and 1998, the economies of OPEC members contracted by 1.3 percent a year. Oil-dependent nations do especially badly by their poor: infant survival, nutrition, life expectancy, literacy, schooling — all are worse in oil-producing countries. The history of oil-dependent countries has produced what Terry Lynn Karl, a Stanford University professor, calls the paradox of plenty.

Oil not only creates very few jobs, it also destroys jobs in other sectors. By pushing up a country’s exchange rate, the export of oil distorts the economy. “Oil rents drive out any other productive activity,” Karl says. “Why would you bother to produce your own food if you could buy it? Why would you bother to develop any kind of export industry if oil makes your money worth more and that hurts all your other exports?” The most successful societies develop a middle class through manufacturing; oil makes this extremely difficult.

Oil concentrates a country’s wealth in the state, creating a culture where money is made by soliciting politicians and bureaucrats rather than by making things and selling them. Oil states also ask their citizens for little in taxes, and where citizens pay little in taxes, they demand little in accountability. Those in power distribute oil money to stay in power. Thus oil states tend to be highly corrupt.

This article is mostly about Venezuela's oil industry. And it's a good one, a fair one; a real analysis for once that's not dominated by either a dull hatred of the country's socialism or a romantic, leftist boosterism. More importantly, however, it's a parable about what to do when a poor country is sitting on vast resource wealth.

Resource exploitation tends to create injustices in a state no matter what form of government or what kind of economy. I'm not so sure it's all simply an efficiency question, as the article suggests. That is, whether a state's resources are privatized or nationalized seems to make little difference to what the resource exploitation means in concrete terms to the citizens of a state. The distinction between a liberalized economy or socialized economy tends to entail only qualitatively different forms of injustice (assuming resources on national territory should be used for the benefit of the people), and not the absence or presence of injustice. It's all a matter of what injustices your political-economic ideology blinds you to.

A socializing economy may, in the name of solving poverty or other injustices, overlook features of economic policies that actually work at cross-purposes to the supposed goals. Venezuela's oil seems to be such a case. If we grant the genuineness of the drive to eliminate poverty by redistributing oil revenues, the apparent beneficence of the ideology may create blinders regarding whether or not nationalization of a resource actually does make such goals possible. It sounds good for a country to take control of its resources in the name of the people, but it becomes a vapid slogan when the capacity to extract redistributable rents from the resource dries up. Politics then becomes a matter of louder and louder sloganeering.

Whether or not one actually cares can also be ideologically preordained, as we see in many aspects of the US economy when the emphasis is on economic growth and efficiency with little or no reflection on what the goals - the ends - of growth and efficiency are. In the name of sustaining the growth of an economic environment in which self-maximization can flourish - in the name of an abstract conception of the individual - such economies can allow real citizens who don't or can't play the game to spiral into ever worse circumstances. A society that then claims that this is because these citizens don't work hard enough is a society that has eaten its own heart.

Perhaps economies based on material resource exploitation are inherently regressive. Perhaps Locke - and Marx, for that matter - were wrong. It's not so much that labor injects value into otherwise valueless natural resources, that labor creates value, and that a society with abundant material resources can potentially generate vast amounts of value through its labor. Perhaps it's that economies of material resource exploitation - and not necessarily with a concomitant assumption of non-scarcity - generate a dependence on a base, uncreative form of labor, and base, uncreative political-economic forms.


Unknown said...

Hello Helmut! I just wanted to let you know that we decided to feature your post in today's World section of It was a wonderful post, and is so interesting to us that we are considering building an Issue of the Day on the idea of the Resource Paradox. We would love to hear your thoughts on how we can best present this issue. Replies to this comment will e-mail directly to me, so please let me know if you have any thoughts.

All the best,


helmut said...

Thanks, Matt. Nice site of yours. I'll mark it.

MT said...

Notice we go and artificially recreate scarcity economics in ideas and creativity itself with patents and copyrights. So your real property can crash in value as the well runs dry, and by patenting, say, whistling and exercising your resulting right to restrict whistling to renters of your bungalows on the Orinoco, you never have to sell the Rolex to pay the caviar bill.