Missing Links

The Devil’s Excrement

Can oil-rich countries avoid the resource curse?

Oil is a curse. Natural gas, copper, and diamonds are also bad for a country's health. Hence, an insight that is as powerful as it is counterintuitive: Poor but resource-rich countries tend to be underdeveloped not despite their hydrocarbon and mineral riches but because of their resource wealth. One way or another, oil -- or gold or zinc -- makes you poor. This fact is hard to believe, and exceptions such as Norway and the United States are often used to argue that oil and prosperity can indeed go together.

The rarity of such exceptions, however, not only confirms the rule, but also serves to clarify what it takes to avoid the misery-inducing consequences of wealth based on natural resources: democracy, transparency, and effective public institutions that are responsive to citizens. These are important preconditions for the more technical aspects of the recipe, including the need to maintain macroeconomic stability, prudently manage public finances, invest part of the windfall abroad, set up "rainy-day funds," diversify the economy, and ensure the local currency does not reach too high a price.

It all sounds sensible, and a recent book edited by Jeffrey Sachs, Joseph Stiglitz, and Macartan Humphreys, Escaping the Resource Curse, synthesizes the consensus about what countries beset by the combination of rich subsoil and poor institutions should do. As Brazil, Ghana, and others are soon likely to become major oil players for the first time, they will provide rare real-life test cases of these recommendations.

Unfortunately, for most underdeveloped countries, the suggested defenses are as utopian as the larger goal they are supposed to help achieve. Countries that already have all these institutional strengths need not worry. For the rest, like an autoimmune disease, the curse undermines the ability of a country to build defenses against it. Indeed, we've learned in recent years that concentrated power, corruption, and the ability of governments to ignore the needs of their populations make it hard to do what it takes to resist the resource curse.

Juan Pablo Pérez Alfonzo, Venezuela's oil minister in the early 1960s and one of the founders of OPEC, was the first to call attention to the oil curse. Oil, he said, was not black gold; it was the devil's excrement. Since then, Pérez Alfonzo's insight has been rigorously tested -- and confirmed -- by a slew of economists and political scientists. They have documented, for example, that since 1975 the economies of resource-rich countries grew at a slower rate than countries that could not rely on the export of minerals and raw materials. And even when resource-fueled growth takes place, it rarely yields growth's usual full social benefits.

A common trait of resource-based economies is that they tend to have exchange rates that stimulate imports and inhibit the export of almost everything except their main commodity. It's not that their leaders fail to realize they need to diversify their economies. In fact, all oil countries have invested massively in the development of other sectors. Unfortunately, few of these investments succeed, largely because the exchange rate stunts the growth of agriculture, manufacturing, or tourism.

Then there is the intense volatility of the commodities that these countries export. In the last 24 months, for example, oil shot up from less than $80 per barrel to $147.27, then fell to $32.40, and again moved up, to $59.87 by mid-2009. These boom-and-bust cycles have devastating effects. The booms lead to overinvestment, reckless risk taking, and too much debt. The busts lead to banking crises and draconian budget cuts that hurt the poor who depend on government programs. To make matters worse, governments faced with a windfall of revenues feel pressure to launch plans that are larger and more complex than their bureaucracies can handle. Inevitably, the overambitious projects end up generating enormous waste and are often abandoned once revenues drop.

What's more, the oil industry is highly concentrated and capital intensive. This means that oil-fueled growth does not create jobs in volumes commensurate with oil's large share of the economy. In many of these countries, oil and natural gas account for more than 80 percent of government revenues, while these sectors typically employ less than 10 percent of the country's workforce. Inevitably, this leads to high income inequality.

Perhaps even more significantly, the oil curse also nurtures bad politics, and herein lies its autoimmune nature. Because governments of such countries do not need to tax the population to amass giant fiscal revenues, their leaders can afford to be unresponsive and unaccountable to taxpayers, who in turn have tenuous and often parasitic links with the state. With their ability to allocate immense financial resources pretty much at will, such governments inevitably grow corrupt.

This explains why the many sovereign wealth funds, oil-stabilization funds, and other solutions tried by resource-rich countries to avoid the effects of volatility, fiscal excess, indebtedness, export-inhibiting exchange rates, and other problems have rarely worked. Such funds either get raided before the rainy days or squandered in poor investments. Almost no resource-exporting country has been able to prevent its exchange rate from undermining the international competitiveness of its other sectors.

Once in power, oil-rich governments are deadly hard to dislodge. They stick around by spending their vast public resources to buy out or repress their political opponents. Statistically, it is far less probable that an authoritarian oil country will transition to democracy than that a resource-poor autocracy will. Oil-rich governments spend two to 10 times more on their militaries than countries without oil and are more prone to go to war. Most oil-exporting countries that do not have strong democratic institutions before they start exporting crude inevitably create an inhospitable environment for democracy.

One promising new idea is to force multinational corporations to be more transparent about their contracts, investments, tax payments, and revenues in poor countries. The premise is that more transparent information will curtail the ability of unaccountable politicians to use national resources as if they were their own. Not all multinationals are accountable and willing to play by these rules, however, and it takes more than the threat of posting a report on the Internet to stop a deeply entrenched kleptocracy from stealing.

So, is all hope lost for poor countries with rich natural resources? Not quite. Chile and Botswana stand out as success stories on continents where the resource curse has otherwise wreaked havoc. Their experiences confirm what we know is needed to inoculate a country from the oil curse. But why they were able to do so is still a mystery. Answers such as "good leadership," "strong governance," and "reliable institutions" only serve to mask our ignorance. Unlocking the secret of what enabled these two poor countries to successfully lift the resource curse can spare millions from the devil's excrement. But nobody has done it yet.

Missing Links


The magic number to get real international action.

Never say never. Because of the global economic crisis, habits that seemed unalterable are suddenly being altered. Americans are now saving more and consuming less. Financial institutions are no longer betting the house on risky investments they do not understand. Wealthy oil-exporting countries are tightening their belts. At least some emerging markets long prone to financial accidents are behaving with uncharacteristic prudence. Everywhere, change is in the air.

Everywhere, that is, except in the way humanity responds to its most menacing threats. You know the list: climate change, nuclear proliferation, terrorism, pandemics, trade protectionism, and more. Not one can be solved, or even effectively contained, without more successful international collaboration. And that is not happening.

When was the last time you heard that a large number of countries agreed to a major international accord on a pressing issue? Not in more than a decade. The last successful multilateral trade agreement dates back to 1994, when 123 countries gathered to negotiate the creation of the World Trade Organization and agreed on a new set of rules for international trade. Since then, all other attempts to reach a global trade deal have crashed. The same is true with multilateral efforts to curb nuclear proliferation; the last significant international nonproliferation agreement was in 1995, when 185 countries agreed to extend an existing nonproliferation treaty. In the decade and a half since, multilateral initiatives have not only failed, but India, Pakistan, and North Korea have demonstrated their certain status as nuclear powers. On the environment, the Kyoto Protocol, a global deal aimed at reducing greenhouse gas emissions, has been ratified by 184 countries since it was adopted in 1997, but the United States, the world's second-largest air polluter after China, has not done so, and many of the signatories have missed their targets.

The most recent multilateral initiative successfully endorsed by a large number of countries was in 2000, when 192 nations signed the United Nations Millennium Declaration, an ambitious set of eight goals ranging from halving the world's extreme poverty to halting the spread of HIV/AIDS and providing universal primary education—all by 2015. Although some progress toward achieving these goals has been made—mostly thanks to Asia's spectacular economic performance—the failure of rich countries to fully fund these efforts, execution problems in poor countries, and the global economic downturn make the achievement of the goals by 2015 unlikely.

The pattern is clear: Since the early 1990s, the need for effective multicountry collaboration has soared, but at the same time multilateral talks have inevitably failed; deadlines have been missed; financial commitments and promises have not been honored; execution has stalled; and international collective action has fallen far short of what was offered and, more importantly, needed. These failures represent not only the perpetual lack of international consensus, but also a flawed obsession with multilateralism as the panacea for all the world's ills.

So what is to be done? To start, let's forget about trying to get the planet's nearly 200 countries to agree. We need to abandon that fool's errand in favor of a new idea: minilateralism.

By minilateralism, I mean a smarter, more targeted approach: We should bring to the table the smallest possible number of countries needed to have the largest possible impact on solving a particular problem. Think of this as minilateralism's magic number.

The magic number, of course, will vary greatly depending on the problem. Take trade, for example. The Group of Twenty (G-20), which includes both rich and poor countries from six continents, accounts for 85 percent of the world's economy. The members of the G-20 could reach a major trade deal among themselves and make it of even greater significance by allowing any other country to join if it wishes to do so. Presumably, many would. Same with climate change. There, too, the magic number is about 20: The world's 20 top polluters account for 75 percent of the planet's greenhouse gas emissions. The number for nuclear proliferation is 21—enough to include both recognized and de facto nuclear countries, and several other powers who care about them. African poverty? About a dozen, including all the major donor countries and the sub-Saharan countries most in need. As for HIV/AIDS, 19 countries account for nearly two thirds of the world's AIDS-related deaths.

Of course, countries not invited to the table will denounce this approach as undemocratic and exclusionary. But the magic number will break the world's untenable gridlock, and agreements reached by the small number of countries whose actions are needed to generate real solutions can provide the foundation on which more-inclusive deals can be subsequently built. Minilateral deals can and should be open to any other country willing to play by the rules agreed upon by the original group.

The defects of minilateralism pale in comparison with the stalemate that characterizes 21st-century multilateralism. It has become far too dangerous to continue to rely on large-scale multilateral negotiations that stopped yielding results almost two decades ago. The minilateralism of magic numbers is not a magic solution. But it's a far better bet at this point than the multilateralism of wishful thinking.

See also: FP bloggers respond to Moisés Naím's "Minilateralism."