[Dehai-WN] Project-syndicate.org: Escaping the Oil Curse

From: Berhane Habtemariam <Berhane.Habtemariam_at_gmx.de_at_dehai.org>
Date: Sun, 11 Dec 2011 12:17:03 +0100

Escaping the Oil Curse

 <http://www.project-syndicate.org/contributor/133> Jeffrey Frankel


CAMBRIDGE - Libyans have a new lease on life, a feeling that, at long last,
they are the masters of their own fate. Perhaps Iraqis, after a decade of
warfare, feel the same way. Both countries are oil producers, and there is
widespread expectation among their citizens that that wealth will be a big
advantage in rebuilding their societies.

Meanwhile, in Africa, Ghana has begun pumping oil for the first time, and
Uganda is about to do so as well. Indeed, from West Africa to Mongolia,
countries are experiencing windfalls from new discoveries of oil and mineral
wealth. Heightening the euphoria are the historic levels that oil and
mineral prices have reached on world markets over the last four years.

Many countries have been in this position before, exhilarated by
natural-resource bonanzas, only to see the boom end in disappointment and
the opportunity squandered, with little payoff in terms of a better quality
of life for their people. But, whether in Libya or Ghana, political leaders
today have an advantage: most are well aware of history, and want to know
how to avoid the infamous natural-resource "curse."

To prescribe a cure, one must first diagnose the illness. Why do oil riches
turn out to be a curse as often as they are a blessing?

Economists have identified six pitfalls that can afflict natural-resource
exporters: commodity-price volatility, crowding out of manufacturing, "Dutch
disease" (a booming export industry causes rapid currency appreciation,
which undermines other exporters' competitiveness), inhibited institutional
development, civil war, and excessively rapid resource depletion (with
insufficient saving).

Oil prices are especially volatile, as the large swings over the last five
years remind us. The recent oil boom could easily turn to bust, especially
if global economic activity slows.

Volatility itself is costly, leaving economies unable to respond effectively
to price signals. Temporary commodity booms typically pull workers, capital,
and land away from fledgling manufacturing sectors and production of other
internationally traded goods. This reallocation can damage long-term
economic development if those sectors nurture learning by doing and fuel
broader productivity gains.

The problem is not just that workers, capital, and land are sucked into the
booming commodity sector. They also are frequently lured away from
manufacturing by booms in construction and other non-tradable goods and
services. The pattern also includes an exuberant expansion of government
spending, which can result in bloated public payrolls and large
infrastructure projects, both of which are found to be unsustainable when
oil prices fall. If the manufacturing sector has been "hollowed out" in the
meantime, so much the worse.

Even if an increase in oil prices turns out to be permanent, pitfalls
abound. Governments that can finance themselves simply by retaining physical
control over oil or mineral deposits often fail in the long run to develop
institutions that are conducive to economic development.

Such countries evolve a hierarchical authoritarian society in which the only
incentive is to compete for privileged access to commodity rents. In the
extreme case, this competition can take the form of civil war. In a country
without resource wealth, by contrast, elites have little alternative but to
nurture a decentralized economy in which individuals have incentives to work
and save. These are the economies that industrialize.

The final pitfall is excessively rapid depletion of oil or mineral deposits,
in violation of optimal rates of saving, let alone environmental

What can countries do to ensure that natural resources are a blessing rather
than a curse? Some policies and institutions have been tried and failed.
These include, in particular, attempts to suppress artificially the
fluctuations of the global marketplace by imposing price controls, export
controls, marketing boards, and cartels.

But some countries have succeeded, and their strategies could be useful
models for Libya, Iraq, Ghana, Mongolia, and others to emulate. These
include: hedging export earnings - for example, via the oil options market,
as Mexico does; ensuring counter-cyclical fiscal policy - for example, via a
variant of Chile's structural budget rule; and delegating sovereign wealth
funds to professional managers, as Botswana's Pula Fund does.

Finally, some promising ideas have virtually never been tried at all:
denominating bonds in oil prices instead of dollars, to protect against the
risk of a price decline; choosing commodity-price targeting as an
alternative to inflation targeting or exchange-rate targeting for anchoring
monetary policy; and distributing oil revenues on a nationwide per capita
basis, to ensure that they do not wind up in elites' Swiss bank accounts.

Leaders have free will. Oil exporters need not be prisoners of a curse that
has befallen others. Countries can choose to use their resource bonanzas for
the long-term economic advancement of their people, not just that of their

Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard


      ------------[ Sent via the dehai-wn mailing list by dehai.org]--------------
Received on Sun Dec 11 2011 - 06:17:09 EST
Dehai Admin
© Copyright DEHAI-Eritrea OnLine, 1993-2011
All rights reserved