Monday, April 14, 2003

The Curse of Oil Wealth

Daniel Pipes was amazingly prescient in seeing as long ago as 1982 that the presence of oil can be more of a curse for a nation than any sort of blessing. On the face of it, one would think there'd be no downside to having oil in abundance, as it would obviate the need for governments to carry out large-scale borrowing to finance infrastructure development or investment in human capital.

So much for the theory - in practice, oil windfalls have almost always had a negative impact over the long term. No windfall ever lasts, however large, but while the boom is in progress, it sets in motion developments that end up redounding to the harm of its' beneficiaries. Massive fortunes are rapidly made, with no real effort required on the part of those lucky enough to be sitting at the government till, enfusing an entire society with a "get-rich-quick" mentality, and making any sort of effort to prosper by sheer toil come to seem foolish. Government revenues rise to dizzying and unsustainable heights, and large sums are expended on all kinds of white elephants and grandiose schemes. People come to rely on government largesse, while the government is freed from all accountability to a citizenry from which it recieves no taxes.

For a short while, all these problems can be covered up by the ever-rising gusher of oil revenue, but when the gusher subsides, the return to reality can be extremely painful. None of the OPEC countries can be said to be anywhere nearly as prosperous today as they were at the height of the second oil boom (Algeria excepted), and in point of fact, most are much worse off than they were before it; per capita GDP in Nigeria today is about the same as it was in 1965, while in Saudi Arabia it has fallen from $28,600 in 1982 to about $6,500 today, and is still falling. Even Algeria has seen a steady decline in GDP per capita since 1990. The only middle-eastern country that has seen a real rise in its' standard of living over the last 20 years is Israel, which has no mineral resources of great commercial value.

How does all of this tie into current affairs? Most obviously, it suggests that Iraq's gigantic oil reserves are no guarantee of anything; to the converse, they are more likely to hinder the country's prospects than to boost them. For the country to have a chance, the oil revenues must be kept, to the greatest extent possible, away from the reach of its' politicians, or the temptation to regard high office as a means to quick riches will likely prove too great.

What would be ideal would be a scheme along the same lines as the one in Alaska. Such a scheme would have the benefit of keeping the revenues out of the grasp of politicians, lest they be tempted to mischief, while clearly benefiting the entire population of Iraq. An Iraqi government unable to rely on easy access to oil money for revenues would be more likely to pay attention to those tasks that would boost the earning power, and therefore the taxability, of its' citizens.