Tuesday, January 27, 2004

The Problem With Oil Wealth

Via Jonathan Edelstein, I came across this report on Gabon's declining oil revenues, and the discontent this development is unleashing amongst its secondary-school students. Nothing in this report is surprising to me, as both Nigeria and Saudi Arabia underwent precisely the same economic transition as Gabon is currently undergoing: at first the oil money gushes in so fast that the nation's leaders hardly know what to do with it; then a period of high-living begins, and though native industries wither as the domestic currency appreciates on the international markets ("Dutch Disease"), nobody cares, as the belief starts to take hold that the good times clearly must last forever; but then the party draws to an end, either because oil prices come down from unsustainable heights, oil production falls, or population growth simply outruns the increase in oil revenues.

The problem with transitory windfall wealth is that it engenders high expectations in its beneficiaries that are unsupported by correspondingly high productivity of the people themselves. The Saudis and Nigerians of the 1970s came to believe that the satellite dishes and Mercedes Benzes they flaunted garishly were merely the external appurtenances of their personal merits, and acquired a disdain for all "menial" occupations. Along with this highfalutin' attitude came a conviction that the government, the source of so much largesse during the happy times, was the proper source to which one ought always to look first for a solution to any problem: free university education, free housing, free entertainment, free this, free that - everything could be expected to come free from some government ministry, without the slightest exertion on one's own part, and heaven forbid that any obligations (like, say, paying taxes) be required in return!

Of course, the good times always come to an end sooner or later, and the more rapid the crash, the more severe the difficulties people have in adjusting to the sober new reality. One still meets Nigerians today who are utterly convinced that theirs remains a wealthy country, and if the corruption could only be flushed out of the system, the pie would be big enough to serve generous helpings all round. It takes no more than a back of the envelope calculation* to show the absurdity of this idea. Going by the sorts of complaints made by Saudi expatriates, the illusion of wealth in that country is, if anything, even more tenacious, given the lofty heights of prosperity to which that country once attained. Tough new circumstances would be expected to summon up vigorous measures to adjust to them, but the comfortable old ways of seeing the world stand in the way of their adoption; why should one suddenly be expected to pay for one's own housing, transportation and tertiary education, goes the thinking? The entitlement culture has taken too strong a hold, and the rulers, themselves corrupt and incompetent, are too scared of rebellion to spur their angry subjects to sacrifice. Consequently, things are simply left to rot - potholes appear on once gleaming highways, roofs of government buildings begin to leak, teachers' salaries are withheld for ever longer periods, schoolbooks cease to be revised in order to skimp on printing expenses ... All the proud symbols of yesterday's jackpot acquire the seedy air of a once proud man fallen on hard times due to an addiction to drink.

I know of no easy way out of this cul de sac once a nation has gone down it, and it is for this reason that I break into scornful laughter whenever I hear some ignorant person remark on the "good fortune" some poor country enjoys in being "blessed" with extensive mineral resources. The truth is that all lasting wealth is based on the achievements of the people themselves, their talents, their drive, their wisdom. A resource-poor country with an educated and ambitious populace is better off in the long run than any sheikhdom floating on a sea of oil; the wealth of a nation like Israel, surrounded by oil-rich but impoverished despotisms, is a stinging rebuke to the false notion that abundant natural resources are a route to economic nirvana. If there is one bit of wisdom I feel qualified to share with the poorer nations of the world, it is this - "pray that no easy riches will ever be found either lying beneath your soil or within your coastal waters. If it is too late for you to make such a prayer, at least pray that the riches not be so great as to warp your citizens' values."

*Nigeria's population is estimated at 120 million. Given the current crude oil production capacity of 2.8 million barrels/day, an oil price of $24/barrel, and an extraction cost of $4/barrel, annual oil revenue would come to $20.4 billion, or $170 per person, hardly the stuff of extravagant living.