Monday, January 04, 2010

Fresh Takes on The Resource Curse Hypothesis

The hypothesis that oil damages countries it comes from, in more ways than one, has been with us for some time now. Industry observers and critics perhaps do find common ground in noting that discovery and extraction of crude oil, especially in case of developing economies exporting the stuff, has failed to provide the bonanza and even spread of prosperity that it should for these nations.

On the contrary, oil has stirred up troubles and conflicts. Furthermore, wherever one looks there is a political dimension to the dominance of this single commodity which is limited and will run out in the future, though not as dramatically as sometimes portrayed.

Adding to the debate are fresh thoughts contained in two very interesting books that I have read in recent months. The first is titled Crude World: The Violent Twilight of Oil by Peter Maass. The second is titled False Economy: A Surprising Economic History of the World by Alan Beattie, the fourth chapter of which dwells on the subject (viz. Natural Resources: Why are oil and diamonds more trouble than they are worth? – Pages 95 to 120).

In his book, Maass opines interestingly that the commodity is itself the real villain here. His central argument is that oil has damaged nations it comes from as it artificially strengthens their currencies and makes the rest of the economy uncompetitive. More critically, while wealth creation occurs as a result of oil exports – it does not create what developing economies need most in appreciable numbers – jobs. Furthermore, he offers arguments that oil wealth removes the need for wise spending.

What I liked about this book is that it does not look for fall guys or hammers oil companies, who in the author’s opinion are like any other business seeking the maximum possible returns on investment. Rather, he opines that corruption, greed and strife are also by-products of the oil trade. It is an interesting and unique book though not rich on the economic analysis front.

Along this tangent, the aforementioned chapter in Beattie’s book offers more detailed economic insight. Like Maass, he agrees that it is in the nature of the oil business to benefit fewer workers, as oil and gas extraction is equipment intensive and not labour intensive. Experts believe it is labour intensive mass production industries that do more to lift people out of poverty in the form of job creation with more wages for more people. Hence, oil creates a unique problem for oil-rich developing economies.

Beattie also notes that a significant portion of the return on extraction is used by oil-exporting developing economies to purchase drilling equipment which they cannot manufacture. Throw in the geopolitical permutations and corruption that Peter Maass alludes to, add in the concept of Dutch disease, and we soon arrive at a self-inflicted tragic hotchpotch which may be labelled as a resource fuelled curse that both authors describe in some detail.

No one is discounting the fact that where managed well, oil as a resource has been good for economies exporting it. Norway is often cited as such a nation, but Beattie says it struck oil meaningfully only in the 1970s, by which time it was already a rich economy. Russia is criss-crossing between becoming a meaningful democracy and going down the old Soviet autocratic way. Oil and gas wealth ensures that it may well be, some say already is, heading in the latter direction.

Four of Africa’s longest serving autocrats are from oil exporting nations. More convincing details, especially on Equatorial Guinea, can be found in the work of Dr. Ricardo Soares de Oliveira published in 2007. For lack of a better metaphor, he aptly brands such nations as ‘failed successful states.’

Both these books, especially as they are aimed at a wider readership base rather than academia, rekindle the resource cruse discussion. I particularly like Beattie’s witty observation that oil is bulky, murky and harder to extract, but “like Visa or MasterCard, also widely accepted!”

© Gaurav Sharma 2010. Photo Courtesy Cairn Energy PLC

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