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The petroleum and poverty paradox

We must work smarter to reverse the resource curse.

By Dick Lugar / December 11, 2008


Logic says that petroleum-rich countries should be rich. The oil-producing, less-developed nations that reaped a bonanza during the past few years of sky-high oil prices ought to be sitting pretty even as crude prices experience free-fall today. However, things aren't that simple.

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Venezuela, for instance, thanks to mismanagement of its oil windfall, is suffering high inflation, a drop in petroleum production, and is talking of possible austerity measures, even though it is the Western hemisphere's largest oil exporter.

In fact, history shows that oil and natural gas reserves frequently can be a bane, not a blessing, for poor countries, leading to corruption, wasteful spending, military adventurism, and instability. Too often, oil money intended for a nation's poor lines the pockets of the rich, or is squandered on showcase projects instead of productive investments.

A classic case is Nigeria, the eighth-largest oil exporter. Despite half a trillion dollars in revenues since the 1960s, poverty has increased, corruption is rife, and violence roils the oil-rich Niger Delta.

The term "Dutch Disease" was coined after the Netherlands' economy weakened following the 1960s discovery of natural gas, thanks to a rising exchange rate and a fall-off in manufacturing. Even OPEC countries are not immune. As a group, their per capita gross national product actually dropped from 1965 to 1998, one study found.

This "resource curse," as economists call it, curses America, too. It worsens global poverty, which can be a seedbed for terrorism, it empowers autocrats and dictators such as Saddam Hussein, and it can crimp world petroleum supplies by breeding instability.

What can we do to reverse the resource curse? A new report I commissioned from the Senate Foreign Relations Committee staff, "The Petroleum and Poverty Paradox", offers some answers. There is no simple cure, of course. But where leaders are ready to face the problem, outsiders can offer important incentives and advice.

One key prescription is to promote stronger anticorruption measures and more openness, or transparency.

The World Bank and the International Monetary Fund have launched efforts to improve accounting and transparency of extractive industry revenues, to make it harder for officials to hide corruption – and easier for citizens to demand that the money be spent wisely.