The Paradox of Plenty

Todays article on the evil of oil. This one asks the question, why do nations with natural resource wealth tend to be so poor?

Michael Ross, at the University of California at Los Angeles, argues that oil-rich countries do far less to help the poor than do countries without resources. He points to evidence that oil and mineral states fare worse on child mortality and nutrition, have lower literacy and school-enrolment rates and do relatively worse on measures like the UN's “Human Development Index”.

Why? Economics offers some answers. Unlike agriculture, the oil sector employs few unskilled people. The inherent volatility of commodity prices hurts the poor the most, as they are least able to hedge their risks. And because the resource is concentrated, the resulting wealth passes through only a few hands—and so is more susceptible to misdirection.

This misdirection points to another explanation for the oil curse that is gaining favour: politics. Because oil money often flows directly from Big Oil to the Big Man, as Africa's dictators are known, governments have little need to raise revenues through taxes. Arvind Subramanian of the IMF argues that such rulers have no incentive to develop non-oil sources of wealth, and the ruled (but untaxed) consequently have little incentive to hold their rulers accountable.

An analysis by Paul Collier of Oxford University suggests that for any given five-year period, the chance of a civil war in an African country varies from less than 1% in countries without resource wealth to nearly 25% in those with such riches.

Any possible way to stop this from occuring? How about transparency?

The good news is that international initiatives are starting to shine a cold light on the murky business of oil. Tony Blair is promoting the Extractive Industries Transparency Initiative (EITI), a voluntary effort involving governments and oil majors. George Soros is backing the “Publish What You Pay” campaign, which demands more aggressive disclosure. Even big oil companies, long accused by activists of propping up dictators with bribes, are joining the transparency bandwagon.

The World Bank now seems keen: “Countries have no justification for secrecy,” insists Rashad Kaldany of the bank's International Finance Corporation. “All of these agreements will be made public in future.” And the IMF is already leading the charge: it required Equatorial Guinea, Angola and other recalcitrant countries to open up their oil accounts or risk ostracism.

via The Economist