The Oil Curse
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The Curse of Being Blessed with Petroleum.

Mario Alejandro Mercado Mendoza

Usually there are reasons to celebrate when a country strikes oil.
Nevertheless, many countries will end up substantially worse than if they didn’t find anything. According to Michael Ross, oil-rich countries such as Gabon and Iraq experienced an income decline of 45 and 85 percent respectively, from 1980 to 2006. Moreover, oil-rich countries are twice as likely to suffer a civil war and have 50 percent higher chance of being ruled by an autocrat. While not all oil-rich countries are susceptible to these curses, the most fragile are lower income nations such as Algeria, Angola, Nigeria, South Sudan and Iraq. Moreover, oil-rich economies don’t grow nearly as much as they should, given their mineral wealth.

According to Ross, oil income has four characteristics that make it susceptible to being misused. These are:

* Oil-income is big: on average, governments funded by oil riches are 50 percent larger than comparable non oil-funded governments. In low-income countries, the government size can be as big as 800 percent larger than in comparable nations. One such example is Azerbaijan.
* Oil income flowing to governments does not usually come from taxes: in many countries, governments do not charge oil companies any taxes. Instead they take income directly from the companies and use the cash to provide free basic services such as education and healthcare. This often makes governments less accountable, since people are less likely to protest against what they receive for free.
* Oil income is very volatile: the price of a barrel of oil had been as low as $18 during 1998, and, for a moment, as high as $140 during 2008. With such variability, it is difficult for a government to project future oil income.
* Oil income can be secretive: when institutions are weak, oil revenues can be hidden, stolen or misreported.

Are all oil-rich countries cursed? Countries such as Norway, Canada, and the U.S. are not seriously affected in typically corrupting ways by their oil wealth. In part, this is because the size of these economies is far bigger than the oil revenues. Also, many of these economies were already diversified away from oil long ago

The answer to some of the problems mentioned above may lie in Norway. Norwegians separated oil income from current government spending by creating an investment fund that holds oil profits . This fund is only allowed to invest in assets outside Norway. Currently, it is the largest sovereign fund with up to one trillion dollars in assets distributed among 9,158 companies within 73 countries. If all the money were given to Norwegians, each would receive about $185,000. As it stands, the fund is reserved to pay for pensions.

The idea is to lock away oil money. In the meantime, Norway continues charging high taxes and keeps people working, An objective is for Norwegians to be as independent as possible. To keep the local economy growing, they created a trustworthy business environment, with high participation of women.

Here is one way to colloquially explain the Norwegian strategy. If you win the lottery, don’t throw yourselves into conspicuous spending. Instead, put your money to work in financial investments, keep working and focus oil wealth on helping people as they retire.

Ross, Michael. The Oil Curse, How Petroleum Wealth Shapes the Development of Nations. Princeton: Princeton University Press.

This article builds upon a previous version, which can be found here.
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