Can Newly Oil Rich Nations Avoid The Resource Curse?


Google “oil” and “curse” and you get about 25 million hits, which is pretty good considering “michael lynch petroleum idiot” only gets a quarter of a million.  (To which my daughter once said, “Dad, if all those people think you’re an idiot, well,…”)  The notion of mineral resources being detrimental to an economy and/or society is a long-standing one.  Presumably, some ancient Greeks complained that if only they hadn’t found silver, they wouldn’t have built a large navy, become a major power, and ended up losing it all in a war to Sparta.

In modern times, macroeconomics has explained some aspects of the problem:  a sudden infusion of mineral revenue can strengthen the currency, hurting any other sectors of the economy that export goods.  Additionally, having a wealthy industry (or company) in a developing economy means that an “island” effect is created, to which the best and brightest are drawn and the rest of the economy suffers accordingly. Needless to say, there are other political, social and economic problems as well, to the point where oil has been called, “The Devil’s Excrement.”

Of course, there’s the famous quote, “I’ve been poor and I’ve been rich.  Rich is better.”  (Beatrice Kaufmann apparently.)  Few countries have turned down the prospect of wealth in general, although few have been wary of rapid development of mineral resources.  (Many more have delayed resource development due to political squabbles, usually over the sharing of the revenue.)  Norway slowed upstream development to avoid straining its labor force, given the small size of its population, and while this might not have been optimal, the large oil resource meant the losses were bearable.

Saudi Arabia provides an interesting counterpoint to the fears of damage from oil revenues.  Many note its undiversified economy which is subject to the foibles of the oil market, and the government’s ongoing efforts to change that.  On the other hand, oil wealth has allowed the country to develop an impressive social infrastructure, including world class health and education.

In the case of Saudi Arabia, it is noteworthy that they are trying to reduce dependence on oil income not by reducing oil income but by raising the share of other economic sectors.  This is similar to the Texas (perhaps unintentional) approach; although four out of five of the largest companies in Texas are oil companies, and the state has a reputation as the center of the American oil industry, the oil industry represents only about one-tenth of the state’s economy.

One problem stems from the tendency to underestimate the longevity of the resource base.  For decades, I’ve been seeing references to this or that nation’s oil “running out” in x years, a reference to their reserves to production ratio.  Unfortunately, those comments are based on ignorance of resource estimation, where the ‘years’ of reserves is simply a measure of the rate of exploitation. (The U.S. has had 10 ‘years’ of reserves for decades.)  This encourages a frenzied dash to develop other economic sectors, which often leaves un- or underutilized megaprojects that were the pets of some senior officials.

Of course, the greatest challenge is for countries that experience a surge in mineral revenue that is large relative to their economy.  For the United Kingdom, the oil industry was never large enough to distort their economy seriously.  For Guyana, soon to be a significant oil producer, the country has abundant opportunity to learn from the mistakes and success of other countries undergoing similar challenges.

Because none of this is new.  In the 1970s and 1980s, the late economist Ragaei El Mallakh wrote about the limited absorptive capacity of Middle Eastern oil producers as a constraint on their ability to exploit their oil wealth successfully.   Terry Lynn Karl’s 1997 book The Paradox of Plenty described in painful detail the way Venezuela in the 1970s wasted its oil bonanza, primarily as a result of politician’s arrogance in thinking they could easily transform the domestic economy, a lesson that was ignored by the Chavez regime to the woeful detriment of the country.

Urging patience on politicians and voters is an unenviable task and requires significant foresight among the political class most of whom would rather have photo-ops opening large facilities than to be remembered decades later for their wise economic guidance. But for those who would rather leave a legacy for the history books instead of rusting ruins, it would behoove them to not only study the history of resource-rich economic development, but to educate their voters in best (and worst) practices.

I am a Distinguished Fellow at the Energy Policy Research Foundation and President of Strategic Energy and Economic Research. I spent nearly 30 years at MIT as a studen