Of all the pressing questions facing Iraq today, perhaps the most important in the long run is what to do with the country's oil. Vast wealth from natural resources can often be a curse, not a blessing, corrupting a nation's political and economic institutions and impeding the growth of democracy. There is only one way for Iraq to resist the oil curse: by handing over the proceeds directly to the Iraqi people.
Nancy Birdsall is President of the Center for Global Development. Arvind Subramanian is a Division Chief at the International Monetary Fund.
ESCAPING THE RESOURCE CURSE
As the United States, the United Nations, and the Iraqi Governing Council struggle to determine what form Iraq's next government should take, there is one question that, more than any other, may prove critical to the country's future: how to handle its vast oil wealth. Oil riches are far from the blessing they are often assumed to be. In fact, countries often end up poor precisely because they are oil rich. Oil and mineral wealth can be bad for growth and bad for democracy, since they tend to impede the development of institutions and values critical to open, market-based economies and political freedom: civil liberties, the rule of law, protection of property rights, and political participation.
Plenty of examples illustrate what has come to be known as the "resource curse." Thanks to improvements in exploration technology, 34 less-developed countries now boast significant oil and natural gas resources that constitute at least 30 percent of their total export revenue (1). Despite their riches, however, 12 of these countries' annual per capita income remains below $1,500, and up to half of their population lives on less than $1 a day. Moreover, two-thirds of the 34 countries are not democratic, and of those that are, only three (Ecuador, São Tomé and Principe, and Trinidad and Tobago) score in the top half of Freedom House's world ranking of political freedom. And even these three states are fragile: Ecuador now teeters on the brink of renewed instability, and in São Tomé and Principe, the temptations created by sudden oil wealth are straining its democracy and its relations with next-door Nigeria.
In fact, the 34 oil-rich countries share one striking similarity: they have weak, or in some cases, nonexistent political and economic institutions. This problem may not seem surprising for the several African countries on the list, such as Angola and the Democratic Republic of the Congo, that have only recently emerged from civil conflict. But it is also a problem for the newly independent, oil- and gas-rich republics of the former Soviet Union, which have done little to consolidate property and contract rights or to ensure competent management or judicial independence. And even the richer countries on the list, such as Libya and Saudi Arabia, suffer from underdeveloped political institutions. Concentrated oil wealth at the top has forestalled political change.
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Increasing aid and market access for poor countries makes sense but will not do that much good. Wealthy nations should also push other measures that could be far more rewarding, such as giving the poor more control over economic policy, financing new development-friendly technologies, and opening labor markets.
The next great oil boom is on: four former Soviet republics on the Caspian Sea are sitting atop an economic bonanza. But they should remember the fate of OPEC, whose members squandered their 1970s windfall. Where did all the money go? The state took on too dominant an economic role and wasted the wealth at home in a rash of boondoggle projects and military buildups. All OPEC members came down with "quick-money fever." They became addicted to supposedly limitless oil revenues even as boom turned to bust. The Caspian states, too, risk going from riches to rags if they do not resist the temptations of petromania.
"The Limits to Growth" is a brief, forceful, easily read polemic which has already generated many times its own weight in enthusiastic encomia and equally strong condemnations.[i] It advances a familiar, indeed fashionable, thesis. The goals and institutions of our present world society stimulate population growth and production increase at a rate that cannot be sustained. Further, and perhaps less familiarly, we are now about a generation from the point of no return, after which the world must suffer a catastrophic drop in numbers and wealth, no matter what is then done to restrain further growth. The argument is presented with a sufficient panoply of graphs, flow diagrams, references to the World Model and the new discipline of System Dynamics, and invocations of the computer to produce an aura of scientific authority for the conclusions. They have the additional weight of the endorsement of a prestigious private international group of respected businessmen, officials and academics, The Club of Rome, in a commentary appended to the study and signed by its executive committee. It is my contention that the authors' analysis is gravely deficient and many of their strongest and most striking conclusions unwarranted. None the less, it draws attention to a number of difficult and important problems which must be faced, including the question of whether its whole approach is helpful or harmful in dealing with these real problems.
