x Abu Dhabi, UAETuesday 25 July 2017

Oil's curse: filtering profits before reaching people

The 'oil curse' afflicts many producing countries, making them complacent and neglectful of their wider economies.

Easy money seems to come naturally to many oil exporters. They pump the black stuff out of the ground with minimal effort and extract a large premium above the cost of production often by restricting supply to the market. Such behaviour can breed bad habits among the people, whether in Norway or Nigeria. Once the oil money pours into the treasury, this large pot of gold distracts them from fishing, farming and production, and instead triggers competition for access to the pot.

Economists do not like this because it can make people complacent, and reduce growth and job creation in the economy over the long term. Average citizens often do not like it either, because it feeds incompetence, inefficiency and corruption in government. In countries where laws are poorly enforced, this quest for easy cash can become rapacious, fuelling power grabs and strengthening dictators whose authority is supported by their control over the oil spigots, as was the case in Saddam's Iraq.

In Nigeria, which suffers a particularly bad case of this "oil curse", two IMF economists proposed a radical solution. If oil money was poisoning the political system, they proposed cutting off the supply to the government completely and distributing the cash directly to the people. In a memorable IMF working paper in 2003, Xavier Sala-i-Martin and Arvind Subramanian said it would be more effective to give US$700 (Dh2,570) a year to all 70 million adult citizens in the country - children must be excluded to stop the system becoming an incentive to reproduce - than to continue feeding a broken, oil-addicted state.

The idea has a lot to recommend it. It ensures a just distribution of this natural resource, frees government finances from the vagaries of oil price swings and forces the state to rely on levying taxes from industry. Over time, economists argue, this will foster accountability and transparency by giving everyone a stake in their government. Nigeria may be an extreme example of what can go wrong when oil money permeates a fragile state, but the same factors threaten all nations that rely on the export of natural resources; even stable ones such as the Emirates and Norway.

These countries have managed to protect their public finances to a large extent by creating sovereign wealth funds to insulate the economy from commodity booms and busts, creating a solid base of reserves that give fiscal stability today and act as a bank for the future. They have also reinvested some oil revenue to build up a diversified industrial base that will hopefully become sustainable after the oil dries up.

But even these governments struggle against the constant evils of inefficiency, corruption and poor productivity. In heavily populated oil-exporting countries such as Nigeria, Venezuela and Iran, bloated government, fraud and patronage mean that almost all the oil money is absorbed by "benefit captors" before it reaches the man or woman on the street. In these countries, often the only way people experience their resource wealth is at the petrol pump, where it is almost free to fill up, and perhaps with a few coins for their voting card at election time. Meanwhile, their stagnant economies produce armies of unoccupied youths whose discontent causes conflict and instability.

With elections coming in Tehran, all candidates are promising to distribute the oil wealth to the masses. Mahmoud Ahmadinejad has promised to issue "oil bonds" if he wins the June 12 vote, giving citizens a chance to share in the profits from the oil industry. His rival, Mehdi Karoubi, has also pledged to distribute shares in the oil and gas industry if elected, blaming the president for squandering last year's windfall.

If Mr Ahmadinejad wins a second term, perhaps it won't be long before he attempts to experiment with a particular form of oil cash distribution I witnessed two years ago in Nigeria. Then president Olusegun Obasanjo had proposed a bill to the National Assembly to amend the constitution and abolish the two-term limit for the president. The idea was to extend his tenure, and large amounts of money were on offer to any assembly member who agreed to rubber-stamp it.

Run-of-the-mill deputies could expect to receive $400,000 for a written promise to go along, and senior members, including a close friend of mine, were being offered up to $1.5 million. Talk of cash payments in Abuja was so rampant that armed robbers even raided members' residences, demanding a slice of the "third term" pie. Now, I should explain here that my friend was never going to accept the money. Not only was he one of the few honourable members of the assembly, but he was already a multimillionaire. Moreover, he had staked his reputation on opposing the amendment, having published an opinion column in a local newspaper explaining his position. Then one of my friend's constituents came to see him. He knew it would be tough to persuade my friend of the merits of accepting the money, so he resorted to a pragmatism.

"Sir," he said. "This money has already been looted. If you don't take your share, it will only be shared out by the other members. And besides, you can always pass it on to us." I don't think this is what the IMF had in mind. @Email:tashby@thenational.ae