THEGREENGROK

Whose Oil Curse Is It?


by Bill Chameides | November 30th, 2010
posted by Erica Rowell (Editor)

Permalink | 3 comments

Crossposted with National Geographic’s Great Energy Challenge Blog.

Can having too much oil be a curse? Or is being dependent on oil the real curse?

Since the 1990s, thanks to the insights of economists like Jeffrey Sachs and Andrew Warner (see “Natural Resource Abundance and Economic Growth” [pdf], Harvard University, 1997), it has been widely accepted that having an abundance of extractive resources such as oil is a curse rather than a blessing: countries with the ability to score huge bundles of cash (a k a petrodollars) from the sale of oil and other extractive industries inevitably suffer from slow economic growth, government corruption, high levels of poverty, and authoritarian regimes.

For example, Sachs and Warner note that resource-poor nations like Korea, Hong Kong, Taiwan, and Singapore thrived in the latter half of the 20th century while resource-rich countries like Mexico and Venezuela foundered. Their conclusion [pdf]: “countries … with a high value of resource-based exports to [gross domestic product] GDP tend to experience slower growth.” (Read more on Sachs and Warner; read more on the resource curse.)

New York Times columnist Tom Friedman has even extrapolated the oil curse to what he calls the ”First Law of Petropolitics: the price of oil and the pace of freedom operate in an inverse relationship in … states with weak institutions and a high dependence on oil for their GDP.”

Importing Oil: A Blessing?

This is certainly a comforting worldview for countries like the United States that are dependent on — some even say “addicted to” — oil imports for their economic survival. Thank goodness we are the ones who import oil — so much better than if we were the unfortunate ones who exported it. Right?

Maybe Not — Why ‘Curse’ Might Be Wrongly Applied

Over the post-Thanksgiving holiday, as I plowed through the piles of leftovers (a prime example of a resource curse if I ever saw one), I picked up a copy of a book by a colleague of mine at Duke — Erika Weinthal, associate professor of environmental policy at the Nicholas School of the Environment — and her colleague Pauline Jones Luong. Their book, entitled Oil Is Not a Curse and recently published by Cambridge University Press, taught me a thing or two.

I learned that there is a growing literature out there challenging the notion of a resource curse. For example, Christa Brunnschweiler and Erwin Bulte argued in a paper [pdf] published in the journal Science in 2008 that analyses suggestive of a resource curse reach a misleading conclusion by conflating resource wealth and resource-export dependence.

The authors showed that economies of resource-rich countries actually grew between 1970 and 2000, and the richer the country, the greater, in general, was the growth. According to Brunnschweiler and Bulte, the curse, if you accept that term, correlates with resource-rich countries whose economies are overly dependent upon income from the sale of their resources. Why are these countries so dependent on exports? The authors argue that it can be explained in terms of weak institutions and governments: “Resource dependence appears as a symptom, rather than a cause of underdevelopment.”

A Study Grown From the Ruin of the Soviet Union

That’s where Weinthal and Luong’s book comes in. They examine the role of governance with respect to the resource curse by examining the trajectories of five oil-rich nations born out of the ashes of the Soviet Union: Azerbaijan, Kazakhstan, Russia, Turkmenistan, and Uzbekistan. While all five began in very similar states in 1991 — with only nascent governmental and economic infrastructures — they followed different paths of social, economic and political development.

Prosperity indicators, such as the Human Development Index, suggest that the citizens of Russia, Kazakhstan, and Azerbaijan have fared much better than their counterparts in Turkmenistan and Uzbekistan. Why? The reason Weinthal and Luong argue is the ownership structure (including governance and fiscal policy) the nations adopted to manage their wealth. The states that avoided the so-called resource curse chose less government control and greater transparency in developing their petroleum resources.

Facing Up to the Curse?

So is there an “oil curse” or not? Despite the work of Brunnschweiler and Bulte and Weinthal and Luong, I’d say there is.

The oil-exporting nations are not a priori cursed. After all, even those that are suffering can reform and escape the trap. They can even diversify their energy portfolio into green technologies like oil-exporting giant Abu Dhabi. But what about us oil addicts? For decades we’ve talked about lowering our need for oil, all to no avail. Could it be that the curse is on us?

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3 Comments

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  1. Marty Smith
    Feb 26, 2011

    Weinthal and Luong provide compelling evidence for institutions being the source negative outcomes we associate with the “resource curse” rather than the existence of resource abundance. They use a natural experiment as an identification strategy. Their replicates are the many new states that emerged simultaneously with the fall of the Soviet Union. Sachs and Werner had no such identification strategy nor had much variation in institutional structures. Sachs-Warner attached a causal interpretation to an interesting correlation. Brunnschweiler and Bulte showed this was an artifact of poor econometric methodology in their short Science paper and in a much more extensive study in the Journal of Environmental Economics and Management. One of the important features of Weinthal and Luong that was left out of this blog post is that the authors present a more general theory that is capable of explaining why earlier studies concluded that there is a resource curse. Their more general theory also helps to explain why wealthy resource-rich countries are not cursed by their resources. If the Grok’s concern is that dependence on oil is somehow a curse, then perhaps a new phrase should be used to avoid confusion with the very particular meaning of the term in the academic literature.

    • Bill Chameides
      Mar 16, 2011

      Marty: Thanks for the insights. As to the use of “curse,” I suppose a different name might avoid confusion, but I hate to lose the word play.

  2. Travis
    Dec 3, 2010

    Raw materials are not resources. They become resources when inventive individuals figure out ways to use them. Until an individual figured out how to turn oil into energy, it was black gooey stuff. That we are able to turn raw materials into resources has been a blessing for those few people in countries where they had the economic freedom to do so. The curse is the thuggish forms of government that still exist in many parts of the globe that prevent individuals from turning raw materials into resources. Travis

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