The Devil’s Excrement by Moises Naim

August 31, 2009

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(Juan Pablo Perez Alfonso who popularized the name The Devils’ Excrement although the indians called the oil that was near the surface that.)

How could I not print an article written by Moises Naim and called The Devil’s Excrement to boot? The article appeared in Foreign Policy.

Somehow, I refused to believe we are doomed…

The Devil’s Excrement by Moises Naim in Foreign Policy

Oil is a curse. Natural gas, copper, and diamonds are also bad for a country’s health. Hence, an insight that is as powerful as it is counterintuitive: Poor but resource-rich countries tend to be underdeveloped not despite their hydrocarbon and mineral riches but because of their resource wealth. One way or another, oil — or gold or zinc — makes you poor. This fact is hard to believe, and exceptions such as Norway and the United States are often used to argue that oil and prosperity can indeed go together.

The rarity of such exceptions, however, not only confirms the rule, but also serves to clarify what it takes to avoid the misery-inducing consequences of wealth based on natural resources: democracy, transparency, and effective public institutions that are responsive to citizens. These are important preconditions for the more technical aspects of the recipe, including the need to maintain macroeconomic stability, prudently manage public finances, invest part of the windfall abroad, set up “rainy-day funds,” diversify the economy, and ensure the local currency does not reach too high a price.

It all sounds sensible, and a recent book edited by Jeffrey Sachs, Joseph Stiglitz, and Macartan Humphreys, Escaping the Resource Curse, synthesizes the consensus about what countries beset by the combination of rich subsoil and poor institutions should do. As Brazil, Ghana, and others are soon likely to become major oil players for the first time, they will provide rare real-life test cases of these recommendations.

Unfortunately, for most underdeveloped countries, the suggested defenses are as utopian as the larger goal they are supposed to help achieve. Countries that already have all these institutional strengths need not worry. For the rest, like an autoimmune disease, the curse undermines the ability of a country to build defenses against it. Indeed, we’ve learned in recent years that concentrated power, corruption, and the ability of governments to ignore the needs of their populations make it hard to do what it takes to resist the resource curse.

Juan Pablo Pérez Alfonzo, Venezuela’s oil minister in the early 1960s and one of the founders of OPEC, was the first to call attention to the oil curse. Oil, he said, was not black gold; it was the devil’s excrement. Since then, Pérez Alfonzo’s insight has been rigorously tested — and confirmed — by a slew of economists and political scientists. They have documented, for example, that since 1975 the economies of resource-rich countries grew at a slower rate than countries that could not rely on the export of minerals and raw materials. And even when resource-fueled growth takes place, it rarely yields growth’s usual full social benefits.

A common trait of resource-based economies is that they tend to have exchange rates that stimulate imports and inhibit the export of almost everything except their main commodity. It’s not that their leaders fail to realize they need to diversify their economies. In fact, all oil countries have invested massively in the development of other sectors. Unfortunately, few of these investments succeed, largely because the exchange rate stunts the growth of agriculture, manufacturing, or tourism.

Then there is the intense volatility of the commodities that these countries export. In the last 24 months, for example, oil shot up from less than $80 per barrel to $147.27, then fell to $32.40, and again moved up, to $59.87 by mid-2009. These boom-and-bust cycles have devastating effects. The booms lead to overinvestment, reckless risk taking, and too much debt. The busts lead to banking crises and draconian budget cuts that hurt the poor who depend on government programs. To make matters worse, governments faced with a windfall of revenues feel pressure to launch plans that are larger and more complex than their bureaucracies can handle. Inevitably, the overambitious projects end up generating enormous waste and are often abandoned once revenues drop.

What’s more, the oil industry is highly concentrated and capital intensive. This means that oil-fueled growth does not create jobs in volumes commensurate with oil’s large share of the economy. In many of these countries, oil and natural gas account for more than 80 percent of government revenues, while these sectors typically employ less than 10 percent of the country’s workforce. Inevitably, this leads to high income inequality.

Perhaps even more significantly, the oil curse also nurtures bad politics, and herein lies its autoimmune nature. Because governments of such countries do not need to tax the population to amass giant fiscal revenues, their leaders can afford to be unresponsive and unaccountable to taxpayers, who in turn have tenuous and often parasitic links with the state. With their ability to allocate immense financial resources pretty much at will, such governments inevitably grow corrupt.

This explains why the many sovereign wealth funds, oil-stabilization funds, and other solutions tried by resource-rich countries to avoid the effects of volatility, fiscal excess, indebtedness, export-inhibiting exchange rates, and other problems have rarely worked. Such funds either get raided before the rainy days or squandered in poor investments. Almost no resource-exporting country has been able to prevent its exchange rate from undermining the international competitiveness of its other sectors.

Once in power, oil-rich governments are deadly hard to dislodge. They stick around by spending their vast public resources to buy out or repress their political opponents. Statistically, it is far less probable that an authoritarian oil country will transition to democracy than that a resource-poor autocracy will. Oil-rich governments spend two to 10 times more on their militaries than countries without oil and are more prone to go to war. Most oil-exporting countries that do not have strong democratic institutions before they start exporting crude inevitably create an inhospitable environment for democracy.

One promising new idea is to force multinational corporations to be more transparent about their contracts, investments, tax payments, and revenues in poor countries. The premise is that more transparent information will curtail the ability of unaccountable politicians to use national resources as if they were their own. Not all multinationals are accountable and willing to play by these rules, however, and it takes more than the threat of posting a report on the Internet to stop a deeply entrenched kleptocracy from stealing.

So, is all hope lost for poor countries with rich natural resources? Not quite. Chile and Botswana stand out as success stories on continents where the resource curse has otherwise wreaked havoc. Their experiences confirm what we know is needed to inoculate a country from the oil curse. But why they were able to do so is still a mystery. Answers such as “good leadership,” “strong governance,” and “reliable institutions” only serve to mask our ignorance. Unlocking the secret of what enabled these two poor countries to successfully lift the resource curse can spare millions from the devil’s excrement. But nobody has done it yet.

17 Responses to “The Devil’s Excrement by Moises Naim”

  1. Alek Boyd Says:

    Hi Miguel, on this very topic I’ll recommend a couple of novels by AUP, Retrato en la Geografia and Estacion de Mascaras.

    Doomed we are…

  2. ElTank Says:

    Thank you Miguel
    great read.

  3. GB Says:

    Excellent post!

  4. Kepler Says:

    Good article.

    Someone talked much earlier about this: in 1937 Uslar Pietri was already telling in great detail about the mess Venezuelans were getting in.
    I highly recommend a compilation of known and less known articles by him: De una a otra Venezuela, ISBN 980-01-0117-9

    The cases of the US and Norway are completely different. Unlike what even some Norwegians think, Norway was not really a poor country before the discovery of oil.
    Norway was an industrialized nation already. It had its many famous scientists. It had several Nobel prices in science.
    The US wasn’t underdeveloped when they found oil either and anyway: it became an importer of oil fairly soon.

    Venezuela was a big finca with illiterate people who had been ruled by thieves from day one.
    I would recommend Humboldt’s account about Venezuela. He mentions there were printing presses in every tiny town of the US at the end of the XVIII century, whereas in Venezuela the first printing press arrived in 1810.

    I wrote about Venezuela-Norway some time ago. I quoted an old encyclopaedia on the issue of education in Venezuela at the start of the XX century:

    http://venezuela-europa.blogspot.com/2009/06/what-do-norway-and-venezuela-have-in.html

    Most Venezuelans, including me until some years ago, are not fully aware of how bad the education levels of the average Venezuelan is.
    Yes, people talk about education from time to time, but they are not really conscious of how dramatic the situation is.
    Venezuela is not the USB or Ucv.

    Just look at the graph here:

    http://venezuela-europa.blogspot.com/2008/01/venezuelans-and-maths.html

    Somewhere in the sixties and later the whole education system went down the drain and the big efforts that were started in the forties were to a big extent lost. We got a tiny group of good engineers and doctors, whereby the engineers became mostly representatives of foreign firms
    selling stuff in Venezuela and a huge majority that were and still are functional illiterate.

    Why? Among other things, there was lack of accountability in schools, salaries for teachers stagnated and the government forgot particularly primary and secondary schools.

    We will need to teach people what accountability is (chileans know), we will need to find Venezuelan-proof methods to fight corruption, we will need intelligent plans for improving our public schools.
    We will need politicians that talk publicly about the fact we need to get off our petrodollar addiction.
    chavismo won’t be doing anything of this.

  5. torres Says:

    If El Petroleo es de Todos los Venezolanos, I wonder how progressive it is for a government to spend money from oil income; isn’t that tantamount to a tax of equal *amount* to each citizen? That is, $30million made from oil sales, is the same as taxing $1 from each of 30million citizens! Give resource income directly to all citizens, equally, on a daily, unconditional, buffered basis; force the goverment to live off of taxes, as must resourceless countries. Turning the Petro-state on its head, Quico described it.

  6. AnonIII Says:

    Oil is a curse for underdeveloped countries. For others like Norway is a blessing.

  7. m_astera Says:

    torres, I agree with you completely. Why should the government get to waste the people’s resource income? Give it to the people and let them spend it as they wish. Things certainly won’t be any worse than they are now.

  8. wlad Says:

    from that same issue of FT: The Iraqi who saved Norway from oil

  9. FC Says:

    “Venezuela is not the USB or Ucv. ”

    Kepler even the USB and UCV is full of not quite educated people these days, standards have been declining over the past two decades now. I’m pretty sure I have my own knowledge gaps I try to diligently cover but mostly it’s attitude. For a lot of people it’s: why should I bother learning about topics that don’t help me in my day to day struggles.

  10. Andres F Says:

    I don’t think a Chile like economy is probable, until the devil’s excrement ceases to exist.

  11. An Interested Observer Says:

    moctavio Says:

    September 1, 2009 at 9:34 am
    ….and our politicians get brain transplants…

    Problem is, the only ones who have the brains to spare (because they aren’t using them, so they’re in pristine condition) are those very same politicians.

  12. Kepler Says:

    FC:

    I know, I know, but often when I come with this issue some people say: “it is not that bad, look at the USB, look at …”

    We are as a whole lagging behind even the rest of Latin America, which is lagging behind all the rest but Africa.

    At least Bolivians, whose pupils are second worst in maths (remember Venezuelan pupils were the worst in the last evaluation tests they took part in, in 1998), know how to plant potatoes.

  13. Victor Says:

    Hi Miguel, Great pick. Humbly I know the answer for Chile. They do not know how to dance salsa ;) Botwswana i dunno….

  14. Kepler Says:

    Astera,
    thanks. I posted something on your contribution. I will be updating and improving all ideas for Venezuela when I have more time

  15. Mercedes Says:

    Miguel,
    A dónde te puedo enviar un mensaje privado?

  16. Leon Says:

    It is fascinating to read this type of articles. The curse of this or that. Resources are used in every resource-rich country for good and sometimes for bad.

    But the resources themselves are not the core of the problem, as one of the commenters mentioned, it is the people and their understanding of their rights but also their obligations that make a difference. An education will always be paramount to be able to understand what is it that citizens should receive, but more importantly, contribute to the building of a successful country and society.

    In Venezuela we lack in education, we lack in understanding our civic duties, and we pride ourselves in being more “vivo” than the next one, thus mostly placing the individual (and immediate) benefit to the long term results. I do not believe that was always the case, as previous generations had pride in “serving” the country a term hardly heard anymore.

    Try explaining the current situation in Venezuela to a person that has not lived there and it is quite a challenge.

    Why would a portion of the population support a Chavez, even after 10 long years of complete inability to get anything done. Why do so many people have the image that Chavez is not completely sane, but yet loved and adored and always excused of errors made by others, as if he would not commit such errors.

    I am a big believer that Chavez had a chance to be in power forever. If you look at Perez Jimenez and his accomplishments for the general population and the modernization of the country, in a period shorter than Chavez has been in power, it was truly an accomplishment. Persecution of dissenters and political trials were as prevalent as they are now, but now we have no benefits.

    Had Chavez truly provided improvements in the life of Venezuelans, my guess is they would not have cared if he had called it Socialism of the XXI Century, Chavism or the Empire of Chavez. But there seems to be little pride left in Venezuelans, the utter inability to understand that you have a right to a peaceful life without theft, vandalism, highest homicide rates in the world, to private property and even more to hold your government accountable, seems to escape most, and they rather see how long you can survive, even at the expense of others.

    And maybe that is the biggest failing of the opposition, their ability to orchestrate and educate the population as to their rights and truly channel a common voice that looks for a common good. It is sad to see UCVistas and others that you know will vow down to the current government for financial benefit. It is the short term view for the quick buck, which funny enough is what Venezuelans seem sometimes to be so proud of.

    The oil is a curse, maybe, but as said here, it could also be a blessing and it is up to the people of the country to learn what direction the country needs to go, adn right now the oil allows a few to buy some, but those bought are as much to blame as the oil.

    LV

  17. Rufus Says:

    LV has a point.

    The oil in Venezuela is a curse in some ways.

    You can see the same symptoms in the Kuwaitis: incompetence, laziness, an imbalanced sense of entitlement…

    Chavez is about the best social democrat this failed nation could hope for, just as Pedro Carmona was the best leader the local fascists were able to come up with.

    Today, Chavez is doing a typically Venezuelan job of keeping his promises: he’s kept about 15% of them.

    In the mean-time, the opposition has done an admirable job of convincing outsiders that a political system can only be defined as a “democracy” when the election results turn out the way you want them to.

    Chavez is a screw-up… but he’s a proper representative of the general population, who are a bunch of drunken screw-ups themselves.

    I’m sorry, my fascist friends, but this is how democracy works, for better or worse… at least until the next Reagan or Adolf.


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