We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.

Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]

Help! I’m drowning in Oil

One of the interesting but un-noticed thing about world affairs is that, for all the wealth that traffic in oil is able to generate, the nations that produce it are not high up on the list of nice places to be. Not many people consider Saudi Arabia, Iran, Nigeria, or Russia to be desirable places to go for a holiday, never mind live. In an odd twist to the old folks tale that ‘money won’t make you happy’, it is pretty clear that oil wealth is not particularly useful in solving the problems of a nation.

Nancy Birdsall and Arvind Subramanian did notice it however and wrote a 5,000 word essay on the subject, with Iraq in mind, for Foreign Affairs magazine (preview here) What they noted was that oil wealth tends to corrupt the state, and since it has an easy stream of revenue at its disposal, it does not have to work so hard at gouging its citizens. So it also has no incentive to promote property rights as a way of creating wealth. And those that control the state, control the wealth.

Therefore, you get the distressing sight of the President of Chad spending the first instalment of his country’s oil wealth on a new Presidential jet for example. More recently, in Russia we see President Putin using state power to attack the oil-enriched oligarchs. And Nigeria seems to have been actively impoverished by its oil wealth, as the ‘Pirates in Power’ have skimmed $100 billion over the years. Oil wealth is not particularly healthy for democracies, either.

How to escape the curse? Merely privatising the oil sector does not work very well in states where the concept of ‘property rights’ is a shaky one at best (see Russia). Another attempt has been to create special ‘oil funds’ with constitutional restrictions on the way the money is used. This has been used in many different places. But again, the strength of the rule of law is the decisive thing. Chad had a ‘oil fund’ but the President still got his airplane.

Birdsall and Subramanian instead advocate the novel idea of distributing the oil wealth directly to the citizens. This means that every citizen of the nation gets an annual cheque from the oil company. For Iraq, this idea has many wonderful features. In the first place, Iraqi citizens get a real stake in their government, and will be not inclined to support Islamist or separatist groups who wish to smash the state for their own nefarious purposes.

Secondly, all Iraqis get the same cut. A struggling farmer, a Mad Mullah, or an educated doctor- each of them get the same thing. No complaints about the system getting rorted in favour of one ethnic group or another.

And best of all, ordinary Iraqis will get prosperous at the expense of the government. There will not be rivers of gold for a class of local ‘social planners’ to waste, and the government will have to work hard to sell the need for tax increases to fund their operations. This means that citizens can look the state in the eye. And tell it where to get off, too.

Tweet about this on TwitterShare on FacebookShare on LinkedInShare on TumblrShare on RedditShare on Google+Share on VK

28 comments to Help! I’m drowning in Oil

  • Paul

    Is it really oil that corrupts or is that most oil happens to be in places with dodgy govt systems already? I raise this question because Norway (3rd largest oil exporter) doesn’t follow the same trend.
    The oil funds are protected by law and
    are mostly put aside for when it runs out.

  • What happens is that the oil wealth tends to expose the flaws in the government and social systems. As Norway already had a strong democracy and civil society, it was not harmed by oil in the way other countries were.

  • No complaints about the system getting rorted in favour of one ethnic group or another.

    Well, none for now.

    I would be extremely sceptical of this redistributionist proposal. It differs little from the notion of an Oil Fund. Further, I don’t see the logical corrollary from the fact that Oil is a highly prized commodity to the conclusion that the normal consequences of markets and property rights don’t apply.

    And best of all, ordinary Iraqis will get prosperous at the expense of the government. There will not be rivers of gold for a class of local ‘social planners’ to waste, and the government will have to work hard to sell the need for tax increases to fund their operations. This means that citizens can look the state in the eye. And tell it where to get off, too

    Yet this is just wishful thinking. For one this ‘oil dole’ will be administered by the government. Pretty soon it would become just another source of government revenue in the same way that “social insurance” is no kind of insurance at all. Further, as the proposal disavows privatisation the “oil company” will be the state. For anyone who doubts the capacity for the state to bugger up energy industries there are plenty of good examples.

    The basic problem is simply to do with property rights. The irrational exuberance which acccompanies the discovery of oil seriously exacerbates the problem but a country which doesn’t respect property rights will tend to have problems, oil or not.

  • Cydonia

    Interesting to note that the free-est and most successful middle east country – Dubai – has no oil to speak of. There was a fascinating article on Dubai in the Economist recently, which compared it to Singapore and Hong Kong:

    http://www.economist.com/business/displayStory.cfm?story_id=2709282(Link)

    The story of its success? It is (in effect) the world’s only privately owned country.

  • Sam Roony

    Must say I have not read the piece putting this argument, but the egalitarian distribution of citizen entitlements (oil revenue shares) runs right against the facts of oil price instability. Whatever instrument of state is devised for the purpose, it would not deliver a predictable flow of benefits to the poorest. Applied in a strictly egalitarian fashion, it would quite likely be destabilising, rather than otherwise.

  • Guy Herbert

    If Dubai is wholly owned by one family and it is a success, I suggest it may be the exception rather than the rule. (It is still not a liberal paradise, just vastly better than the neighbourhood.) Many of the vilest dictatorships in history have been effectively a family farm, and this is certainly the case with Saudi Arabia, where it is not just an effective but a constitutional rule.

  • While Saudi Arabia is financially ruled by the house of Saud, domestic policy is shaped by the religious nutcases. This is the key reason for the country’s extreme levels of vileness, rather than its family rule.

  • Guy Herbert

    The Belgian Congo?

  • Julian Morrison

    Ok, so, there’s a ton of reasons I could attack this, which is basically communism for oil and has all the usual drawbacks. But I’ll go with the biggie: what on earth makes you think that this system won’t be just as easily corrupted?

  • ernest young

    Interesting that no-one seems to have remembered that the UK is also an oil producer and exporter.

    Now just where has all that revenue gone to?…

    I wont make the obvious remarks re undesirable places to live and collective dictatorships, or for that matter about corruption…

  • Verity

    The most powerful, most democratic, richest nation on earth also has incredible oil wealth.

    Like ‘new money’, it is is the ‘new corrupt’ who are the most OTT. Mexico’s corrupt, but like old money, it’s always been corrupt so knows how to handle it. Also, corruption in Mexico is benefitting from President Fox’s interest in weeding it out, and oil revenues have benefitted poor as well as wealthy Mexicans in that the money has provided income for labour engaged in public projects and has raised everybody’s boat.

    So I don’t think the theory holds.

    Saudi Arabia, Chad, Nigeria et al are shitty little countries and they’d be shitty little countries even if they didn’t have oil.

  • R C Dean

    Well, since Iraq’s oil has basically been nationalized for some time now, why not a good old fashioned Coasian auction? Sell it off to the highest private sector bidder, that’s the best way to ensure that it is maximally productive and profitable, and to prime the pump for reinvestment, trickle-down, and so forth.

    What to do with the proceeds? How about declaring a tax holiday until the government has spent it all and actually needs revenue again?

  • I am surprised to be the first to note that countries that have a very large portion of their income generated by oil tend to suffer terribly from “Dutch Disease” as defined loosely as the deindustrialization of a nation’s economy that occurs when the discovery of a natural resource raises the value of that nation’s currency, making manufactured goods less competitive with other nations, increasing imports and decreasing exports. The process also generally distorts economic output into three sphere: a profitable one around oil itself; another wholly evolved to service the oil industry — including a burdensome state aparatus — but also including classic services (restaurants, health care, housing) aimed at those in the oil industry; and a third that could be called everything else but is really the subsistance economy of the struggling poor.

    There are oil rich countries that do not suffer from the DD but this is due to the fact that oil is a smallish share of their economies…. Mexico’s, for example, is only 10% generated by oil (even if it accounts for 35% of Government revenue). Britain and the US also have oil in smallish proportion. Norway is our one real anomoly.

    Alaska is a fascinating example if taken on its own. Oil riches have definately driven up the costs of everything else and rewards do seem to skew in favor of the sector and its denizens. However the management of the situation has not resulted in a huge state bureaucracy and — more importantly and more in line with this post — ALASKA SENDS TAX REBATE CHECKS TO ITS CITIZENS TO SUBSIDIZE THEIR LIVING THERE. Just like Nancy and co have advocated.

  • Cydonia

    Guy:

    You are of course right that Dubai is not a liberal paradise. Certainly freedom of speech is restricted in ways we would consider unacceptable. That said, it is strikingly free, economically. Why Dubai should be such a success whilst Arabia is such a basket case when the ruling family there also owns the country, is an interesting question. I can only suppose that ideology makes all the difference.

    p.s. the economist link seems to have stopped working, but this link also has some useful info comparing the various gulf states, including Dubai:

    http://66.102.9.104/search?q=cache:RUQrNLMmBFcJ:www.freerepublic.com/focus/news/654120/posts+dubai+economist&hl=en(Link)

  • Tim Sturm

    This is an issue about property rights, not distribution of profits. Distributing profits from a state-owned oil company (or imposing similar requirements on a private company) won’t change the fundamental problem.

    A better solution is for the Govt to privatise the company by giving away 100% of the company in the form of shares distributed evenly among the populace. This form of privatisation would remove the State from the issue of how to spend revenues from an auction or any other sales process, and should achieve wide political buy-in from the sheeple. As long as the shares are freely tradable then ownership will end up where it is valued most, and everyone’s happy.

  • Dan

    This certainly is a property rights issue before anything else.

    In many countries, such as Ecuador, Venezuela, and Nigeria, the oil under your ground belongs to your government.

    How on earth is it possible to avoid corruption in that circumstance? Local villagers get moved off their land by military force and then the government officials roll in the money they’re stealing.

    Free trade is fair trade if all involved are consenting parties. When Indian tribes in Ecuador are getting moved off their land by force, you can’t say that you have “free trade.” At best, you’re buying stolen property.

    Anyhow, the easiest way to fix the corruption issues isn’t redistributing the money, it’s making sure that citizens and not governments own the oil while it’s still under the ground, and that those citizens have the freedom to sell that oil or not sell that oil as they choose.

  • Walter Wallis

    As long as the citizens use their first check to buy a gun to help them keep their money. Then the government will have to beg the citizens for a share.
    Interesting concept.

  • Gordon

    I suspect that the possession of natural resources valuable enough to provide a rent for a substantial proportion of the population is necessarily corrupting. Income, if not wealth, must be earned to generate a work ethic.

  • Malcolm Kirkpatrick

    Anarchy and its Breakdown

    , (Journal of Political Economy), by Jack Hirschliefer, discusses the effects of resource concentration and defenseability on social structure. I suppose that when social structures evolve in an environment amenable to small freeholders, the sudden advent of a concentrated revenue stream will take some time to produce a steep social hierarchy (e.g. USA, Norway). Where concentrated wealth occurs in a country without distributed political power (e.g., Bolivia, Saudi Arabia), its corrupting effects manifest immediately. What this implies about the chances for Iraq democracy deserves serious consideration.

  • Felix

    Yes, but…

    … how can it be good for the national character of a people to get easy money every month? Where’s the incentive to work, to innovate, to invent, to produce?

    A better solution would be to fund retirement and healthcare with the oil revenues, but to make citizens work for their daily bread.

  • c

    Tax-income is one of the ways you as citizen can controle the state. If the state does foolish things you can pay less in tax so a state will think twice about doing foolish things because it will mean that they will have less income. That is also why a high tax state works better than a low tax state. It can’t fool around so much

    About property rights. Can you name one state which respects property rights when when it is in their favor not to do so?

    About buying a gun with the first check. See Iraq and how unarmed they were.

    Oil funds are a brilliant idea. Almost as brillaint as a guano fund. Does it disappear too?

  • Doug Collins

    This came up a year ago. I commented on it then and have seen no reason to change my opinion. Those above who wrote that this is a matter of property rights are correct. Unfortunately, the US is about the only country in which oil and gas, as real estate, can be privately owned. I think the old West German bundesrepublik and Canada have some sort of private ownership also. Canada, however, pulled a fast one on its citizens a number of years ago – a tax on undeveloped, undiscovered oil on one’s land; said tax could be avoided by turning ones mineral rights over to the government. Consequently most non producing oil and gas acreage in Canada is now in government hands as I understand it. (I would be pleased to be corrected.)

    Anyway, my proposal -in case you don’t want to read my moldy old comment- is that the Iraqi government, (or even better: their constitution), would divide the area of Iraq by the current population and give the resulting half acre or so of mineral rights to each Iraqi. This would be unsellable, but only leasable for 18 years. 18 years would be long enough for infants to reach their maturity and for fools to gain some sophistication in the value of their new possession. We had a similar situation in Oklahoma in the early 20th century when apparently valueless land on which Cherokee Indians were settled, proved to be fabulously rich. A lot of them were cheated.

    This isn’t socialism, because I’m not talking about surface ownership. Minerals in most countries are owned by the state. THAT’s socialism.

    As far as the existing oilfields are concerned, their current income could be handled as Alaska does, with a royalty payment to each citizen. As to those commenters, like Felix, who ask “how can it be good for the national character of a people to get easy money every month?”, the obvious answer is: no worse that for a landlord who collects rents, or a rancher who leases his mineral rights to an oil company and collects royalties.

    Unlike most of the commenters, I am much more concerned with the undrilled acreage in Iraq. Over the next couple of decades, its income is likely to dwarf anything coming from existing fields. It has lain fallow for decades while the finding technology of the oil and gas industry has hugely improved. It will be ‘low hanging fruit’ once the fighting stops. It is extremely important that its ownership get into private hands now while it is not seen as being as valuable as it is.

    Thomas Jefferson, in his Notes on the Colony of Viginia and later in the Northwest Ordinance, repeatedly made the point that one of the foundations of a solid democratic republic, is some small ownership of land and the consequent stake in stability and law for every citizen. As an unrehabilitated aristocrat he was talking about farmland -an impractical idea in our industrialized day and age. The principle, however, is still a good one and land that produces petroleum is a good modern equivalent.

    Finally, from a selfish Anglo-American point of view, I have to relish the idea of our oil companies, which are used to leasing from many small private landholders, competing with the French, Chinese and Russians who are going to have a hell of a time with stubborn farmers and uncooperative widows. We have a hell of a time too, but we are used to it. It also might be highly educational for the surrounding countries’ people to see that there is another possibility beside the Oil Concession/One or Two Big Oil Company arrangements that leave the average person out of the loop.

  • Jonathan L

    It differs little from the notion of an Oil Fund

    I don’t agree. Direct distribution of the money reduces state power and enables citizens to spend it as they wish.

    it would not deliver a predictable flow of benefits to the poorest.

    This would negate many of the problems of free money. Everyone would also need a job.

    basically communism for oil and has all the usual drawbacks.

    Actually its not. In every country that I know of, the state takes a cut of the oil profits. This is based on the presumption that the oil belongs to the state. However the distribution idea, is based on the notion that the oil belongs to the people.

    Further, as the proposal disavows privatisation the “oil company” will be the state.

    Again not true. The state auctions off oil rights to private companies. The money to be distributed is simply the “governments share” of the revenue. The state does not need to have anything else to do with the oil business.

    Income, if not wealth, must be earned to generate a work ethic.

    I agree. But the amounts of money that we are talking about is not enough in most cases to destroy the creation of a work ethic. Its a lot of money for a government, but split 25 million times it just becomes pocket money.

    making manufactured goods less competitive with other nations, increasing imports and decreasing exports.

    This is true, but the problem is exacerbated by the concentration of money in state hands. Spread the money thinly and everyone will have a little more spending power, which will drive development in a much more diverse way. DD is unavoidable, but will decrease if other parts of the economy can be developed. (If the UK was a 3rd world country, oil revenue would be a very major part of its economy.)

    A better solution would be to fund retirement and healthcare with the oil revenues.

    Create an “NHS” with the oil money? I fear the health and pension system would become very corrupt.

  • Sam Roony

    Jonathan L.

    I think we all got dragged into a scramble to create rules for a bunch of countries (oil producers) that are, actually, very different. Even within OPEC, generalisations about small-population Gulf emirates are unlikely to mean much for big-population countries like Indonesia, Nigeria, or even Venezuela.

  • Tim Sturm

    “In every country that I know of, the state takes a cut of the oil profits. This is based on the presumption that the oil belongs to the state. However the distribution idea, is based on the notion that the oil belongs to the people.”

    And this is the notion I have a problem with. The oil doesn’t morally belong to “the people”, since they haven’t done anything to earn it.

    The problem here is that we are talking about privatising an asset that has already been developed into something of substantial value, when in fact the asset should have been transferred into the hands of developers (or at least, allowed to remain in the hands of the developers) many decades ago when the risk was high and the value low.

    Once we’ve arrived at a situation where the state is in ownership of a valuable asset, there is nothing to do but to get it into private hands – permanently – in any way that is seen to be openly fair. A lottery would be as good a means as any in economic efficiency terms. However in order to get wide political acceptance, an alternative is to simply give property rights away to “the people”, even though there is no moral requirement to do so.

    We can discuss the ways in which property rights might be distributed until the cows come home (see for example the earlier posts by myself and Doug Collins), but the basic point is to get the assets into private hands in any way possible.

  • c

    Problem with oil is that it has a high profit margin so they will tax it very high even if “the people” don’t take it outright. So i don’t see how this will curb the corruptive effect of oil

  • Jacob

    I wish my country were in a position to cry: “Help! I’m drowning in Oil”. Let no country have worse problems than that !

  • This is what the US state of Alaska does with their oil wealth. Right down to the “everyone gets exactly the same amount”.