Friday, February 22, 2008

Turning the Resource Curse into a Blessing

Today Dr. Muhammad Ali Zainy sent me an essay titled Iraqi Oil: Turning the Curse to a Blessing, which he wrote for the upcoming Conference on Iraq Oil Policy in Paris. I thought about posting the entire essay, but it's 22 pages long, so I'll just post the conclusion along with this very interesting graph showing Iraqi real GDP from 1969 to 2007:
Conclusion: "The resource curse could be true in many ways. One way is to produce spoiled governments and spoiled peoples. Spoiled governments are produced in the sense that, having secured a large source of unearned income (oil rent in the Arab case) sufficient – and often more than sufficient - to finance its activities, the government of a rentier state has a propensity to become autocratic, unaccountable and dissociated from the interests and aspirations of its people. Additionally, such government will keep dragging its feet and will not sincerely endeavor to build a successfully diversified tax-based economy as long as its unearned income keeps flowing. Also, in a rentier environment, spoiled peoples are produced in the sense that, enjoying the overflow of a natural resource bounty and, at the same time, not having to pay taxes, the people of a rentier state become inclined to be lax and tolerant of autocratic traditions, and sometimes even complicit with their government by looking the other way when transgressions against the people and the state are committed.

In the case of Iraq, however, to use the word spoiled is to be most charitable. From the beginning of the formation of the modern state of Iraq, the successive governments of this country, regardless when Iraq was resource-poor or after it became resource-rich, had always been undemocratic and often ruthless, and when Saddam came to power his government became criminal in the full sense of the word.

When Saddam took over absolute power in the summer of 1979, he presided over a rich country with wonderful infrastructure and good public services, a strong and healthy economy expanding at a fast rate of 8% per annum in real terms, and a treasury of foreign exchange reserves of $35 billion. All of that was dissipated in a matter of two decades of tyrannical rule and foolish military adventures, which left Iraq under a huge burden of $120 billion foreign debts, battered infrastructure, rampant unemployment, collapsed services system and a crippled economy.

All of this tells us that, yes, it is quite prudent to have a proper oil law whose mandate would be to protect the country’s oil riches and maximize their monetary value to the Iraqi people. However, maximization of the value of oil revenues to the country is not an end in itself but a means to an end. The end, broadly speaking, is to build the country. In order to achieve this noble cause, those Iraqis in charge must devote their sincere efforts to prepare the conditions for a blessing, in the way described above."

Update (Feb 23): Harry Barnes commented that it would be helpful to see a graph of real GDP per capita. I'm sure such a graph exists somewhere on the web, but in this article the last graph shows Iraqi income per capita in 1980 prices, showing the effect of the population doubling between 1980 and 2007, along with war and sanctions. Click and zoom in on Figure 10 at the bottom to view the graph:

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