Debt, poverty, and the resource curse

In the mid 1990’s economists Jeffrey Sachs and Andrew Warner noticed a funny thing. One would think that countries that were well endowed with oil, gas and mineral wealth would be correspondingly economically well off – but in fact just the reverse seemed to be true. Sachs and Warner found a strong negative correlation between a country’s dependence on mineral exports (particularly oil), and their GDP. Further research by others also has found that these countries also suffer from high rates of poverty, malnutrition, child illiteracy, corruption, authoritarianism, civil war, and even indebtedness. Collectively, these observations are known as the Resource Curse.

Much of this is credibly attributable to the corrupting influence of large amounts of money on unaccountable individuals and institutions. But much of it also appears to be systemic.

Under pressure from campaigners, the World Bank decided in 2001 to undertake the Extractive Industries Review (EIR), which sought to judge what the poverty alleviation impacts of Bank support for the extractive industries were. In December of 2003, Dr. Emil Salim, the head of the EIR, surprised industry, the World Bank, and NGOs alike by recommending that the Bank phase out its support for coal immediately, and for oil within five years. While the World Bank’s management and Board rejected Salim’s recommendation nine months later, the fact is that during the entire process the Bank had been unable to provide a single example where their support for an oil project had alleviated poverty. Many examples of the oil, gas and mining industries creating and exacerbating problems were cited. The NGO community supported the EIR recommendations in a historically large coalition that included Nobel laureates, mainstream and socially responsible investment firms, funds, and banks, and more than a thousand environmental, community, human rights, and development groups from more than 100 countries.

Debt & Oil

Download the full report, Drilling into Debt (964KB PDF)

Download just the Executive Summary (112KB PDF)

Countries that produce oil tend to be poorer, more violent, more corrupt, and less productive economically than they should be, given their supposed blessings. This “resource curse” has been well documented over the last decade. It was often thought, however, that whatever other curses oil brought, its vast revenues offered a path out of debt for oil exporting countries, and thus perhaps, eventually out of poverty. But the notion that oil production alleviates debt proves false – in quite the reverse is true.

At the G8 in 2005, Oil Change International, the Jubilee USA Network, the Institute for Public Policy Research, Milieu Defensie, and Amazon Watch co-published Drilling into Debt - the first study to rigorously examine the relationship in between oil and debt. We collected data on 161 countries for the period 1991-2002, and collected further data on 80 developing countries for the period 1970-2000 for use in a statistical model of debt burdens.

Our key findings were:

1. Increasing oil production leads to increasing debt. There is a strong and positive relationship between oil production and debt burdens. The more oil a country produces, regardless of oil’s share of the country’s total economy, the more debt it tends to generate.
2. Increasing oil exports leads to increasing debt. There is a strong and positive relationship between oil export dependence and debt burdens. The more dependent on oil exports a country is, the deeper in debt it tends to be.
3. Increasing oil exports improves the ability of developing countries to service their debts. There is a strong and positive relationship between oil exports and debt service. The global oil economy improves the ability of countries to make debt payments, while at the same time increasing their total debt.
4. Increases in oil production predict increases in debt size. Doubling a country’s annual production of crude oil is predicted to increase the size of its total external debt as a share of GDP by 43.2 per cent. Likewise, the same change is predicted to increase a country’s debt service burden by 31per cent. For example, the Nigerian government currently plans to increase oil production by 160% by 2010. Past trends indicate that Nigeria’s debt can thus be expected to increase by 69%, or $21 billion over the next six years.
5. World Bank programs designed to increase Northern private investment in Southern oil production have instead drastically increased debt. Northern multilateral and bilateral “aid” for oil exporting projects in the South has exacerbated, rather than alleviated debt. Specifically, an examination of those countries where the World Bank Group conducted “Petroleum Exploration Promotion Programs” (PEPPs) reveals debt levels (debt-GDP ratios) in those countries that are 19% higher than those countries that did not undergo this form of structural adjustment.
6. The relationship between debt & oil is most likely caused by the interplay in between three factors:
   a. Structural incentives for and direct investments in the oil industry by multilateral and bilateral institutions, such as the World Bank Group and export credit agencies.
   b. Oil fueled fiscal folly – both in the North by creditors over eager to lend to nations perceived as oil rich, and in the South by unwise fiscal policies.
   c. The volatility of the oil market.

Why is this happening? Unfortunate coincidence, or design?

As most students of the debt crisis are aware, the twin oil shocks of the 1970’s were key precipitating factors in creating the crushing debt burdens we see today. The fact that oil prices have tripled in the last four years are raising many of the same concerns again today.

But there is an even more direct link between energy policy and debt burdens. Since American oil production peaked in the early ‘70s, and the Arab oil embargo sent prices through the roof in the US and globally, strategic planners in Washington have had to cope with the fact that dependence on oil meant dependence on the MidEast. The answer for the last 30 years has been a global US energy strategy known as “diversity of supply” – the intent of which is to encourage as much oil production outside of OPEC as is possible.

As usual, the World Bank has been instrumental in implementing this US agenda.

In 1981, with the new Reagan administration just beginning its term, World Bank President Robert MacNamara proposed to dramatically increase Bank lending for oil and gas (which had only recently started in 1977). The rationale for this investment was two-fold: 1. Developing countries were paying high prices to import oil and gas from OPEC nations, making them unable to service their debt to the World Bank and other lenders, and 2. Northern governments wanted to see non-OPEC countries open up their oil and gas fields to reduce OPEC control over oil prices.

Developing countries needed more money (to service Northern debt), and the US and its allies needed more non-OPEC oil. The perfect solution was to increase development “aid” for oil and gas projects. The results: more money for regular debt service, but higher levels of absolute debt; more oil for Northern consumers but ever increasing demand for more oil. And increasing effects of oil addiction globally: climate change, increased violent conflict, poverty, and other aspects of the resource curse.