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 gross domestic product (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.
Oil and Debt
It was often thought 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 countries that produce oil tend to be poorer, more violent, more corrupt, and less productive economically than they should be.
In 2005, Oil Change International, the Jubilee USA Network, the Institute for Public Policy Research, Milieudefensie, and Amazon Watch co-published Drilling into Debt – the first study to rigorously examine the relationship in between oil and debt. The report found that:
- Increasing oil production leads to increasing debt.
- Increasing oil exports leads to increasing debt.
- Increasing oil exports improves the ability of developing countries to service their debts, while at the same time increasing their total debt.
- Increases in oil production predict increases in debt size.
- World Bank programs designed to increase Northern private investment in Southern oil production have instead drastically increased debt.
Further, the study found that the relationship between debt & oil is most likely caused by the interplay in between three factors: 1) 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; 2) 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; and 3) the volatility of the oil market.
This “resource curse” has been well documented across extractive industries.
Energy Supply, Debt, and Developing Countries
The twin oil shocks of the 1970’s were key precipitating factors in creating the crushing debt burdens we see 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 United States and globally, strategic planners in Washington have had to cope with the fact that dependence on oil meant dependence on the Middle East. The answer for the last 30 years has been a global U.S. energy strategy known as “diversity of supply” – the intent of which is to encourage as much oil production outside of OPEC as is possible.
Not surprisingly, the World Bank has been instrumental in implementing this U.S. 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.
The World Bank and Extractive Industries
In 2001, under pressure from campaigners, the World Bank agreed to undertake the Extractive Industries Review, which sought to judge the poverty alleviation impacts of World Bank support for the extractive industries. Following a two year process, Dr. Emil Salim, the head of the Extractive Industries Review, 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 Dr. 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 unprecedented coalition supporting the Extractive Industries Review recommendations 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.
The World Bank, Extractive Industries and Energy Poverty
One of the primary reasons that the World Bank gave for continuing to fund extractive industries was poverty alleviation. Yet, a study by Oil Change International in 2010 found that none of the World Bank Group’s $7.2 billion in fossil fuel finance over the last two years directly targets the poor or ensures that energy benefits are reaching the poor. In fact, the World Bank’s own assessment does not classify any of its coal or oil projects over the last two years as improving energy access. Most often, the World Bank’s public project documentation does not identify the intended consumer of the energy services, and, overwhelmingly, energy project documents do not indicate plans to monitor the number of poor receiving energy services from the project.
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