Petroleum and Poverty

Speaking at a OSI Forum in New York on June 26, 2003, three experts discussed the impact of oil revenues on developing nations in Africa and the Caspian region. The panel discussion focused on the "resource curse"–a pattern in which poor countries become poorer when they start selling lucrative oil exploration rights.

The speakers–Oliver Mokom and Ian Gary of Catholic Relief Services, and Svetlana Tsalik of the Central Eurasia Project's Revenue Watch–cited oil pipeline and extraction projects in Africa as templates for how oil wealth can actually undermine a nation s economic health. The experts called on international financiers, energy conglomerates, and large aid-giving countries to overhaul the way such projects work.

Summary

Kazakhstan and Azerbaijan may see poverty worsen as their oil exports grow, a panel of experts warned during a discussion in New York City. Citing oil pipeline and extraction projects in Africa as templates for how oil wealth can actually undermine a nation's economic health, the experts called on international financiers, energy conglomerates, and large aid-giving countries to overhaul the way such projects work.

The panel discussion, sponsored by OSI's Central Eurasia Project (CEP), focused on the "resource curse"—a pattern in which poor countries become poorer when they start selling lucrative oil exploration rights. (Even states with wealthy veneers show this pattern: according to the panel, average per capita income in Saudi Arabia fell from $28,600 in 1981 to $6,200 in 2000.)

Ian Gary, a strategist for Catholic Relief Services, used case studies from Africa to highlight the dangers faced by resource rich states in the Caspian Basin, including Azerbaijan and Kazakhstan. Gary began by offering two possible visions of 2013: one in which African oil-producing states buckle under corruption and violence as poverty rages, or one in which all players in the global energy economy encourage a "big push for transparency and accountability." His colleague, Oliver Mokom, reviewed a 665-mile oil pipeline from Chad to Cameroon, illustrating social and environmental damage, And Svetlana Tsalik, who directs CEP's Caspian Revenue Watch, explained how the curse threatens the former Soviet Union's young "petrostates."

Gary's prescription was radical. It would involve closer coordination among huge institutions and corporations that are not used to cooperating. Corporate best practices, he said, would include disclosure of how much companies pay to specific state ministries for the right to drill.

Perhaps most dauntingly, he said, all oil companies would have to embrace this change simultaneously: British Petroleum, which disclosed its payments in Angola and met hostility from the state oil company, found out the hard way that "any one company cannot step out in front."

In addition, Gary urged the World Bank and the International Monetary Fund to coordinate their financing. He called the World Bank too "technocratic" in its lending policies, urging it to consider a country's human rights environment and financial disclosure laws. More generally, he stressed the importance of "sequencing" the development of civil society ahead of the allocation of oil-based loans. A country "needs to establish a legal framework before oil revenues come on line," he said.

Meanwhile, Mokom told the audience that the ExxonMobil-backed pipeline linking Chad and Cameroon, due to begin delivering oil on July 15, had not fulfilled its sponsors' promises for poverty alleviation. Ticking off the projected benefits of the project, including schools and health centers, Mokom said many had failed to materialize. "There is going to be nothing to show for the pipeline," he said. "Once the pipeline was buried, the hopes of a generation are also buried."

Tsalik illustrated the hazards facing Azerbaijan and Kazakhstan. She said that Azerbaijan, which has pinned much of its economic growth plans on oil revenues, might drain all its available crude within two decades. Tsalik also pointed out that Azerbaijan's state Oil Fund was created by presidential decree. That means President Heidar Aliyev's administration wields a considerable amount of influence over how Oil Fund money is allocated. The relatively low level of oversight leaves the Oil Fund vulnerable to political manipulation. Tsalik went on to characterize Azerbaijan, with its hundreds of thousands of internally displaced persons and the long-unresolved territorial issue of Nagorno-Karabakh, as a "ticking time bomb" that could yield tragedy when the economy contracts.

Kazakhstan could also possibly experience social unrest because of imbalances in the distribution of oil-related wealth, Tsalik suggested. "Extractive resources flow through the government," Tsalik said. This system can encourage corruption, as underscored by the fact that two unnamed Kazakhstani officials have been implicated in an ongoing U.S. bribery probe. At the same time, most Kazakhstani citizens do not benefit from the country's abundance of natural resources. For example, the unemployment rate in oil-rich Mangistau Oblast is reportedly about 87 percent.

To help break the curse, panelists said, foreign investors should embrace democratic reforms rather than appease authoritarian-minded regimes. "The most important democratic institutions are the ones that create checks on spending decisions," said Tsalik. A free press is essential for demanding accountability, she added. Unfortunately, neither Azerbaijan nor Kazakhstan has articulated plans to utilize their current oil wealth for the benefit of future generations, Tsalik said.