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Dimensions of the Oil Curse A Framework for Assessing Africa’s New Resource Producers Dr. Robert Looney Naval Postgraduate School [email protected] Oil Curse Overview Several generalizations are possible concerning the oil or resource curse • Economic performance among those with oil, mineral or agricultural resources • Tends to be no better than among those without, • And often worse • Long run patterns suggest that more often than not when fuels, ores and metals exports increase as a proportion of merchandise exports, GDP growth declines • This pattern is not inevitable, with many countries finding oil/resources to be a blessing rather than a curse. • A good analogy is the lottery winner. • In the past many African countries have had many symptoms of the oil curse – not inevitable that this 2 phenomenon will characterize the future. Patterns of Long-Run Growth 3 Channels of the Oil Curse • At least four main channels through which the resource curse has harmed an economy. The African countries under consideration have, at one time or another, experienced each: • Pro-cyclical fiscal and monetary policies • Crowding out of manufacturing • High volatility of commodity prices • • Deterioration of governance and supporting institutions All or combinations of these factors can lead to: • Unsustainable growth – bubble economy • Wasteful public investment programs • An over expansion of the public sector • Destruction of the agricultural sector • Lack of competitiveness outside the oil sector • Underdevelopment of the private sector • High levels of chronic unemployment 4 Variants of the Oil Curse • Main element separating the oil curse and oil blessing countries is the relative level of governance • Many aspects of the oil curse are captured in the Legatum Institute’s Prosperity index which has eight dimensions • Two of these dimensions separate the oil countries into three separate environments: • Economy • Five year growth rate (2000) • Confidence in financial institutions (% yes) • Satisfaction with living standards (% yes) • Governance • Confidence in the government (% yes) • Confidence in the judiciary (% yes) • Government Effectiveness (World Bank) 5 Ranking -- Legatum Governance (1 highest, 142 Lowest) Diversity of Oil Economies 140 Venezuela Iraq Russia Iran 120 Nigeria Azerbaijan 100 Angola (Classic Oil Curse) (Partial Oil Curse) Indonesia 80 Chad Sudan Mexico 60 Saudi Arabia UAE 40 Kuwait 20 (Oil Blessing) 0 0 20 40 60 80 100 120 140 Ranking -- Legatum Economy (1 highest, 142 lowest) 6 Oil Economies: Patterns of Governance Composite Governance (percentile) 55 50 45 40 35 30 25 20 Country/Grouping Iraq Partial Oil Curse Oil Curse Oil Blessing 15 10 5 0 1996 2000 2003 2005 2007 2009 2011 Source: World Bank, Worldwide Governance Indicators, 1996-2011 Total Governance: Voice and Accountability, Political Stability/Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption 7 Manufacturers Exports (% Total Merchandise Exports) Oil Economies: Diversification 50 45 40 35 30 25 20 15 10 5 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Country/Grouping Oil Curse Partial Oil Curse Oil Blessing Iraq 8