Mobility of goods and people is a key element in today’s globalizing world. Global mobility depends on oil for transport of goods and people, whether by land, sea or air. Demand for oil is increasing, while traditional sources of supply are diminishing. The arrival of China’s 1.3 billion people as significant energy consumers in the world market is introducing further complexity and competition into the traditional oil markets.
Perhaps because oil is the lifeblood of Western world economies, western world media focus on high oil prices, access to oil and oil threats to the environment. All these supply-side topics are important -- but they are not the real issue we all must be concerned with today. World economies and market forces are remarkably adaptive and, given time, can deal with those problems if allowed to do so.
Oil offers a unique opportunity for citizens to prosper, as in Norway and Alaska where the democratic institutions of a civil society, – such as the rule of law, an independent judiciary, and a free press -- were already solidly in place before oil was discovered. These institutions assured transparency and accountability in government. In other nations without these institutions, oil revenues have fostered corruption, tyranny oppression and peril to democracy and development. Saddam Hussein and the late Sanni Abacha exemplified extreme oil despots, but witness also events in Angola, Iran, Libya, Nigeria, Russia, Saudi Arabia, Sudan and, most recently, Venezuela.
Oil money when it is controlled by the government tends to increase rent seeking. When government owns the oil and controls the oil revenues, the currency of an oil-rich nation sometimes tends to be in demand and over-valued, which makes foreign goods cheap. Local manufacturers and farmers then become uncompetitive on global markets and even in their own domestic markets. This effect, known as the “Dutch disease,” inhibits investment and job creation.
In many respect the implications of oil revenue pouring into government hand are huge. Reliance on oil diminishes economic diversity because investors focus on oil related sectors of the economy. The economy becomes increasingly dependent on oil, and on uncertain and volatile world oil prices.
Oil revenues flowing into the government weaken the private sector and stifle the middle class who are the foundation stones of democracy and economic freedom. Entrepreneurs go into government rather than the private sector because, in the words of Willie Sutton, the famous American bank robber, “That’s where the money is.”
When individual initiative is stifled, income gaps widen. Rich elites get richer. The poor become wards of the state and bend to government dictates. Oil wealth feeds incompetence, centralization of power, crony capitalism and continually increasing spending by government at a rate that eventually becomes both unstoppable and unsustainable.
Oil wealth can also finance tools of repression to eliminate opposition: Arms, military strength, heavy handed police, massive spy networks and prisons, all reinforced by a captive judiciary and captive media. Ordinary people who live with fear, rather than with freedom and opportunity, will vote for what harms them least. The bright and energetic ones who can will simply leave the country, diminishing the country’s most valuable resource, its human capital.
Corrupt leaders are delighted to finance schools, hospitals, roads and other infrastructure projects that can be located and contracted to favor their supporters, exclude opposition and monopolize power. A corrupt judiciary, working with corrupt local officials, can make a mockery of individual property rights, which are the rock bed foundation for an accountable democracy and a growing economy.
Mussab Hassan Al Dujaili, a former founding Iraqi OPEC governor and now Marketing Director in Iraq’s State Oil Marketing Organization recently said: “Take the most virtuous of governments, brought to power by democratic means, and give it huge oil revenues. I bet that within three years this same government will be just as corrupt as any authoritarian regime in the developing world, because a politician who can finance his economic and social policies, his police force and an army with natural resources no longer needs to raise taxes or listen to the people.”
Dealing with the “curse of oil” therefore requires a number of approaches. The number one priority should be to diffuse the power inherent in oil revenues. That lesson comes from “Centuries of Economic Endeavor,” a seminal work by John P. Powelson in which he goes back over the history of every region of the world to try to determine why some nations prospered where others did not. His conclusions are startlingly simple: People prospered and societies thrived where there was genuine diffusion of power.
Where power was centralized among a ruling few, the ruling few were able to take care of themselves, but their nations failed to grow and prosper a! nd the people remained poor and oppressed.
Reorganizing and decentralizing the oil industry -Where government insists on continued ownership and management of a nation’s oil resources, some diffusion of power can be accomplished by breaking up a national oil company into three or more separate producing companies, and “hiving off” other oil related divisions or entities within the national oil company. Each producing company should be allocated facilities scattered around the country, rather than regionalized groupings, and each company should be placed under a different shareholding ministry.
An overall oil ministry should focus on oil policy issues and overall review, evaluation and reporting on oil industry operations, but should NOT manage the oil companies themselves. Separate oil companies, with independent boards of directors and independently audited financial statements, would allow a measure of competitiveness as well as improved transparency and accountability. An oil ministry would set the rules, and play the referee, but should NOT also play in the game itself.
Transparency – Bad things tend to happen in secret, under the table, out of sight of the public eye. Public awareness and visibility, on the other hand, help to reduce corruption and increase accountability. Required disclosures are widely employed in many fields in the U.S., for example, to protect investors with required corporate financial disclosures, consumers with product content disclosures, and citizens with public information mandates for government agency operations, to mention a few.
Cash oil revenue payments to the people – This approach could be one of the most simple, effective and quick ways to begin to achieve transparency and citizen attention to how oil moneys are used. A cash payment or levy, based on actual barrels of oil produced, would be similar to a bond coupon or an interest payment, except that the citizens never have to lend money or buy bonds – they are simply issued an oil levy entitlement certificate made out in their name, and the oil company would pay perhaps $5 per barrel (or 10% of oil receipts) quarterly into a central bank or trust for immediate distribution to the certificated citizens.
This would in no way preclude also establishing people’s investment trust funds such as the one created in Alaska, or the eventual full or partial privatization of oil facilities, which are strongly urged by free market exponents but are complex and long-term solutions.
Stabilization funds – One answer to insulating oil revenues from government politicians is to set up a special stabilization fund or trust, with independent outside trustees and auditors and spending restrictions according to specific purposes laid out in the charter. Most of these funds are designed to keep the oil sale proceeds in foreign currencies to help stabilize exchange rates. Norway, Alaska, and Chad are good examples of trust funds with special oversight to ensure that the money is used for the good of the people.
Privatization – Removal of government from ownership and operation of a nation’s oil resources is the preferred approach by all who seek efficient management and more honest and effective government through a full and hopefully permanent separation of government from the free and unaccountable revenues that flow in from oil.
The government itself is then no longer independently wealthy and unaccountable to the people, but instead must raise its operating revenues through taxes and tariffs paid by the people. Politically, privatization of an oil company is a daunting task and few governments have ever tried, nor have they had the desire to try.
*Gordon Johnson is an advisor of Institute of Public Policy Analysis, Lagos
** This is an edited version of the presentation made during 2005 Annual Conference of Center for the Study of Islam and Democracy in Washington, DC