Book Club: A pox on our house

Michael Ross’s “The Oil Curse” is a sprightly visit to an old topic: how oil wealth damages countries. But while his overtly pessimistic outlook is justified, one has to wonder if he’s thinking of the right counterfactual.

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Many years ago, I read a book that opened my eyes to the interplay between oil and Venezuelan society. The book, The Paradox of Plenty, argued that countries such as Venezuela had more in common with other petro-states than we thought, and that in all our countries, the institutional decay wrought on by oil wealthy was the root cause of our dysfunction.

So when I picked Michael Ross’s The Oil Curse, a book about pretty much the same topic, for our book club, I did so with a bit of trepidation.

It turns out, Ross’s book puts an updated spin on an old story, adding nuance and, why not say it, quite a bit of horror about “the devil’s excrement.”

In the first half, the author lays out the main conclusions: that petroleum has a toxic effect on development, much more so than other minerals.

One of the crucial distinctions that Ross draws is that oil begat low growth since 1980, give or take. Before that, oil did not cause a resource curse. Yet “since 1980, good geology has led to bad politics.” And, in turn, bad economics.

Since 1980, oil-producing countries have become less democratic and less transparent.

What makes oil so special? Conveniently, the author explicitly lays out his reasons: scale, source, stability, and secrecy. All of them make our countries’ economies extremely volatile, hampering growth.

Oil makes for bad politics because of the enormous amounts of money they provide. Curiously, Ross shies away from the argument that the “scale” hurts state institutions (he calls this the “Beverly Hillbillies fallacy”). Instead, he says oil takes away opportunities from women and because of the enormous volatility that comes with oil revenues. That’s the nature of the curse.

We’ve discussed several times on the blog why volatility is bad for the economy. The intuitive explanation is that human beings are averse to risk. If offered the choice between a situation where you can win or lose the same amount with 50-50 probability and not exposing yourself to the risk, most of us would prefer not exposing ourselves.

(A cool application of this principle is fleshed out in the St. Petersburg Paradox, something I explain to my students at the beginning of each semester, which poses the situation that a game with expected value of infinity is worth a finite amount of dollars to most players.)

Volatility is bad, and so we try to avoid it. Volatile situations means investors will be shy about investing, and consumers will hold back on consumption. And yes, oil nations, particularly those with complete domination by the state, tend to be volatile, and that makes them much poorer. Since 1980, this pattern has only deepened.

But poorer than what? That is where Ross’ book has not sold me yet.

While Ross makes a clear case about the effects of oil wealth and how it affects different variables, he seems to be saying that the curse actually makes countries poorer than they would have been had they not had oil to begin with. He says, “[t]he oil curse should also remind us that more income is not always better, even for low-income countries: it depends on where the income comes from, and how it affects a country’s politics.”

Perhaps the second half of the book will clarify this issue for us a bit more. Perhaps he isn’t really saying that oil income makes you poorer than you would have been if you had not had oil, but rather that it makes you poorer than you could be if you got your politics right.

It’s hard to sell the argument that Venezuela would have been better off had Los Barrosos No. 2 never exploded, or that Equatorial Guinea has been hurt by its enormous oil wealth, or that Nigeria would be a better country if it had no oil. In all of these countries, oil has created enormous problems, but it has also brought in a healthy amount of capital that simply would not have been there had it not been for oil.

At any rate, the book is a thorough look at one our country’s most important issue. When she was starting on her own book, Juan Pablo Pérez Alfonzo pleaded to Terry Karl: “[s]tudy what oil is doing to Venezuela, what oil is doing to us.”

Never has this plea been more urgent, and we are all the luckier that people such as Ross are focusing their significant intellects on the topic.

10 COMMENTS

  1. “The [Resource monopolized by a regime with the objective to turn it into a means of extertiong domination upon the population in order to keep power indefinitely for their own gain] curse”

    There, a more generic title for this kind of phenomenon, the actual problem in Venezuela comes from dependency from few resources as a monoproductive economy, the gross scale of sociopathic tendencies that infested the population’s minds, and the constant disregard for any logic and sense in order to fulfill complexes and trying to prove that failed ideologies can work.

  2. I’d be interested in understanding why oil’s undemocratic effects have not really been expressed in places like Norway, Scotland, or Canada.

    Is it simply that oil was discovered after industrialization, rather than before?

  3. Thank you Juan for your balanced comments , the key question of course is whether Venezuela would have been better off if it had lacked any oil resources, Im very doubtful that would have been the case ,not every country has the vocation or ready capacity or luck to develop a succesful market economy , much depends on the culture , on the incentives or on factors that often defy prediction, Before oil we never managed to develop a strong economy or attract foreign capital so no reason to assumme that would have been the case if there would have been no oil. One thing is clear that oil if handled right can be of enormous help to developing a modern economy and if handled wrong can be the source of lost opportunities and disasters.

    One thing I think is clearly wrong is that oil hampers the rise of women in society , at least in the case of Venezuela Im always delighted to see the number of women who have become prominent as professionals and in other walks of life ….because they have taken full advantage of the educational opportunities which a richer state had to offer……maybe in oil rich islamic states
    the local culture helps put down women , but in Venezuela I think that there is no stopping their continuing rise to positions of increased relevance and responsibility …..Venezuelan women have a special something that makes them adept social warriors despite the challenges of an outdated machismo .!!

  4. Hi Juan, I think your comment is very good. However, I think it’s a bit unfair. In my interpretation, the book is not looking to show that oil countries do better in terms of income than their non-oil counterfactual. The claim is rather than they do worst than a counterfactual that generates that same money, but using regular taxation. The author reveals this when he says that countries didn’t grow as they should (given the level of income).

    I think the main curse the author sees is the fact that oil hinders democracy, or makes countries less likely to go through a democratic transition if they’re not democratic. Roy makes a valid point when he asks why the oil curse affects countries like Venezuela and not Norway for example. The author points to initial institutional differences; although, he finds one example in which still with even without these initial differences oil mattered, which is the case of the state of Louisiana with Huey Long (for me this is the best piece of evidence of a real oil curse and not initial institutional differences).

    Nonetheless, the answer that initial difference in institutions are so important is very unsatisfactory and makes it impossible to draw valid inferences from this book. The author can’t control for institutional differences properly, so even in the counterfactual oil same income vs non-oil same income, it’s still possible that oil countries have worst institutions originally and this is the cause for lack of growth. So even in a world in which they raise money through taxation, they would use it to hinder democracy and stay in power. For me is not clear why oil makes it easier to hide wealth (corrupt governments can hide other sources of income, or rely on inflation, which is a form of tax, to finance their sheninagans). So it’s maybe increases in the size of government and corruption what hinders democracy in these countries and not oil. Oil only would make it easier to increase the government. But, you could also make it a la Cuba, or a la Zimbabwe, or a la North Korea, which is by taking the means of production.

    It’s a good book, but I think the author is biting more than he can chew. He can’t possibly answer the questions he’s after by looking at cross-country regressions (and he also has this feeling in many parts of the book). Also, the book takes the statistical inferences too seriously and I think this is one of the cases in which the author lacks a good theory. He posts some hypotheses out of the blue, but without thinking very carefully about a mechanism. I agree is an interesting read, but I think it’s a book that is doomed to not fulfill its final objective.

    • Actually, I think he’s saying the “institutions” explanation falls short. He is leaning more to saying that, because of its sheer size, oil wealth fosters corruption, and institutional decay is just a consequence of that.

      I’m more open to finding out what the rest of the book says, and to seeing how much more convincing it can be. I still think it’s a worthwhile read.

  5. I plotted this chart a couple of years ago:

    http://1.bp.blogspot.com/-0y9g8XMqT28/Uz_Ds04jdHI/AAAAAAAAEGo/RDTmFFI9yHM/s1600/pibvenenorunige.png

    It shows GDP growth for Nigeria, Venezuela and Norway since 1980 until 2012. If I update the chart, things will be even more dramatic.

    Feudalism never developed in Norway -unlike other European countries except Sweden- whereas Venezuela in 1937 and in 1998 and in 2016 was and is a profoundly feudal country…like Nigeria, the Arabic countries and so on. Even the self-appointed “intellectual elite” in Venezuela keeps a profoundly feudal attitude towards development. The same applies in Nigeria.

    This has profound consequences when it comes to how people behave when easy money comes in.
    This also has profound consequences for the level of discourse.

    Norway – as Canada – was already developed when oil exploitation began. Norway had already a very high proportion of highly educated people – almost total literacy back in 1770- whereas Venezuelans’ average education levels are extremely low even now (and now they might be worse than in 1990).

    A Venezuelan graduate – like even ultra-privileged Capriles – reads less books on a yearly basis than a citizen of most other Latin American countries, not to mention developed nations.

    Is it any surprise oil has caused the ravages it has caused in our countries? What level of government and accountability, of public pressure and national debate do we expect?

    • But the “institutions” explanation was established twenty years ago. His attempt is to try and go deeper than that …

  6. It ocurrs to me that maybe it helps if there is oil but not so much that its impact on the economy is so overwhelming that it distorts the countrys economy and mode of politics and stymies the development of other private sources of wealth by making imports too cheap and easy.

    Just as handling large masses of soldiers or large companies requires more management talent ( always a scarce resource) , handling too much public resources can become a problem for a public sector that lacks mature institutions and management skills. A problem compounded where the ruler is burdened by ideological or megalomaniacal delusions ….

    As a metaphore once saw how the driver of a rented car with a very powerful motor tried changing lanes and overdid the gas pedaling pushing the car to wildly jump two lanes and crash on the side of the road , evidently the driver was unused to driving such powerful car and understimated what his pedalling would do ……

    I suspect that the the problem is not necessarily with the size of govt but with the capacity of the public sector management to competently handle whatever size of govt there is well. In short where too easily acquired wealth overtakes and surpasses the capacity of its manager to handle it with competence.

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