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.

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.

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