You know that feeling when you begin reading a book, and you think it’s going to be about one thing, but it turns out to be about another?

Something like that happened to me as I was reading Michael Ross’s excellent “The Oil Curse.”

You see, there are many authors who believe having oil is a recipe for disaster, and I have little patience for them. Oil, they seem to claim, breeds corruption, waste, and economic dysfunction. For some countries, it might be best not to have any oil at all – which is ridiculous, considering that oil provides previously dirt-poor countries to accumulate at least some capital.

In my first entry, I lamented that it seemed like the book was going to rehash old stories about how oil screws up everything. I was fully expecting the same ho-hum arguments about oil and institutions that we have heard before.

As it happened, the book makes the contrary case: oil does not make countries less wealthy – it only makes them less wealthy than they should be, given their enormous endowments.

By looking through the data more carefully and comparing it to previous findings, Ross makes the case that oil-producing countries have grown more or less at the same rates as other developing countries. The problem, he says, is the benchmark -a point I also raised in my previous post.

How much should they be growing?

Ross claims that oil-producing countries should be growing at much higher rates than other developing countries, given the distinct advantage oil creates.

And why are they not growing at these spectacular rates? He gives us two reasons.

The first, he says, is that oil-producing countries are places where the female labor participation is lower than it should be. By keeping women out of the labor force more than other countries, oil producers limit their respective countries’ potential.

The other aspect – and the one that is clearly more convincing – is that oil is very volatile, and volatility makes countries grow less quickly. Oil exports depend to a great extent on the wildly fluctuating oil prices, and prices began their roller-coaster rides right at the same time that oil-producing countries began to grow less: the 1970s.

This volatility hurts private investment by making the cost of credit fluctuate as well. It also affects fiscal policies, making them inconsistent over time.

There are several things Ross proposes. He is very keen on oil stabilization funds where countries can save when times are good, and withdraw when times are bad. Sadly, he doesn’t harbor much hope for the politics in our countries to allow for the creation of a credible stabilization fund. Still, his tone is mildly optimistic about the possibility.

He also suggests other things to diminish the flow of oil rents to corrupt governments: leaving oil on the ground, spending it via barter contracts in exchange for infrastructure, distributing oil rents to citizens, or distributing them to local governments. All of these policy suggestions have their problems, so Ross wisely leaves it at that.

Now, there is one thing missing from the book: a discussion on productivity.

Economic theory tells us that while capital and labor growth can help an economy grow for certain periods of time, developed countries are characterized by the level of productivity in their societies, and in its industries. The more you know, the more knowledge you produce for yourself and others, the more productive your job/company will be, and the more the country will grow.

In the end, it’s about people’s brains.

In spite of this, Ross rarely mentions productivity -in fact, the world is only mentioned once in the main text.

He should have done it more often. Underlying his argument on volatility being the main culprit of suboptimal growth is the idea that volatility hurts investment, knowledge accumulation, and hence, productivity.

You might think the granular details are not important, but they are. Think about the amount of knowledge a country such as Canada obtains from exploiting the Alberta Tar Sands and you get the idea: oil producers are being held back because they do not improve their productivity. They do this either by allowing the volatility of oil exports to affect capital accumulation, or because the lack of women in the labor force means the overall levels of productivity growth in society are lower than they should be.

The questions that linger from Ross’ analysis have to do with this reality: why has oil inhibited educational achievement levels? Why does oil prevent people from maximizing their productive potential? Why are national oil firms so averse to innovation?

Regardless of these shortcomings, the book was a succinctly-written scholarly piece. The lesson seems to be that, if we even want to begin growing again, the idea of an oil stabilization fund that is impermeable to vested interests … is something we will need to look into once again.
What did you think of the book? Were you convinced by its arguments? Shoot off in the comments section.

18 COMMENTS

  1. Another factor is the “lotto” mentality oil tends to generate in some cases, where the perception is that a given country is awash in free money (despite the fortune needed to extract and refine it), and the popularist trends of some governments to simply give goods and services to the “pueblo” in return for political fealty. Eventually the recipients feel thy are owed something they never worked to get. Instead of managing the oil dough like a volatile piece of stock, and incrementally investing the profits in the foundations of productivity – mainly education, infrastructure and viable institutions – the monies are squandered, pilfered, spent on vanity projects, or simply given away (not much). Instead of pursuing a productive model and promoting productive values, the oil money works against both. Devil’s Excrement indeed.

    It takes a lot of sobriety and wisdom to manage a fortune, and shit-for-brains to simply spend and steal it.

    And here we are…

    • Hehe. The same thing happens in Texas every 20 years. Oil prices rise, people make a fortune, people spend it, prices drop.

      Old saying in Houston “God, please give me one more oil boom. I promise I won’t waste it this time.”

      But people know they have nobody to blame but themselves, and some folks tend to save.

      • Sandy: Used to be 30 years ago that Texas economy was hit hard every time oil prices went down , but since then Texas has developed many other industries and is now much more impervious to he impact of falling oil prices , even 30 years ago the impact of falling oil prices was much larger in Texas than in Venezuela where the mood of the people kept things going even if the economy was in the doldrums ……!!

  2. Productivity: that is one thing that is missing time after time in the discourse in Venezuela. I hope there will be exclusive posts about that very topic here.

    When you compare GDP rates across the years for several oil exporting countries you can immediately see the variance for Venezuela is the highest: violent zigzags. I am no economist but for me it is clear at the end of the day important jumps after a fall won’t make up for the destruction that preceded. Most of the jump will not be in any sustainable development but in consumption sprees. How come Norway has such a steady development? One reason is certainly the fund they so responsibly keep. But how can they do that? Why they?

    One thing that distinguishes Nigeria and Venezuela from Norway is education. Education levels did improved in Venezuela from 1937 until 1998 but quality of education – the correspondent idea to productivity in the market place – went from mediocre to extremely low. Education in Norway was as good as in the other Scandinavian countries and the average education levels were as good as they could get: the protestant church of those countries even required people to be able to read and write to do confirmation, which was the passage to adult social life and marriage…back in the times when Francisco de Miranda visited the region.

    In Venezuela we haven’t cared about quality of education for the average citizen for many decades now.
    Very few people are willing to measure education quality and much less to make results public.

    It is that education that is tightly connected to productivity, adaptability and sustainability.

    • Don’t heap too much glory upon Norway. While oil rich, it is so laden with taxes that tax dodging is the national sport. A dozen eggs costs $5. Even going over to Sweden is 20% cheaper! Norwegians routinely travel to Germany and England to purchase anything of value. While socialism can bring greater equity, it also steals a certain amount of drive. Especially when it comes to education, as many Norwegians don’t aspire to anything beyond studying to become a librarian.

      • I don’t but compared to many countries, they are doing fine.
        The Norwegian crown will adapt in the next years.
        The issue is not how many eggs you can buy with how many dollars but how many eggs you can buy with your salary, what kind if costs you have to do through your life for education and health and, ultimately, how your country will adapt to econoic changes on the long term.

  3. A Marxist would tell you wealth is a curse, but it is actually the answer.
    Like anything, it is how it is used.

  4. Good comment by Juan on the importance of productivity , where the mass of the people have it easy or at least tolerable because the oil income normally keep peoples head above the water ( so that most people dont drown) ,people have less of an incentive to be productive , while where there is no oil most people either learn to swim or they drown which is a great incentive to people engaging in productive activities and businesses ……!!

    On the favourable impact on productivity of women joining the workforce in great numbers , according to some stats I found in the internet , the percentage of women economically active in Venezuela is 51% (53% in the UAE) while the equivalent number in the US is also 53%, so it doesnt seem as if thats necessarily a factor !! More important perhaps is the productivity of the activities which women do engage in.

    • Indeed, I don’t think the share of women at work is really such a factor in Venezuela.
      Data coming from there should be looked at with extreme care.
      I would say it’s the productivity of everyone…a lot of Venezuelans work a lot but inefficiently, partly because they do not have the education, partly because they do not have the capital and partly because the whole system puts down whatever they try.

    • It’s been for years during chavismo that the statistics get altered to present false results that could wash the regime’s face on the world (Ej. the FAO prizes for “Keeping the venezuelans well-fed) in fact, it was one of the first things chavismo did when they seized power, alter the parameters to measure everything in Venezuela, from poverty to the amount of working people and so on, disregarding any international standards.

      The data you saw might have included the infamous bachaqueros, which are part of the much greater informal sector of economy, aka “buhoneros” or “illegal street vendors”, which, actually don’t provide any growth to the country for an amount of reasons, one of them being that they don’t pay taxes of any kind (And no, bribes are not taxes)

  5. “oil does not make countries less wealthy – it only makes them less wealthy than they should be”
    True, and the same can be said about Corporations, which is typical that their size doesn’t correspond to their rate of innovation. Apple Inc. was many times smaller in 2007 than it is now, yet they are not innovating at the same rate that they should be according to size/wealth.

    In the particular case of Venezuela, I think the combination of the Oil and the Political system has turned the country into a Mega-Populist Dystopia.
    Combine low education with Universal Suffrage and the system will always tend to favor Governments prompt to handouts and giveaways not only to win elections but also to remain in power. –>Chavismo being its ultimate expression.

    Why would anybody work or study hard if at the end the government will provide?

    Has Venezuela sow the Oil?. Hell yes! with huge investments in Education since the 50’s, few countries in the world can claim free higher education and scholarships for their citizens.
    Where is that “fruit” ? Is alive but working in other countries.

    Some solutions.
    1. Take the Government to unprecedented levels of Transparency to fight corruption. This is mandatory given the amount of money involved and of course we need an stabilization fund.

    2. Change the electoral system to mitigate the impact of populism in Politics. Age alone shouldn’t be the only qualifier as voting right for instance. We have a different demographics than Denmark or Singapore so the system has to be different. Forget about fiscal responsibility or stabilization fund without this change.

    3. Put our vast number of capable, educated, professional class in positions of power, hopefully some might return from abroad. This requires #2. At least to make sure we no longer have illiterates as Presidents !!

    • Imagine being the next president of Vzla, going on cadena and saying.

      “Yeah guys, thanks for voting me in, now prob half of you can´t vote now”

      Yep, I wonder how that would turn up.

  6. Education is basic but by itself not enough , individual productivity is the sum of expertise ( which results from the appropiate work experience) and the knowhow and productivity enhancement of working in a well run efficient organization with a corporate culture and work practices that make the work of the group render optimal results …….!! The same person working for a second rate organization will not be as efficient as a person working in a first rate organization !! Look at all those Venezuelans that shine for the excellence of their talents after they ve moved abroad but which in Venezuela would have probably turned into mediochre hacks…..

    • Productivity is also a function of the investment in plant and machinery. At 10 cents an hour for labor, it isn’t economical to invest in a backhoe, which will allow two workers to do the same job as twenty workers with shovels.

      • Investment in Plant Property and Equipment is essential but not enough , remember a study ( along time ago) where local manufacturers were assessed as running very flawed operations even it at the time they had the latest equipment and a good dedicated work force , the problem was a management that didnt know how to organize and run things on an efficient basis . they followed no rational production method , didnt plan their operations , maintained their equipment willy nilly etc. productivity takes a lot of things ……..but its a fantasy that education is the decisive factor if people dont have the know how that is gained by the right kind of acumulated experience in a well run organization and of course if the organization itself doenst have the culture or follow the practicals that allow it to operate with optimal efficiency….

    • One solution for insuring productivity is to distribute money in the form of loans! The investment should be productive enough to pay the money back, although infrastructure investments may not be able to do that. However, economic measurements should reflect good infrastructure investments.

  7. I think it’s indeed a good book. I think the author proposes a correct counterfactual by claiming that the oil curse is not that oil hinders growth in itself, but that countries grow less than they should given their level of income.

    I’m not really set on the mechanisms though. The one about women on the labor force I think it’s not general enough.Is it really just about women? Or is it an entire industry that attracts almost all investment with a small workforce required? I think oil in general separates the workforce much more than other industries because per worker the oil industry is much more productive than any other and, therefore, seeking this rents is a better business than looking for regular paying jobs. This argument is very close to the point Juan is making. I think the lack of women in the labor force may be a great explanation for the Middle East (and it’s very smart thinking from the author), but in Latin America seems to be less convincing. Nonetheless, the productivity channel may still be there as Juan points out.

    Now, regarding volatility. It’s true that it may hurt investment and make economic cycles more problematic. However, again, this by itself is not an explanation. Volatility would be bad just in the case that there is no possibility of insurance for example. Is this risk really nondiversifiable in oil economies? Why is it not possible for an oil company to insure through financial markets (using options, forwards etc.)? The author does talk about these contracts in the book (although briefly and without much hope) when he mentions the current contracts with China (in the form of grants), or mentioning the oil funds (which are basically self-insurance), or talking about privatisation (which is basically letting the private sector take the hit through the stock market), or by having a company that for example sells oil using forward contracts and, therefore, minimises price volatility (this is my suggestion, there is no discussion of the positive side of financial markets in the book). I’m sure the main concerns are from a political perspective. But, we want to some how commit the government to not abuse its powers when oil prices are high and revert these insurance mechanisms. How can this be done I think is the most relevant question.

    Other suggested policies raise similar commitment concerns, without the gains. Take for example, keeping oil in the ground when price is high, you first need a government that commits to do this. Either investment is low and, therefore, the government has limited capacity to extract more in the bad times and, hence, it still suffers a shock. Or it does have the capacity, and, therefore, they need to commit to let this capacity idle when price is high. This is a difficult commitment problem. Especially because it has little sense (you want to sell when price is high).

    In general I think the book offers a refreshing view on the oil curse as a problem, by asking some very good questions, proposing a good counterfactual, and providing evidence for interesting channels like how easy it’s to hide oil wealth for a government, evidence of how even people not yet in power is able to pledge future rents (with the bounty bonds, which I found fascinating), and a discussion of interesting policies to fight the curse. Nevertheless, I still believe that focusing solely in questions so big will provide very vague and unsatisfactory answers. From an empirical perspective it’s hard to think this evidence as causal. For the next reading group maybe we could switch styles of smaller questions, but more convincing answers. “Poor Economics” may be a good idea, Juan mentioned it in another post. Or a more in between book could be “The Great Escape”.

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