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.

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