Understanding the resource curse

Normal, Weekender

DENNIS BADI analyses the pitfalls before the windfall from the PNG LNG Project

THE experience of four decades has shown that reliance on petroleum wealth does not transform poor countries into flourishing economies within a generation.
That experience may be more profound today in Papua New Guinea. Since Kutubu oil was commercialised in 1994, there has been no permanent community infrastructure apart from company roads and amenities but trails of poorly managed community projects, failed community leadership, widespread malnutrition and poor educational performances in Kutubu Project Impact area, not to mention the neighbouring regions like Mt Bosavi LLG which have not benefitted much. There are many lessons to be drawn from Kutubu.
There is now a mounting world market pressure for the oil twin – gas, which is promised to be the single largest investment in the nation’s history with K9 billion projected each year.
It is reported that a massive K300 million will be spent over four years during the construction phase of the PNG LNG project in Hides, Angore, Komo and Juha. This includes K12 million which will be spent on supplier development every year. This will benefit landowner and PNG companies for the project lifespan. Landowners will have the world under their feet and the Government will be the gatekeeper of all the income.
The Kutubu development consequences were real. Few benefitted and will the twist of luck be on Kutubu now that the ExxonMobil-led LNG project is in full swing in the area?
The PNG Government is expected to intervene and administer ambitious policies if this nation is to prosper from the windfall – the world market prices are volatile, coupled with the complex nature of land tenure issues and politics.



The paradox of plenty

MANY years ago, development practitioners and economists thought petroleum and mineral exports alone would bring riches and economic development. They predicted, just as LNG proponents and analysts today have forecast, the employment and training opportunities as well as social and environment benefits that oil commercialisation will bring.
Nonetheless, today their expectations are far more restrained. The consequences of development based on the export of petroleum have tended to be negative during the past 40 years, according to these experts. When compared to countries dependent on the export of agricultural commodities, oil exporting countries suffer from unusually high poverty, poor health care and widespread malnutrition, high rates of child mortality, low life expectancy, and poor educational performance. These are surprising findings given the revenue streams of resource-rich countries. This is no different to our Kutubu oil project.
The Kutubu oil project landowners were bewitchingly snared by “the paradox of plenty” or what Juan Pablo Perez Alfonzo, the founder of the Organisation of Petroleum Exporting Countries (OPEC), once called the effects of “the devil’s excrement.”
The reality is sobering. With the LNG project, this will be a testing period for our landowners and our Government. With billions to be injected into our economy, will it be the remedy for all our woes? Or could it make our island a renter state?
In renter states, economic influence and political power are concentrated, the lines between public and private are very blurred, and rent seeking as a strategy for wealth creation is rampant.



What the resource curse is…

Due to the highly volatile nature of oil markets, oil-exporting nations often fall victim to sudden declines in their per capita income and growth collapses. These had occurred in PNG on a smaller scale but the statistics of the collapses are startling.
In Saudi Arabia, whose proven crude oil reserves are the greatest in the world, per capita income plunged from $US28,600 in 1981 to $US6,800 in 2001. In Nigeria and Venezuela, real per capita income has decreased to the levels of the 1960s, while many other countries –  Algeria, Angola, Congo, Ecuador, Gabon, Iran, Iraq, Kuwait, Libya, Qatar, and Trinidad and Tobago – are back to the levels of the 1970s and early 1980s.
The surprisingly negative outcomes in oil dependent countries are referred to as the “resource curse” or the so called Dutch Disease; however it is helpful to clarify what it is not.
The resource curse is not a claim that natural resource abundance is always bad for economic growth. To the contrary, there are powerful historical examples of successful resource-based development, including the United States, Australia, Chile, and Norway – although there are almost no cases of successful development based on the export of oil.



The crux of the problem … renter states and oil lessons for PNG

Many countries like Algeria or Angola depend heavily on oil exports since their public institutions are generally weak and lack the capacity to handle the challenges of oil-led development. If pre-existing institutions are weak, the influx of rents from oil tends to produce a rentier state – one that lives from the profits of oil.
Experience has shown that corruption and poor governance are rampant among oil exporting countries. Their rulers, presidents and prime ministers tend to stay in power by diverting revenues to themselves and their supporters through subsidies, protection, the creation of public employment and overspending. These countries have a chronic tendency to become overextended while promoting cultures of rent-seeking among their populations.
In resource-poor countries, intense popular pressure on scarce resources is more likely to reduce the tolerance for inefficiency and predation, and the economy cannot support extensive protection and over expanded bureaucracies over long periods of time. But in these so-called oil states, oil wealth weakens agencies of restraint. The net result is a state that looks powerful but is hollow.
The country’s democratic process may be another casualty. Authoritarian rulers often use petrodollars to keep themselves in power, prevent the formation of opposition groups, and create vast supporters from landowner leaders to politicians, forming repressive apparatuses. Not surprisingly, such regimes tend to last a long time and democratic change is hindered.
Other political problems make these oil states unusually susceptible to policy failures. Because the state is a “honey pot,” it is easily influenced by powerful outside interests and is often involved in widespread corruption. As a group, oil-exporting countries are significantly more corrupt than the world average (even if Canada and Norway are included). Nigeria, Angola, Azerbaijan, Congo, Cameroon, Indonesia have competed for the position of “most corrupt” in the annual rankings of Transparency International, a non-governmental organisation dedicated to countering corrupt government and international business practices.



An option for the government

THERE are many proposals for avoiding the resource curse. One excellent option is for the PNG Government to establish a commodity stabilisation fund (“rainy day funds”). This will smooth out price volatility; more economic openness and sophisticated foreign exchange policies to mitigate Dutch Disease. With the setting up of this fund, there would be more efficient investment in human resources such as education and skill acquisition; and greater transparency in tax policies.
International commodity prices are subject to enormous volatility, providing the major motivation for the creation of stabilisation funds that allow the smoothing out of expenditures. But such stabilisation funds can serve other functions. By setting aside funds in a separate account, stabilisation funds can provide a check against the natural proclivity of governments to spend all of the resources at their disposal; and they can help ensure that the funds are spent on investments, so that the depletion of natural resources is offset by an increase in human and physical capital.
Stabilisation funds can also be used to reduce rent seeking. By providing an open and transparent process for determining how the funds are used,
stabilisation funds can help prevent and diminish the often violent landowner conflicts that have so marked resource rich countries.




Utilising oil wealth effectively is not easy. For policies to be successfully implemented, capable states should have reasonably high levels of governance such that resource funds are appropriately saved, spent and accounted for.
Sophisticated governments in the more developed nations have always faced challenges in executing ambitious intervention policies. If a developing country like PNG can administer ambitious policies with a high level of governance, then this LNG development will truly become a flagship project amid current challenges.