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Foreign Affairs
Saving Iraq From Its Oil
By Nancy Birdsall and Arvind Subramanian
Nancy Birdsall is President of the Center for Global Development. Arvind Subramanian is a Division Chief at the International Monetary Fund.
Escaping the Resource Curse
As the United States, the United Nations, and the Iraqi Governing Council struggle to determine what form Iraq’s next government should take, there is one question that, more than any other, may prove critical to the country’s future: how to handle its vast oil wealth. Oil riches are far from the blessing they are often assumed to be. In fact, countries often end up poor precisely because they are oil rich. Oil and mineral wealth can be bad for growth and bad for democracy, since they tend to impede the development of institutions and values critical to open, market–based economies and political freedom: civil liberties, the rule of law, protection of property rights, and political participation.
Plenty of examples illustrate what has come to be known as the “resource curse.– Thanks to improvements in exploration technology, 34 less–developed countries now boast significant oil and natural gas resources that constitute at least 30 percent of their total export revenue (1). Despite their riches, however, 12 of these countries’ annual per capita income remains below $1,500, and up to half of their population lives on less than $1 a day. Moreover, two–thirds of the 34 countries are not democratic, and of those that are, only three (Ecuador, São Tomé and Principe, and Trinidad and Tobago) score in the top half of Freedom House’s world ranking of political freedom. And even these three states are fragile: Ecuador now teeters on the brink of renewed instability, and in São Tomé and Principe, the temptations created by sudden oil wealth are straining its democracy and its relations with next–door Nigeria.
In fact, the 34 oil–rich countries share one striking similarity: they have weak, or in some cases, nonexistent political and economic institutions. This problem may not seem surprising for the several African countries on the list, such as Angola and the Democratic Republic of the Congo, that have only recently emerged from civil conflict. But it is also a problem for the newly independent, oil– and gas–rich republics of the former Soviet Union, which have done little to consolidate property and contract rights or to ensure competent management or judicial independence. And even the richer countries on the list, such as Libya and Saudi Arabia, suffer from underdeveloped political institutions. Concentrated oil wealth at the top has forestalled political change.
Can Iraq avoid the pitfalls that other oil–rich countries have fallen into? The answer is yes, but only if it is willing to implement a novel arrangement for managing its oil wealth with the help of the international community. This arrangement should not mimic the much–maligned oil–for–food program set up in the aftermath of the Persian Gulf War, under which Iraq’s oil income was directly controlled and administered by foreigners. Instead, the Iraqi people should embed in their new constitution an arrangement for the direct distribution of oil revenues to all Iraqi household—an arrangement that would be supervised by the international community.
From Manna to Witches' Brew
To understand the corrupting effect that oil can . . .