Oil Revenues and Economic Growth

01.03.2006

High oil prices (read high oil revenues) do not always mean economic growth.  Just look at the oil-rich Azerbaijan. 

Some 40 percent of the population lives below the poverty line. Teachers in the country earn only about $50 per month. And while the impact of the oil money can be seen in Baku – where new high-rises dot the skyline and shiny German sedans compete for road space with rusting Russian Ladas – the areas outside the capital suffer from neglect and their decaying infrastructure.

While resource-rich countries may get a lot of money for selling their natural resources, it is not how much money they get, but how they spend it that matters.  What we see in many countries is that oil and other natural-resource revenues are collected in government funds and then spent on questionable public projects and social programs.  Sometimes, they are siphoned off by corrupt government officials, and the public gets absolutely nothing.  Instead, the money could be spent more wisely on reforming countries’ economic and political institutions so that there are long-term opportunities for economic growth (entrepreneurship).  The relationship is circular, as stronger institutions also ensure more efficient use of funds gained from selling natural resources. 

 “Only those countries enjoying an efficient, accountable and democratic state prior to the exploitation of oil for export (e.g. Norway) have been able to manage oil revenues and produce better development outcomes,” wrote Stanford University professor Terry Karl in a 2003 article for Transparency International. “This is the crux of the oil trap.”

Spending high oil revenues on public projects without substaintial reforms of the underlying system can also create a false sense of economic growth.  Something reformers in Russia, Venezuela, Iraq, and other countries should definitely keep in mind.