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The Oil Curse and the Patronage Trap

Stories that begin with somebody winning the big lottery usually end sadly.  I suppose it has to do with the corrupting power of unearned/unexpected wealth and the frailties of human nature.  Oil wealth can be as bad as a lottery win because not only does it often shoot more money into a country than it can usefully absorb, but it also empowers governments and encourages both centralization and corrupting patronage.

Let me hasten to say that I am speaking only my opinion and it is not based on any special knowledge, but as we see Iraq’s oil revenue jumping from around $20 billion under Saddam to $70+billion today.  I fear we may have a lottery winner. 

Oil revenues past helped destroyed Iraqi agriculture and retarded local initiative.   It doesn’t make intuitive sense that good fortune could be such a curse, but the influx of so much easy money crowds out other endeavors.   It cheapens hard work.  The lottery winner feels like a chump if he keeps on working just as hard.   Local initiative is stifled more directly, as money from the central government supplants local funding until the only guys left standing are those from Baghdad.

Oil wealth also creates a feeling of entitlement.   People think they deserve "their" share and start getting angry when that share is too small in their opinion … and eventually it always is too small.   It really is true that money cannot buy happiness and bribing people with gifts is a losing proposition.  Over the long run (or even the not so long run), resentment & irritation always trump gratitude and satisfaction in these sorts of uneven relationships.    

All this is much beyond my pay grade and since I have no ability to influence the outcome, I feel free to speculate.  Take it for what it is worth.   I think it is a stroke of good, but dangerous luck that Iraq is taking in so much more oil revenue.  The money will allow Iraqi to rebuild and recover from the damage done by so many years of war and mismanagement.  The caveat is that the oil wealth helped create the mismanagement and waste in the first place.  To adapt an old saying, to err is human, but to really screw up you need the steroid power of oil wealth.

I hope that Iraq will spend that windfall on infrastructure upgrading and maintaining what they already have.   There are certainly many places that could use such investments.  Infrastructure investments that do not include governmental management of the economy are usually a good thing.  Another thing that could be usefully done is to distribute revenues directly to the people, like the State of Alaska does.  This is not perfect, but it gets some of the money out of the control of the bureaucrats.  I fear there will be pressures to “do something positive” such as subsidize the dinosaur state owned enterprises and spread patronage from the central government.  Actually, I suppose it will be a mix of both hope and fear.  Let’s hope the hopeful part predominates.

But this is really above my pay grade.


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