The curse of black gold

Oil is bad news for a country: far from bringing prosperity, it is the harbinger of poverty, malnutr

In the great 1970s sitcom Rising Damp, the late Leonard Rossiter played Rigsby, the miserable owner of a boarding house. In one episode, he was forced to find reasons to be cheerful when he had to talk a suicidal lodger down from the roof. After toying with the joys of the springtime, inspiration hit him. "Think of North Sea oil!" he cried. Those of us of a certain age can remember the thrill those three little words produced. Oil was going to take us from the dowdy 1970s and transform Britain into a prosperous and contented land.

It didn't quite work out like that. The dowdy 1970s were followed by the calamitous early 1980s, when unemployment went from one to four million. Much of the blame for the collapse of British manufacturing rested with Margaret Thatcher's demented monetarist experiment. North Sea oil revenues helped pay for the cost of keeping millions on benefit, so in that sense oil mitigated the worst effects of Thatcherism. But oil revenues also allowed Britain to tolerate mass unemployment and deeply damaged exports by further forcing up the already unsustainably high value of sterling.

Looking back, it is hard to see the oil as a blessing. In the developing world, the blessings of oil have been even more elusive. At about the time Rigsby was reeling in his tenant, Juan Pablo Perez Alfonzo, a Venezuelan oil minister and founder of the Organisation of Petroleum Exporting Countries, gave a prophetic speech to his countrymen. "Ten years from now, 20 years from now, you will see, oil will bring us ruin. It's the devil's excrement. We are drowning in the devil's excrement."

The usual complaints about the dependence on oil are that it destroys the environment and starts wars. A new report from Christian Aid adds poverty and corruption to the list.* It is written as a warning to the Iraqis as their oil flows again. They would do well to take it seriously. Oil has a history of impoverishing its producers.

In 1995, Professor Jeffrey Sachs of Harvard University and his colleague Andrew Warner looked at how the possession of oil and other raw materials affected national economies.

Conventional wisdom held that there was no better news for people than prospectors striking lucky on their land. Sachs and his colleagues found that, on the contrary, the more a country depended on natural resources, the lower its growth rate. Not quite believing his own results, he double-checked, introduced new variables and checked again. The results were indisputable.

Professor Michael Ross of the University of California backed them up with a chart which mapped oil sales against literacy and malnutrition rates. Each 5-percentage-point rise in oil exports was matched by a three-month fall in life expectancy and a 1-point rise in childhood malnutrition.

Nigeria is the clearest case of what Christian Aid calls the "oil curse". Possession of Africa's largest oil reserves did not prevent the proportion of households living in absolute poverty - that is, managing on $1 a day, or less - rising from 27.8 per cent in 1980 to 66 per cent in 1996. In Angola and the Sudan, the battles to control oilfields exacerbated the terrible civil wars brought on by tribalism and religion.

Alfonzo's Venezuela has earned $600bn from oil since the 1970s, but the real income per head of its citizens fell between 1973 and 1985, and is falling again today. Even those Arab oil countries that in the 1970s captured the popular imagination of the world with their fabulous wealth - Kuwait, Saudi Arabia, the United Arab Emirates, Bahrain and Iran - saw their economies contract between 1970 and 1989: yet these were years that covered the supposed boom time of the Opec cartel.

Indeed, an underappreciated reason for Saudi Arabia's role as seedbed of the most brutish religious bigotry is that the promises of wealth its citizens received in the 1970s have proved illusory. Saudi Arabia has one-quarter of the world's oil reserves, and oil and gas exports account for 80 per cent of the country's exports, but it remains relatively poor.

The princes of the House of Saud have done very well, but the population as a whole has a per capita income of £4,300. Puerto Rico and Slovenia do better. St Kitts and Uruguay are only just behind.

The tiger economies that charged out of poverty in the second half of the 20th century did not have huge reserves of oil or any other natural resource. They defied conventional wisdom on a second count by ignoring free-market economics and relying on trade barriers to nurture native enterprises. Capitalist protectionism was tolerated by the United States in the cases of South Korea, Japan, Taiwan, the Philippines and Indonesia because they were its allies in the cold war, or, in the case of China after Mao died, imposed by the market-Leninist dictatorship.

Sachs and Warner explain the phenomenon of oil poverty by showing how the discovery of oil destroys native enterprise. An oil boom sends the currency soaring, making it harder for local manufacturers to export. Skilled workers leave industry and agriculture to service the new rich, who pay more for their labour. By using oil as collateral, governments are freed to build up enormous foreign debts. Grand projects proliferate, and the most popular form of aggrandisement is, invariably, the aggrandisement that comes from purchasing weapons.

The curse of oil is not confined to the developing world. Developed economies have suffered from the "Dutch disease" - named after the crash in the Dutch economy following the discovery of natural gas in the 1950s. Yet there is no logical reason why oil and gas wealth should always lead to poverty. The Netherlands and Norway, for example, eventually found ways of handling the windfall. With a little ingenuity, democratic governments can spread income and set up trust funds to encourage the diversification of industry.

The snag in that last sentence is found in the words "democratic governments". In the developing world, oil and corrupt autocracy appear to be natural partners. Britain's relations with Saudi Arabia provide a case study. The al-Yamamah arms deals in the 1980s were certainly the biggest and probably the most corrupt weapons sales in history. The corruption on the Saudi side was notorious: every prince who could get a bribe - or "commission", as bribes were tactfully called - grabbed one. The corruption on the British side was harder to pin down.

Al-Yamamah is likely to have been the British equivalent of the Elf Aquitaine scandal, which is currently shredding the reputation of the French political class. Unlike France, Britain does not have investigating magistrates and our parliament is controlled by the executive. All we know is that the only report the National Audit Office refused to release to the public or to MPs was the report on al-Yamamah, and that Jonathan Aitken's 1997 libel action against the Guardian was driven by his desire to cover up his links with Saudi Arabia.

What is certain is that the weapons sales made no military sense. According to the Campaign Against Arms Trade, "defence" absorbed 30-33 per cent of the Saudi government's budget in the 1990s, and 10-16 per cent of the national income. The spending continued despite huge budget deficits, an economic crisis and the knowledge that the usually mediocre weapons systems were not needed. A plausibly cynical explanation would be that the "commissions"that arms sales generated were a useful way for the princes to justify taking a cut of the profits from oil exports.

Oil might have been made to corrupt. It is best exploited by large companies - in theory there is no reason why one multinational could not manage the entire oil production of the Middle East. Concentration of ownership and concentration of power go together. A government need only do business with a few men at the top of a few companies. Sweetheart deals are easy to arrange. One reason why the pseudo-sophisticated argument that the Iraq war was "all about oil" didn't stand up was the way it betrayed an ignorance of the oil industry. The oilmen around Bush were perfectly capable of sparing him the trouble and expense of an invasion by cutting a deal with the tyrant.

The concentration of tax revenues is as malign as the concentration of power and production. Christian Aid says that, when a natural resource provides the bulk of a state's revenue, as in many oil-producing states, there is no incentive for the state to encourage the development of representative government. Oil removes the need to tax the population and win its consent for taxation.

Professor Michael Ross produced a second chart, which showed that when oil wealth rose, democratic rights fell. "Oil makes matters worse in countries where governments are already weak," he concluded. "It provides the income for a government to ignore its people and get on with the business of spending without questions being asked. Oil provides the reason and the means - it is a terrible opportunity forgone."

In Angola, the International Monetary Fund estimated in 2002 that $1bn of oil income disappeared in 2001 alone. Among the allegations that French magistrates have levelled in the Elf Aquitaine affair was the charge that the former president of the French state oil company paid "commissions" to secure Angolan oil contracts. By an uncanny coincidence, Jose Eduardo dos Santos, the president of Angola, is not only Angola's most powerful man, but also its richest man.

A collection of essays from new Labour's Foreign Policy Centre** paints an even starker picture of dependence in Africa. Uganda has no oil, but because its government has tackled HIV and reduced poverty, aid has flooded in. Half the Ugandan government's income now depends on western governments and aid agencies. The ends may be admirable, but like the rulers of the oil-dependent states, the Ugandan government is more answerable to donors than to its citizens.

Finding ways out of dependence is far from easy. Third world activists and the British government have pressed the oil giants to publish the payments they make to states, which would be a start at least. BP agreed to reveal its dealings with Angola - although none of its competitors followed suit. The Foreign Policy Centre and many in the aid world have been heartened by the conditions attached to the financing of a $3.7bn pipeline between Chad and Cameroon. The World Bank lent money on condition that Chad dedicated 80 per cent of its oil revenues to education, public health, social services, education and rural development, and saved another 10 per cent for future generations. It looked like an inspiring deal, which might be a model for the future. But Christian Aid reports that Idriss Deby, Chad's president, was taking oil receipts to buy weapons as soon as the project began.

Just before the Iraq war, Barham Salih, the leader of the Iraqi Kurds, flew to Europe to make what will go down as the most fruitless appeal for fraternal solidarity in the history of the socialist movement. He asked all the nice white people who had supported the Kurds and opposed Saddam when Iraq was America's ally to remember their old comrades and back the destruction of the Ba'ath regime.

"Some of the people demonstrating on the streets said that this war is for oil," he told the audience at the Socialist International. "Iraqis know that their human rights have too often been ignored because Iraqi oil was more important to the world than Iraqi lives. It would be a good irony if at long last oil becomes a cause of our liberation - if this is the case, then so be it. The oil will be a blessing and not the curse that it has been for so long."

I hope he's right, but the record shows that the Devil's excrement is usually cursed.

* Fuelling Poverty: oil, war and corruption. Available at www.christianaid.org.uk

** Unbinding Africa: making globalisation work for good governance. From www.fpc.org.uk