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Thursday, February 13, 2003

It's all about Oil

Jonathan Gewirtz of Chicago Boyz links to a very good refutation in the Financial Times of the "war about oil" argument:

Current oil revenue provides about $1,200 a person a year in Iraq. This is 50-75 per cent of recent estimates of Iraqi per capita income. From an Iraqi perspective, that is a large sum. But at about $100 per US citizen annually, it would be trivial to the average American. Taking a big share of the net revenue would substantially cut Iraq's already low per capita income. That is not a plausible scenario when both the aim of the military effort, and the world's expectation, would be to build a more prosperous and free Iraq. While some productive redistribution of this oil income is easily imagined, it is difficult to see how any of it, even with a substantial boost, could be drained off by a conquering nation or nations.

Other commentators, as I previously noted, come to the same conclusion, though from different prespctives. This follows on from a thoughtful post yesterday by Jane Galt on natural resource endowments and economic development. She hopes that a post-war regime in Iraq "provides the infrastructure for the Iraqis to improve their lives, and aligns the incentives so that it is productive to do so. And the key to doing so is going to be making oil wealth the frosting on the economic cake, not the entire pie."

In a much-quoted 1995 article on the subject, The Economist had this to say:

A natural-resource endowment gives rise to what economists call "rent"--the difference between what is actually paid to the producer and the minimum price
that he would have demanded to produce the stuff in the first place. For many countries that have enjoyed booming natural-resource incomes in the past few
decades, especially those that have had sudden windfalls, these rents have been staggeringly large. Nice for the producers, it seems; by assumption, too, nice
for the country's people.

The trouble is that the lure of those fat rents can be hard to resist. The upshot is routinely an outbreak of competitive rent-seeking. The power centres
in any resource-rich country soon notice that the profits from capturing a slice of the rent from the natural resources beat those from any possible
alternatives; and they act accordingly.

Behind the economic jargon is a simple enough proposition: give a group of people a big pot of money and they will spend their time arguing about how to
share it out, not thinking of risky ways to make even more money by investing the original sum. Experience bears this out. In Mexico in the 1970s, politicians
and firms battled over the state's oil revenues. So it was in Venezuela, Nigeria and several other big oil-exporting countries. Nor is the experience restricted
to oil-exporters. Other resource-rich countries have blown the proceeds of their wealth in competitive rent-seeking: Australia and Brazil are outstanding

In developed countries, such rent-seeking can damage other parts of the economy. Louisiana spent too much on its roads and hospitals; Alaskans
concentrate too hard on their regular annual dividend from the state's oil fund. Too many people in such places also tend to ask why they should bother getting
an education or working hard--or at all--when they can live off a natural endowment.

Rent-seeking (which, though they do not use the term, is what the anti-war protestors are accusing the US of doing) is a notoriously hard thing to fight--when you have wealth just sitting in the ground, getting the incentives to do other things is extremely difficult. An extreme example of poor incentives is Nauru, a country which, though at one point having a per-capita income of US $17,000 is now reduced to taking the boatloads of refugees Australia does not want:

The substantial revenues from phosphates and the substantial budget surpluses which began to flow after independence were, unfortunately, poorly managed and unwisely invested. In the 1990's bankruptcies and declining revenues from phosphates drove the government to borrow heavily and put the country into deep debt. However, it continued to lavish its citizens with an elaborate welfare state.

Such dim outlooks ought to be put in some perspective, though. Just as the US cannot get much off Iraqi oil, the Iraqis can't either--it will years before their production capacity will be up to "normal" levels, and even then the country has to contend with a fluctuating world market price for oil. A lot of the resources, also, will go into reconstruction to make up for the 12 years of nonexistent and negative economic growth. Much for the Iraqi oil "wealth", for the next couple of deacdes at least, represents catch-up, not a windfall gain.

For all the importance of a sound post-war regime, I have to stress the importance of failure as a means of learning; this includes squandering some of the oil wealth they have. Some things, like prudence, cannot really be taught, but rather learned the hard way. Just as post-war Iraq is unlikely to be quickly be a bastion of "life, liberty and the pursuit of happiness" like the United States, is is about as unlikely to be immediately true to, say, Canada's founding principles of "peace, order and good government". Such things take time, and often a bit of trial and error as well.

UPDATE: Lynne Keisling has a great series of posts on the subject of the US and Iraqi Oil.