The Devil's Lifeblood
Few of those living in oil-rich countries have ever benefited from their nation's oil revenues. Will Iraq be any different?
June 2004
An Institute conference convened in late January focused on the challenge of managing Iraq's oil revenues once the Coalition Provisional Authority (CPA) hands over power to Iraqi governing institutions. The panel included Jill Shankleman, senior fellow at the Institute; Fareed Mohamedi, senior director and chief economist at PFC Energy; Svetlana Tsalik, director of Revenue Watch at the Open Society Institute; and Vernon Smith, Nobel prize winner and professor of economics at George Mason University.
Shankleman opened the conference by noting how rarely oil-rich countries develop genuine market economies or well-governed states. Instead, she said, they fall prey to the "oil curse," a combination of corruption, underdevelopment in other economic sectors, ethnic conflict, and ever-deepening debt.
Nigeria, which receives 90 percent of its revenues from oil exports, is a case in point, with a tiny but enormously rich elite, volatile ethnic tensions, and corruption and mismanagement on a scale that have left the vast majority of its people in abject poverty.
In Sudan, conflict over who controls the nation's oil wealth was one of the causes of a civil war that has cost 2 million lives. The few countries or subnational units to have escaped the oil curse—such as Norway and Alaska—had strong state institutions in place before their oil was discovered.
In Iraq, managing the oil revenues responsibly will pose especially strong challenges, participants agreed. Decades of gross mismanagement by the Baathist regime—and twelve years of evading UN sanctions—spawned massive corruption and severely damaged the oil infrastructure. In addition, the oil-rich provinces are likely to demand a greater share of the wealth, leading to potentially bitter ethnic conflict in a country already riven by sectarian interests.
Nobel prize winner Vernon Smith was particularly emphatic about the need to privatize the oil resources, calling oil revenues the "devil's lifeblood." He proposed that oil assets be auctioned off to private companies, with the revenue invested in index funds around the world, and the earnings distributed equitably to each Iraqi. The government, thus starved of oil revenue, would have to tax its citizens in order to raise money to provide services. And because a taxed citizenry is a vigilant citizenry, the government would be more disciplined, and corruption and mismanagement would be kept to a minimum.
Participants made a number of other recommendations. They warned that oil revenues should not be distributed along ethnic lines and suggested that the oil sector be designed in a way that diffuses control; that the ministry of oil be kept separate from national oil companies and overseen by the Iraqi parliament; and that a strong legal framework be developed that encourages a maximum amount of transparency and supports privatization and economic development outside the oil sector.
