The petroleum and poverty paradox

Logic says that petroleum-rich countries should be rich. The oil-producing, less-developed nations that reaped a bonanza during the past few years of sky-high oil prices ought to be sitting pretty even as crude prices experience free-fall today. However, things aren't that simple.

Venezuela, for instance, thanks to mismanagement of its oil windfall, is suffering high inflation, a drop in petroleum production, and is talking of possible austerity measures, even though it is the Western hemisphere's largest oil exporter.

In fact, history shows that oil and natural gas reserves frequently can be a bane, not a blessing, for poor countries, leading to corruption, wasteful spending, military adventurism, and instability. Too often, oil money intended for a nation's poor lines the pockets of the rich, or is squandered on showcase projects instead of productive investments.

A classic case is Nigeria, the eighth-largest oil exporter. Despite half a trillion dollars in revenues since the 1960s, poverty has increased, corruption is rife, and violence roils the oil-rich Niger Delta.

The term "Dutch Disease" was coined after the Netherlands' economy weakened following the 1960s discovery of natural gas, thanks to a rising exchange rate and a fall-off in manufacturing. Even OPEC countries are not immune. As a group, their per capita gross national product actually dropped from 1965 to 1998, one study found.

This "resource curse," as economists call it, curses America, too. It worsens global poverty, which can be a seedbed for terrorism, it empowers autocrats and dictators such as Saddam Hussein, and it can crimp world petroleum supplies by breeding instability.

What can we do to reverse the resource curse? A new report I commissioned from the Senate Foreign Relations Committee staff, "The Petroleum and Poverty Paradox", offers some answers. There is no simple cure, of course. But where leaders are ready to face the problem, outsiders can offer important incentives and advice.

One key prescription is to promote stronger anticorruption measures and more openness, or transparency.

The World Bank and the International Monetary Fund have launched efforts to improve accounting and transparency of extractive industry revenues, to make it harder for officials to hide corruption – and easier for citizens to demand that the money be spent wisely.

An especially promising development is the Extractive Industries Transparency Initiative (EITI), a voluntary program which certifies that participating countries, and the oil companies operating there, are honestly accounting for funds flowing into their coffers. The G-8 and UN have praised the EITI and its work.

Yet action falls short. In Vietnam, where 30 percent of the budget comes from oil, the World Bank and major bilateral donors have done little to address extractive industry transparency. Peru and Equatorial Guinea have signed up for EITI, but major-country donors are not stepping forward to strengthen those nations' capacity to manage massive oil wealth. Skeptical Indonesians asked why America has not joined EITI. In Angola, which has the world's highest infant mortality rate, the US is terminating a program to help the country administer its oil billions, which are largely unaccounted for.

There is an urgent need for concerted diplomacy and assistance targeted at budget management and expenditure accountability. Donor coordination in these areas is rare. And China, whose state-backed oil companies have a large footprint in many developing countries, has not yet engaged on these issues.

As we are now seeing, oil prices can come down just as far, and just as fast, as they go up. That's why it's so critical that developing countries act urgently to ensure that their funds are managed wisely, so that they are not left in poverty after earning billions. We can do more to help:

•America should lead by example and sign up for EITI, submitting its oil and gas royalties to outside audit. This low-cost move would encourage more developing countries to follow.

•The G-8 countries should back their transparency words with deeds. They could, for instance, require that their oil and mining companies publish country-by-country data on royalty, tax, and other payments as part of routine financial reporting.

•International assistance to resource-rich countries should focus on improving revenue management and fighting corruption. Relatively small amounts of aid money could thus help channel large amounts of countries' own funds toward poverty reduction.

•Oil and mining companies can be part of the solution by voluntarily disclosing their payments to countries where they operate.

Most important, the United States, whose attention to transparency often appears sporadic, should vigorously back these efforts. Reversing the curse is in everyone's interest.

• Dick Lugar is a Republican senator from Indiana and the ranking member on the Senate Foreign Relations Committee.