Iraq's oil a dubious balm for ailments

Sun National Staff

With United Nations sanctions lifted, Iraq is poised to resume exporting crude by mid-June and start using its oil wealth - it has the world's second-largest reserves - to bankroll an equitable, democratic society.

Or so American policy-makers hope.

In reality, there's hardly a democracy to be found among the world's oil-rich states, where easy money has encouraged corruption and offered an escape from the sometimes messy work of creating a diversified economy and self-sufficient middle class.

An exception is Norway, which - along with the state of Alaska - is being considered as a potential model for a future Iraqi oil industry. Both successfully redistribute a substantial share of oil bounty directly to their citizens. But both models emerged from existing democracies in wealthy societies and hardly offer a ready application to war-torn Iraq, where reconstruction costs could reach into the hundreds of billions of dollars.

A third possible model is an experiment in the tiny impoverished African country of Chad, where the World Bank is providing the funds for a pipeline that is expected to bring the country nearly $200 million a year in earnings from oil development projects.

Under the bank's financing agreement, 80 percent of the oil revenue is dedicated to education, health and social services, rural development, infrastructure, and environmental and water management.

The rest will go to a "future generations" trust, to the oil-producing area for regional development and to pressing governmental needs.

Whether any of these plans can be applied to Iraq is no more than conjecture.

"We don't have any good models of how oil-rich developing countries should manage their oil funds," said Michael L. Ross, a political science professor at the University of California at Los Angeles who studies the issue. "Most have squandered their oil wealth on patronage and corruption and often used it to build up military forces.

"It's really breaking new ground."

The talk on Capitol Hill is Alaska's Permanent Fund, created in the 1970s during the construction of the Trans-Alaska Pipeline to ensure that the oil windfall would be invested, the principal untouched and a portion of the revenues distributed annually to every Alaskan. Last year, each person received a check for $1,540.76. The fund has grown to more than $20 billion and has generated at least that amount in net income.

Secretary of State Colin L. Powell told a Senate panel recently that the Alaska concept is under consideration for use in Iraq, noting that officials want to make sure a portion of the Iraqi oil revenue "goes directly to the people, so that they can make a choice as to where they want the money to go."

Terry Lynn Karl, a Stanford University political scientist and author of the book Paradox of Plenty: Oil Booms and Petro-States, said Alaska's experience is irrelevant to the situation in Iraq.

"Alaska," she said, "is a state of the United States, not a country, so the notion that you could use a small unpopulated state as a model for Iraq is frankly ludicrous. ... It's not even apples and oranges, it's fruit and non-fruit."

She also noted that Alaska is facing the worst budget deficit of any state in the nation, indicating that the Permanent Fund isn't performing as envisioned.

Among oil-rich nations, Norway is lauded as the world's sole oil-rich democracy that has avoided corruption.

In 1990, the country set up a state fund to manage the oil revenues from the North Sea discoveries in the 1970s and 1980s and ensure pensions for an aging population.

Each year, the legislature deposits the net oil revenues in the fund after the non-oil budget deficit has been covered, and the entire fund is invested abroad to keep financial decisions free of home-grown political considerations and hedge against downturns in domestic industries.

The Washington-based Open Society Institute, which studied the various models, cautions that Norway's fund was introduced in a wealthy, sparsely populated country with a firmly established democracy and a diverse economy - suggesting that it may not function as well in less-developed countries.

"There was already someone who knew how to do audits and controls, there was already transparency, a pre-existing democracy, civil service and controls over any possible forms of corruption," Karl said.

In Chad, the World Bank has imposed a slew of humanitarian and investment requirements as a condition for a loan that is helping finance the Chad-Cameroon pipeline project, scheduled for completion next year.

"Nobody knows if this is going to work because oil money hasn't started to flow, but it's an exciting experiment," Ross said.

In Iraq, with food, water, medicine and electricity shortages still making a nightmare of everyday life, and no democratic elections on the horizon, there is little likelihood that Iraqis will design an oil-revenue management system that directly benefits the citizenry soon, experts say.

They point to cautionary lessons from around the world, where almost invariably oil wealth has proved to be a curse - "the excrement of the devil," former Venezuelan Oil Minister Juan Pablo Perez Alfonzo told Karl in an interview a quarter-century ago.

Oil-rich states that have no need to tax their people are, in turn, unaccountable to them, political analysts say.

"The citizens end up depending on the state for their livelihood and well-being rather than themselves," said James F. Dobbins of the RAND Corp.

These states use oil wealth to bolster their power and that of the privileged elite, Dobbins said. "It leads to a demoralized, unenterprising citizenry that's passive and uninvolved in decision-making and unused to taking responsibility for their own lives."

An oil-dependent economy works fine when the price is high, said Robert Ebel, director of the Washington-based Center for Strategic and International Studies. "But when it comes down, you find yourself in financial straits with nothing to fall back on. Oil income tends to overvalue your local currency and make it easier to import the goods and services you need rather than develop a diversified economy to provide the goods and services yourself."

Nigeria, the fifth-largest oil exporter to the United States, has received several hundred billion dollars in oil revenues over the past 30 years, but per capita income in Nigeria today is lower than it was in 1970, and the country has been run by a military dictatorship for most of that time, Ross said. A transition to democracy in the late 1990s has been hampered by civil strife in the oil-rich part of the country.

"The government has never been able to politically manage all the oil revenue that comes in," he said.

Saudi Arabia, which has the world's largest oil reserves and a wealthy ruling elite, has a literacy rate of only 63 percent, compared with 97 percent in the United States and 100 percent in Japan and Germany, according to the 2003 World Almanac.

Iraq could privatize its oil industry, but that could set off ethnic fighting among Shiites, Kurds and Turkmens who live in the oil-rich areas - or end up enriching a handful of corrupt Iraqis, just as a small group of "oligarchs" benefited from the break-up of the oil industry in the former Soviet Union.

"The key issue," Karl said, "is not what model to follow. It is absolute and total transparency in the management of the oil industry itself, in the running of the industry, in raising the revenues and on the expenditure end."

Most worrisome, she said, is that the United States, as an occupying power, secretly awarded contracts in Iraq to Halliburton and its subsidiary, Kellogg Brown & Root, without offering them for competitive bidding. The contracts are for troop support and to repair and operate oil wells.

This has caused an outcry, not only because of the manner in which the contracts were awarded, but also because of the close ties between the U.S. government and Halliburton, a company once headed by Vice President Dick Cheney.

"If you think about that for a minute, you have a private U.S.-based company managing the central resource of a country that is being occupied in which the former CEO is the vice president of the occupying power," she said. "If you are not transparent, if everything is not totally open and monitored and audited every step of the way, this is a formula for huge grievances in the future."

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