Drilling to Democracy--or Despotism? Conversation with Carnegie Council Fellow Keith Slack

The task of rebuilding postwar Iraq is said to be the largest project of this kind since the Marshall Plan in Europe after World War II. Although the American taxpayer will finance most of the reconstruction, senior administration officials have also hinted that Iraqi oil revenue will be used to rebuild the country. “We’re going to use the assets of the people of Iraq, especially their oil assets, to benefit their people,” said Secretary of State Colin Powell in a recent speech.

At first glance, this makes good sense. If a war-torn country is rich in natural resources, why not cultivate these resources and put the revenues toward the cost of reconstruction? There may, however, be reasons to proceed with caution. For instance, does cultivation of natural resources tend to create wealth for the many or for the few? And if for the few, how does this affect a nation’s prospects for political stability?

The Carnegie Council recently spoke with 2002-2003 Fellow Keith Slack, who advises Oxfam America on resource extraction policy, about the chances of Iraq using its oil wealth toward sustained prosperity and democracy.

CARNEGIE COUNCIL: Some have said that if Iraq’s potential oil capabilities were fully realized, the country could claim a quarter of the world’s oil. But based on your experience with Oxfam America, can—and should—oil be made the key to Iraq’s recovery, and to its future economic growth?

KEITH SLACK: In the wake of the war, Iraq faces a long road to reconstructing its economy and building a democratic society that is responsive to the needs of its people. One can hope that the country’s oil will help, rather than hinder, this process. Unfortunately, however, past experience with oil and minerals-based development provides little reason to believe this will happen. Economists call this phenomenon the “resource curse.” In countries as disparate as Ecuador, Nigeria, and Indonesia, natural resources riches, far from being a blessing, have impaired economic and democratic development, leading to corruption, human rights abuses, authoritarianism, environmental damage, and increased poverty.

This is particularly true of oil—what the Venezuelan founder of OPEC has called “the devil’s excrement.” The oil industry generates relatively little employment and thus little opportunity for the poor to take advantage of their primary asset: their labor. Also, most of the revenues generated by the oil industry go to the central government, not to the regions where the oil is extracted. The “trickle down” benefits to poor communities are often minimal or nonexistent. Finally, the oil industry operations can also cause environmental problems and social disruption that, as the World Bank itself admits, tend to affect poor and marginalized groups most acutely.

CC: But surely oil helps to boost a nation’s economy, something that Iraq desperately needs, particularly after a decade of sanctions?

KS: The sad fact is that countries that rely heavily on the extraction of minerals—oil, natural gas, gold, copper and tin, among others—to support their economies tend to be among the world’s poorest. Economists Jeffrey Sachs and Andrew Warner have empirically demonstrated that the more important natural resources are to a county’s economy, the lower its growth rate. A booming oil or minerals sector tends to draw labor and capital away from other sectors such as manufacturing and agriculture.

There are some exceptions. The Gulf states have converted their oil wealth into economic development—though not one could be considered a fully functioning democracy. Similarly, it’s believed that Chile has generally used its copper reserves effectively, and Botswana, despite having the world’s highest HIV/AIDS rate, has drawn praise for its use of its diamond-generated revenues. But these countries may possess unique characteristics that make it hard to replicate their “success.”

CC: You said that none of the Gulf states could be considered a fully functioning democracy. Could oil likewise lower Iraq’s chances for political stability?

KS: Massive revenues from a boom in natural resource extraction make it hard to hold governments accountable as this gives them the means to buy off pressure to become democratic, and to invest these revenues responsibly.

In addition, a nation’s dependence on oil and minerals carries a higher risk of civil war. World Bank analyst Paul Collier has demonstrated that countries that depend heavily on resource exports run a risk of civil war that is forty times greater than countries with no resource exports. This statistic should give pause to American policymakers confronting the possibility of post-war competition among Iraqi factions for control of the country’s oil reserves.

CC: What steps could be taken to ensure that resource wealth contributes to development in countries like Iraq?

KS: First, companies should disclose how much they are paying in oil and mineral revenues to host country governments. For populations to hold their governments accountable for the responsible use of natural resource revenues, they must first know how much their governments are receiving.

Second, mechanisms should be established to allow civil society to have a direct voice in determining how resource revenues are allocated and to help with verifying that revenues are used for the agreed purposes.

Finally, developed countries need to eliminate unfair trade barriers that discriminate against a developing country’s non-extractive exports. This would help the country to diversify into other sectors such as manufacturing, which in turn would strengthen its economy and provide greater opportunities for the poor to raise their incomes.

—Interview conducted by Mary-Lea Cox