Why are many oil-producing countries still unable to solve their chronic poverty problem?

BY Business Desk  July 9, 2008 at 11:25 AM EDT
An oil rig off the coast of Nigeria.

Question/Comment: With the record world petroleum prices, why is it that many oil-producing countries, such as Mexico, Venezuela, Nigeria, are still unable to solve their chronic poverty problem? Shouldn’t the oil boom generate more jobs for the masses and revenue for the government in these countries?

Paul Solman: Ah, a question that has plagued development economists for as long as there have been development economists, I bet. But ask yourself this: In the U.S., who benefits from an oil boom? The companies that own, refine and sell the stuff, right? And the regions they operate in, maybe. But not the whole darn country.

In fact, when oil prices go up, the rest of the U.S. is impoverished, especially many of the least wealthy among us who are forced to drive oil-inefficient clunkers and can’t afford to live anywhere near where they work.

Suppose pharmaceutical group Eli Lilly and Company concocted a cell-preservation drug to extend life. You just know it would cost a bloody fortune until it went off patent. Would you say the U.S. was bound to eliminate poverty as a consequence? Or just that Eli Lilly et al. (employees, stockholders, suppliers) and maybe the city of Indianapolis would make out like lottery winners, at the expense of most everyone else? So the first point is: ownership of anything – oil, uranium, cotton – mainly benefits those who do the owning.

But wait a minute, you say: Mexico, Venezuela, and Nigeria – the oil industries in those places are largely government-owned. Shouldn’t that benefit the country as a whole?

Perhaps. But it doesn’t mean that it will — or at least, not very much — and not necessarily the poor. Pemex (the Mexican state oil company) still loses at least $1 billion a year to internal corruption,” wrote the New York Times in 2003. Nigeria is a similar case.

In Venezuela? Hey, here you seem to be wrong. Its GDP per capita (national income per person) has more than doubled since 2004. Poverty is down — significantly, from the data I’ve seen, although political antipathy to Chavez in this country has suggested otherwise. (See the Center for Economic Policy and Research which I’ve found quite reliable over the years.) So it’s a counter example to the assumption behind your question.

Remember also that Mexico and Nigeria are huge countries with more than 100 million people each and massive poverty. Moreover, sharing the wealth is hardly a national tradition in either place. By contrast, Venezuela has 26 million. A few big oil deposits can go a long way if they don’t have to cover too many people. Consider Abu Dhabi or Dubai. Or hyper-egalitarian and tiny Norway (pop. 4.6 million), where oil wealth from the North Sea has made almost everyone so well-off, it’s said that the country’s biggest problem is being “too rich.”

One more point: things would almost surely be worse in Mexico and Nigeria if they didn’t have oil. To paraphrase a famous phrase, often (perhaps wrongly) attributed to the “Last of the Red-hot Mamas,” Sophie Tucker: “I’ve had oil and I haven’t had oil, and believe me: having oil is better.” Although even on that point, reasonable people can disagree. The “emir-ocracies” of OPEC have often been attributed to the bountiful oil, which keeps a few lucky families in power.