18 July 2005

Is finding oil good news for Cambodia?


Cambodia might become an oil-producing nation in 2008.

On the face of it, this might seem like good news. Cambodia could sell crude and buy gasoline; the profits could help the country develop.

But the history of developing nations with significant natural resources does not leave one sanguine. In the July/August 2004 issue of Foreign Affairs, there's a good article (subscription required, sorry — full text available as PDF) about this:
In fact, countries often end up poor precisely because they are oil rich. Oil and mineral wealth can be bad for growth and bad for democracy, since they tend to impede the development of institutions and values critical to open, market-based economies and political freedom: civil liberties, the rule of law, protection of property rights, and political participation.

Plenty of examples illustrate what has come to be known as the "resource curse." Thanks to improvements in exploration technology, 34 less-developed countries now boast significant oil and natural gas resources that constitute at least 30 percent of their total export revenue (1). Despite their riches, however, 12 of these countries' annual per capita income remains below $1,500, and up to half of their population lives on less than $1 a day. Moreover, two-thirds of the 34 countries are not democratic, and of those that are, only three (Ecuador, São Tomé and Principe, and Trinidad and Tobago) score in the top half of Freedom House's world ranking of political freedom. And even these three states are fragile: Ecuador now teeters on the brink of renewed instability, and in São Tomé and Principe, the temptations created by sudden oil wealth are straining its democracy and its relations with next-door Nigeria.

In fact, the 34 oil-rich countries share one striking similarity: they have weak, or in some cases, nonexistent political and economic institutions. This problem may not seem surprising for the several African countries on the list, such as Angola and the Democratic Republic of the Congo, that have only recently emerged from civil conflict. But it is also a problem for the newly independent, oil- and gas-rich republics of the former Soviet Union, which have done little to consolidate property and contract rights or to ensure competent management or judicial independence. And even the richer countries on the list, such as Libya and Saudi Arabia, suffer from underdeveloped political institutions. Concentrated oil wealth at the top has forestalled political change.

Can Iraq avoid the pitfalls that other oil-rich countries have fallen into? The answer is yes, but only if it is willing to implement a novel arrangement for managing its oil wealth with the help of the international community. This arrangement should not mimic the much-maligned oil-for-food program set up in the aftermath of the Persian Gulf War, under which Iraq's oil income was directly controlled and administered by foreigners. Instead, the Iraqi people should embed in their new constitution an arrangement for the direct distribution of oil revenues to all Iraqi households — an arrangement that would be supervised by the international community.
I think anyone at all knowledgeable about Cambodia would predict that any new-found oil wealth would make its way into the pockets of Hun Sen and his cronies, and would provide relatively little benefit to ordinary Cambodians. These guys have found a way to divert funds from almost every major program to benefit themselves, so why should oil be any different?

But imagine if the oil revenues were to be distributed equally amongst all Cambodians. 400 million barrels of crude and 3-5 trillion cubic feet of natural gas, at current prices, is about $50 bn. Let's say Cambodia's share is 10% (wild-ass guess); 5 bn is about $400/person, or somewhat more than the average annual wage. It could make a real difference. Instead, I'm sure it's going to fatten some rich people's bank accounts.