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Saturday, April 11, 2009

The curse of oil: a tender trap

Much has been made of the fact that Iraq is oil-rich—the second largest proven reserves in the world some claim. This is supposed to virtually ensure Iraq’s transition to a free democratic society. Oil will attract bags of international investment to finance the rebuilding of the country’s ruined infrastructure, we were told.

Well, so far not so true—at least, not in the short term. But what of the longer term? Paradoxically, history seems to suggest that not only does an abundance of natural resources not lead to long-term development and wealth, but it may actually inhibit real progress. Consider, for instance, Spain versus England and Holland in the sixteenth through eighteenth centuries.

Tons of gold, silver and precious gems poured into Spain from her American colonies—instant, easy wealth on which to build her empire. Whereas England and Holland, without access to such huge reservoirs of natural wealth, built their empires through manufacturing and trade. And, by the end of the eighteenth century, Spain was a spent force, while England and Holland remained powerful, vibrant states.

There are other more contemporary examples. Kuwait versus Singapore and Hong Kong. Who’d you bet on for long-term sustained prosperity and development? Kuwait with its huge non-renewable oil reserves, or Singapore and Hong Kong with their sophisticated economies built on trade and commerce. Moreover, name a single country in the Middle East that has invested the proceeds from its oil wealth to build the institutions and social structures that will be necessary to sustain its standard of living once the oil is gone?

Some will point to examples such as the United States, Canada and Australia, all of which have abundant natural resources. Didn’t they develop sustained prosperity despite their wealth of natural resources? Of course they did, but here’s the difference: the Americans built their country and its vital infrastructure with trade, commerce and agriculture and only later did it exploit its minerals and other natural resources. Canada and Australia benefited enormously from being extensions of the British Empire—and inherited a solid foundation on which to build.

My fear is that Iraq will fall into the same tender trap as sixteenth-century Spain did and, too late, discover that oil really was a curse.

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  1. America became America the first power based on oil. The Dutch ruled as the best in wind, The British with their coal, and then the Americans with their oil....each was a world power with their one upmanship in power sources, of course they were able to channel that power into industry and creation whereas these less developed nation don't create via power but sell and horde paper , creating nothing, except greed and ambition.