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Management of petro-economies

Ironically, since the 1970's, resource poor nations have had higher economic growth rates and more diversified economies than the classic Opec petro-economies. Economic collapse as in Iraq can result from a succession of wars, foreign invasions, UN sanctions and extravagant military juntas who squirreled away billions in oil revenues in offshore bank accounts.

Venezuela has earned a fabulous $600 billion since the golden age of Opec in the 1970's yet it is now one of Latin America's true financial basket cases, on the brink of sovereign default and trapped in a death spiral of economic instability.

Yet the Gulf states have fared far better than most Opec states. The creation of welfare states, the adoption of diversification strategies, conservative central banks, currencies linked to the dollar have all created economies that have proven to be some of the most successful and stable in the Third World.

Of course, the macro management of an oil economy presupposes a natural bias towards a statist model in the Third World. After all, oil sales concentrate financial power in a state which then determines the pulse of economic activity via its decisions on spending, investment and budget.

One great lesson of the past three decades has been the exceptional volatility in oil revenues. In the past decade alone, oil prices have been as low as $10 and as high as $35 a barrel, a classic boom-bust cycle that makes budget management a high risk venture in any petro-economy.

This, of course, is easier said than done. There are certain areas of spending that are politically impossible to slash in the short term - military spending or subsidies would fall in this niche. Therefore it is not possible to balance spending cuts when oil prices fall leading to the phenomenon of Opec nations with extremely high levels of government borrowing and deficit spending. In the 1970's, oil economies such as Venezuela and Mexico borrowed billions from international bankers on the collateral of their oil reserves. It made perfect sense for these nations to borrow money from the New York money centre banks because high inflation rates and a devalued dollar mad sovereign loans a win- win proposition. However, when the Federal Reserve successfully bought down the inflation rate in the 1980's via a monetary squeeze and global recession, the result was the Latin American debt crisis. The mismanagement of oil economies and myopic assumptions about the value of oil reserves by Wall Street bankers almost led to a systemic crisis in the international banking system. Of course, the successful management of an oil economy has models in the West - Alaska and Norway are the most obvious examples. Yet the "boom-bust" cycle of the petro-economy wrecked havoc on the Texan banking and real estate infrastructures in the 1970's.

Norway's political system represents business and labour in a parliament whose dominant values are consensus long term economic stability and a egalitarian culture. Oslo's management of its oil wealth has not been plagued by corruption and it has created a civil services that is both honest and has a reputation for successful, sophisticated investment management of its "oil rents."

It is undeniable that oil economies create distortions. Agriculture and manufacturing is the usual victim of an oil boom Nigeria, despite being an oil exporter since the 1960's has a primitive economic infrastructure. A nation's political system and economic priorities may thus determine the fate of its oil wealth management. Nations where there is a vibrant non-oil sector and an educated population are less exposed to the destructive boom-bust cycle of petro-economics. However, oil wealth alone is not enough for economic growth - the sound management of the oil wealth is even more crucial.