Thursday, 6 January 2011


I blogged last night about the age-old conspiracy theory of how Greece’s endless reserves of natural resources have been hidden from the sainted People in order to keep Greece under the thumb of evil powers. And of how the Government now appears to be taking cues from these tall tales of life-changing resource reserves in order to dole out more of other people’s money to its favourite rent seekers.

Me, I hope we never find oil in my lifetime. And to save everyone a bit of extra money, I hope we never go drilling in the first place.

Why wouldn’t anyone want oil, or gold or the very rare and expensive element LOL-ium, which literally jumps out of the ground in Greece? As one commentator put it:

Let’s not take a one-sided view – natural resources are a public good that NO-ONE has said no to… on the off chance that it ends up leading them astray. Whoever feels weak can sit this one out. Professors should stick to their schools, analysts should stick to their forums, layabouts should stick to their cafés. And those of us with a passion for creation should man the battlements.
[I note this person was not writing from the Sudan and seems to have a lot of time on their hands. Methinks they do not create very much up there on the battlements.]

Since before the widely-cited paper by Sachs and Warner back in 1995, economists have known that growth was, on average, slower among resource-intensive nations. This effect was sensationally dubbed the ‘resource curse’ or ‘oil curse’ and was found to manifest itself in many unpleasant ways (reviewed here). Among other things, people argue that natural resource reserves fuel conflict and civil strife, drive corruption (including a lack of transparency in the private sector), and kill investment.

Not everyone agrees, of course; fans of the ‘big push’ school say that the discovery of natural resources can create rents which give rise to investment and development. Proponents of oil exploration claim that as long as a country’s institutions are sound to begin with and the economy is diversified, oil abundance can be good. In particular, they explain that oil dependence is the problem, not oil abundance. However, this begs the question of how long institutions can remain sound following oil discovery, and whether oil abundance can be kept from turning into oil dependency.

A very instructive and well-studied natural experiment in São Tomé and Príncipe revealed that corruption jumped substantially following the discovery of offshore oil reserves in 1997-9, and established the mechanism through which this came to be. Basically, rent-seekers went absolutely apeshit, savagely elbowing their way into power in time for the oil bonanza. This led to widespread vote-buying as well as widespread peddling of state jobs and access to elite education. I am particularly keen on this paper because its approach for measuring corruption is the same as the one I propose here. Generally speaking, having factional or personalised politics to begin with can get an oil-rich country off to a very bad start. Sound familiar?

In fact, I would argue that Greece has already had its own institution-corroding oil bonanza: it’s called EU membership. See here and here for my past commentary but also see here and here for how much EU funds acted like a resource bonanza, slowly replacing our export base.

The premise of this new Greek oil push is that it can pay off our national debt. That sounds like hopes of oil dependency, not abundance, to me – swapping our addiction to debt for an addiction to oil. In fact, if we are to avoid the resource curse, the literature suggests that it is important to save rather than spend the actual revenues. This is what countries like Norway do, putting revenues into a fund so that they do not directly feed into aggregate demand, or indeed the government budget. Chances of this catching on in Greece? ZERO. One could argue that paying down debt would also be saving of sorts but I doubt it will fuel investment in any meaningful way.

One of the most intriguing studies claims that there is no oil curse as such, and that oil reserves can help push countries out of the Malthusian trap by boosting fertility (through migration) and thus, in the presence of externalities, economic growth.

First, if the authors of this study are right, Greece can only reap the benefits of oil discovery through mass immigration. Something tells me that, unlike the corporate types at Energean, the nationalist nutcases behind our ‘big push’ aren’t ready to welcome millions of immigrants in the name of oil, especially considering the fact that they will mostly be Turks settling on islands near Greece’s border with Turkey.

Even then, however, all is not as it seems. Flip to pg 24 of the study and you will find that it is basically oil price booms that account for most of the positive effects of oil discovery. Or turn to pg. 32 to find that, after accounting for extreme outliers with unreliable data (basically the UAE), the negative correlation between per capital GDP and oil comes right through – it just doesn’t hit home until two or three decades post discovery, when there’s FA anyone can do about it.

All of this leads me to add one more scenario to the five I discussed last time. It is possible that past Greek Governments, in their boundless wisdom, had chosen not to engage in oil prospecting precisely in order to avoid the oil curse. Our current Government believes that, with the quality of our institutions now controlled by our creditors and thus exogenous, it may be an excellent time to embrace the resource bonanza without fear of the resource curse.

Somehow I doubt this is what they are thinking.

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