January 30, 2003
PETROFIED & PETRIFIED:
'The Devil's Excrement': Perez Alfonzo's different name for oil. (Jerry Useem, January 21, 2003, Fortune)"Ten years from now, 20 years from now, you will see," former Venezuelan Oil Minister and OPEC co-founder Juan Pablo Perez Alfonzo predicted in the 1970s, "oil will bring us ruin." It was an oddball statement at a time when oil was bringing Venezuela unprecedented wealth--the government's 1973 revenues were larger than all previous years combined, raising hopes that black gold would catapult Venezuela straight to First World status. But Perez Alfonzo had a different name for oil: "the devil's excrement."Today he seems a prophet. When it hit the jackpot, Venezuela had a functioning democracy and the highest per-capita income on the continent. Now it has a state of near-civil war and a per-capita income lower than its 1960 level.
Far from an anomaly, Venezuela is a classic example of what economists call the "natural resource curse." A 1995 analysis of developing countries by Jeffrey Sachs and Andrew Warner found that the more an economy relied on mineral wealth, the lower its growth rate. Venezuela isn't poor despite its oil riches--it's poor because of them.
How could that be? For the same reason so many entertainers go bankrupt. Showered with sudden windfalls, governments start spending like rock stars, creating programs that are hard to undo when oil prices fall. And because nobody wants to pay taxes to a government that's swimming in petrodollars--"In Venezuela only the stupid pay taxes," a former President once said--the state finds itself living beyond its means.
This dynamic won't be at all surprising to anyone who's read the great Orientalist Bernard Lewis, who makes the point that oilwealth has effectively severed governments in the Middle East from the governed, because the leadership does not have to ask for tax dollars and is therefore beyond accountability.
But, maybe a more interesting point implicated by the story is that, while Americans pride themselves on being ultra-modern and a model of democracy, some of this same dynamic occurred here in the '90s. The post-Cold War boom was so massive and long lived that government--Federal, state, and local--found itself swimming in dollars, without having to raise taxes. For the most part it responded by spending this windfall, rather than returning it to the people. But now, when the downturn has come, those tax dollars aren't there but the spending programs are. So governors--many of whom are forced to be somewhat responsible by balanced budget requirements in their constitutions--face the unpleasant task of slashing spending and raising taxes in the teeth of a recession. The easy money of the 90s got us living beyond our means and enabled us to avoid making hard choices when we could afford them.
Posted by Orrin Judd at January 30, 2003 1:35 PMThere may be some validity to your point, but I have always thought the problem to be more political than economic.
Owning oil (like owning land in Hawaii) is pretty much a curse. Nigeria, Indonesia, Mexico, Russia.
Allah may have put the oil under the Moslems, but it was no favor to them.
Which countries have been able to handle oil? U.S., U.K., Norway, Canada. Really nobody else.
What common factor do they have? Not economics.
What's the difference between economics and politics?
Posted by: oj at January 30, 2003 4:07 PMHarry - common factor among all four - long traditions of freedom, including free-market economies until the twentieth century. Common traits of the oil screw-ups -- no tradition of freedom.
Posted by: pj at January 30, 2003 4:35 PMFreedom of economies (capitalism) and freedom of politics (modern democracy) arose together, along with freedom of belief (small "p" protestantism) over a period of years mostly in Britain/America. No one has adequately explained why, but it appears to be a case of one set of ideas applied to three spheres (economics, politics, religion) that have considerable overlap.
Posted by: oj at January 30, 2003 4:48 PMpj, that's what I was getting at, though I don't want to be doctrinaire. After reading all 3 volumes by Braudel on the rise of capitalism, I still had no idea, really, how it rose.
Venezuela is a good case to ponder. And a prime example of my statement (which I do not expect professional economists like you to endorse, but I'm at best a semi-pro) that to understand economic statistics, you have to disaggregate them.
I don't have Venezuelan aggregates at hand, but if it really was leading Latin America in 1970, that wasn't much to cheer about. Half the babies born in V. then were bastards, not because their parents (all Catholics) disesteemed the sacrament of marriage but because they could not afford marriage licenses.
My guess is that Venezuela's big aggregates in 1970 derived from oil (which, after all, it was a major exporter of from before World War II), and disguised a completely feckless and incompentent government and economy.
What happened to make it worse? Oil prices went up. That far, I'm with Orrin.
OJ:
The book "The Wealth and Poverty of Nations" (John Landes?) seemed to me to have a pretty persuasive explanation why some areas developed economically while others didn't.
Your equating government spending in the 90s to the evils of petrodollars is very perceptive, and illuminates very precisely why it is so important to rein in spending now, rather than raise taxes.
Respectfully,
Jeff Guinn
oj and Harry - best single explanation for the rise of free markets and democracy together in Anglo nations is in Richard Pipes, Property and Freedom
. A superb book. In the middle ages, economic power derived from land ownership. Wide distribution of property distributed power widely in England and even more in colonial America, where everyone owned land, while in France the crown owned most of the land (taken from the church). Taxes effectively had to be levied on landowners; in England, since the crown owned little land, the king had to negotiate with landowners to obtain revenue, which was done in parleys (later parliament), and in exchange for money landowners demanded rights. In France, the king was self-sufficient, never needed anyone's permission to raise money, and his power was virtually unchecked.
Other places, such as Scandinavia and Germany and the Republic of Novgorod in what is now northern Russia were free for a while, but there were vulnerable to invasion and conquest. England had geographic advantages that helped preserve its liberty.
I don't think kings of France were so self-sufficient as all that.
I know they weren't.
Economis, like climate, is too complex to be analyzable, at least in grand sweeps.
I have not read that book by Pipes, but I read his take on Novgorodian capitalism in another book (whose title I cannot recall).
Part of where I think pj and oj are heading is in favor of private capitalism, rather than state capitalism. State capitalism had great successes, in France and in Germany.
Whether those successes eventually foreclosed even greater successes is unprovable, but I'd bet Orrin would think so. Just so, the alleged success of Venezuela in 1970 (or of Uruguay in 1950) doesn't look so hot when you disaggregate the data.
Or, as Harry Hopkins put it, "People don't eat in the long run. They eat every day."
Jeff:
In the absence of a balanced budget amendment--as many states have--you'll never get Congress to cut spending unless the Democrats really implode in '04.
Jeff and pj:
Both Steven Martinovich and I are reading, and will be reviewing, a fascinating new book "A Free Nation Deep in Debt" which makes the argument that it was government debt, which had to be raised from the citizenry and gave them an ownership stake in government, that underlay the rise and success of democracy.
A permanent, funded debt was an explicit choice of the British government after the Seven Years' War. The Exchequer was in a position to liquidate the national debt, but there was no safe place for widows and orphans (and trusts, charities and rich people) to place their funds. Government bonds were -- forsooth! -- a piece of social engineering.
Couldn't get away with that again, though. The Friedmanites would show with six kinds of logic that it was unjust.