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NYTimes.com Article: Striking It Poor: Oil as a Curse

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      Striking It Poor: Oil as a Curse

      June 7, 2003

      The pipes are already laid in southern Chad, where they
      snake south underground through tropical forests from the
      oil fields of Doba to a marine terminal off the coast of
      neighboring Cameroon. At the port of Kribi, the 660-mile
      pipeline will empty up to 250,000 barrels a day of coveted
      crude into tankers waiting to transport the unctuous black
      gold to Western markets.

      The largest energy infrastructure development in Africa,
      the Chad-Cameroon pipeline is to begin operation later this
      year. Built by a consortium of oil companies led by Exxon
      Mobil, it is expected to provide average annual revenue of
      $50 million. The World Bank Group has invested more than
      $180 million in the project, insisting that the pipeline's
      profits could significantly improve the lives of Chad's
      residents, most now living in squalor, by paying for
      services like health care, education, paved roads,
      electricity and sewer systems.

      Many critics find that assessment surprising, given that
      scholarly studies for more than a decade have consistently
      warned of what is known as the resource curse: that
      developing countries whose economies depend on exporting
      oil, gas or extracted minerals are likely to be poor,
      authoritarian, corrupt and rocked by civil war. And now a
      draft of a report commissioned by the bank itself has
      essentially concluded that the bank's previous efforts to
      promote such projects in poor countries has done more harm
      than good.

      Both former bank officials and outside academics have
      complained that bank policy often contradicts the expert
      research. "There's a big disconnect between World Bank
      operations and World Bank research, said William Easterly,
      an economics professor at New York University who spent
      more than a decade as a senior adviser at the bank.
      "There's almost an organizational feud between the research
      wing and the rest of the bank. The rest of the bank thinks
      research people are just talking about irrelevant things
      and don't know the reality of what's going on on the

      In this latest case, using the bank's own internal
      documents, the report's author, Melissa A. Thomas, found
      that the bank had for years focused on promoting foreign
      investment in these industries without considering how the
      countries' governments were managed and what they were
      likely to do with the money. As a result, she said, in most
      of the nations studied - Chile, Ecuador, Ghana, Kazakhstan,
      Papua New Guinea and Tanzania - the bank's work had not
      achieved its development goals.

      Even when the bank made loans conditional on a country's
      promise to make public how it had spent its revenues, the
      projects did not produce economic benefits. Ms. Thomas, a
      political economist at the University of Maryland,
      concluded that the bank should stop financing these
      so-called extractive industries in countries "whose
      governments lack the capacity to benefit from or manage
      such investment."

      Rashad Kaldany, director of the oil, gas, mining and
      chemicals department of the World Bank Group, said it was
      "awkward for me to comment," because the report was still a
      draft, but added: "We certainly feel that the issues of
      good governance and corruption are of paramount importance
      for development. This is what we're focusing on more and
      more in all our activities."

      But scholars are skeptical. "You get the sense that the
      left hand doesn't know what the right hand is doing at the
      World Bank," said Scott Pegg, a political science professor
      at Indiana University. He relied on World Bank research for
      a recent report - commissioned by Oxfam America, Friends of
      the Earth, Environmental Defense, Catholic Relief Services
      and the Bank Information Center - that sharply criticizes
      the impact of extractive industries in Africa.

      Academics hired by the bank have criticized its work
      before. Some of the most important research on the resource
      curse has been done by bank economists. In a pioneering
      1988 book issued as a World Bank Research publication, "Oil
      Windfalls: Blessing or Curse?," Alan H. Gelb, chief
      economist for the bank's African regional office, found
      that contrary to assumptions popular at the time, oil
      wealth had made conditions in most countries worse. And
      Paul Collier, an Oxford University economics professor who
      now heads the bank's development research group, has
      demonstrated repeatedly that oil, gas and mining wealth has
      fueled brutal civil wars. Advocacy groups have used these
      findings to urge the bank to stop supporting oil and gas

      Bank officials say they have taken steps to respond to the
      failings pointed out by critics. Last year the bank began a
      formal review of its support for these industries.

      "We said from the outset that if there's a broad consensus
      that these projects don't contribute to development, and if
      the World Bank Group's role is not clear or questionable,
      we would pull out," Mr. Kaldany said. But he added, "I feel
      confident we will be able to convince all stakeholders that
      there is a positive role for the bank to play."

      At a conference on this issue held last month in
      Washington, Clive Armstrong, principal economist for the
      bank's oil, gas, mining and chemicals division, said the
      bank, for the first time, had made its loans to Chad on the
      condition that the country's notoriously corrupt government
      use the money earned by the pipeline for its people. "In
      Chad, we've gone as far as we can to ensure that revenues
      are used well," Mr. Armstrong said in a telephone

      To receive bank loans, Chad had to adopt anticorruption
      laws and promise to spend most of its oil money on projects
      like health care and rural development. It pledged to
      publish reports on how the funds were spent and to create
      an independent oversight committee to ensure that it
      followed the rules.

      But critics in the academic world and at nonprofit groups
      point to large loopholes in the plan. Chad can unilaterally
      change the rules about allocation of oil revenues after
      five years, even though profits are not expected to start
      flowing until four years from now. The revenue law applies
      to the country's three existing oil fields, but not to
      future ones, and the criteria used to allocate the profits
      among the companies, the government and the different
      regions of the country are unclear.

      Already, a bank inspection has disclosed a long list of
      areas in which the project has been violating bank rules
      and has warned that while pipeline construction is years
      ahead of schedule, the government lags far behind in
      carrying out the promised social and environmental
      programs. As Ms. Thomas wrote in her report about the Chad
      project, "It seems likely that the bank has underestimated
      the governance risks."

      What is more, in a violation of its promise to spend the
      oil money on social services, Chad's president, Idriss
      D�by, spent the first $4.5 million he received in 2000 as a
      "signing bonus" from the oil companies to buy weapons to
      use against rebels.

      Mr. Kaldany called Mr. D�by's action "one big hiccup early
      on," but added: "After this was disclosed, we took a very
      active role. The president agreed to repay these funds and
      to use them as originally intended."

      Bank officials add that without their involvement, the
      pipeline's impact would surely be worse. For the countries
      concerned, these industries are "seen as a major source of
      development," Mr. Armstrong said. "You can't realistically
      say, `Don't develop them.' The issue is: how can you make
      sure they're developed in a way that leads to positive
      benefits? That's what we're trying to do."

      But some scholars disagree. Terry Lynn Karl, a political
      science professor at Stanford University and author of "The
      Paradox of Plenty: Oil Booms and Petro-States" (University
      of California, 1997), argues that Chad would be better off
      without the pipeline.

      "Revenues flowing through incapable or corrupt structures
      will give you perverse outcomes," she said at the
      Washington conference. Not only is the money going to be
      put to bad use, she predicted, but encouraging dependence
      on natural resources also tends to result in corruption and
      a single-industry economy: "When the crisis comes, it's
      much worse than it would have been otherwise."

      Mr. Easterly, who used to work at the bank, said that given
      their poor record, the bank should not finance these
      industries. "The bank can try to influence management of
      those natural resource revenues, but it doesn't have that
      much leverage," he said. "And its record on enforcing codes
      of conduct on the part of borrowing governments is dismal."

      To some extent, the World Bank's limited ability to change
      governments is built into the institution. The bank was
      created in 1944, along with the International Monetary
      Fund, to help finance the postwar reconstruction of Europe.
      The bank was conceived as a nonpolitical instrument that
      would lend money to governments and finance private
      investments based on technical economic considerations,
      Bruce Rich, a lawyer with Environmental Defense, explains
      in his book, "Mortgaging the Earth: The World Bank,
      Environmental Impoverishment and the Crisis of Development"
      (Beacon Press, 1994). Although over time the bank's focus
      has shifted to development, its original charter states
      that "political or other noneconomic influences" are
      strictly off limits.

      For decades, a government's human rights abuses or rampant
      corruption were not supposed to affect lending decisions.
      As the bank's president, James D. Wolfensohn, has famously
      noted, corruption was long the forbidden "C-word" inside
      the bank. Although that climate had begun to change by the
      mid-1990's, it is still difficult for the institution -
      whose board consists of countries that finance and borrow
      from it - to criticize its members openly.

      So, to some critics, the safeguards for the Chad project
      signal a step in the right direction. "There are some
      innovations in that program that I'd like to see used in
      other countries," said Michael Ross, professor of political
      science at the University of California at Los Angeles, who
      has written several articles showing the connection between
      a dependence on natural resources and poverty.

      Mr. Armstrong acknowledges, however, that the bank is not
      likely to replicate such stringent conditions elsewhere. A
      bank report released in May recommends a purely voluntary
      strategy to reduce corruption and improve management of
      resource-dependent countries. A government's participation
      in the plan would not be a condition for receiving bank

      Critics are skeptical that such limited measures will work,
      and they complain that the bank is not really open to
      questioning its continuing support for oil, gas and mining

      As evidence, they point to a conference held in Bali,
      Indonesia, in April as part of the bank-sponsored
      "extractive industries review." There, members of 15
      environmental and other advocacy organizations walked out
      in protest, claiming the process was a sham: the group of
      reviewers set up by the bank had already circulated its
      draft conclusions supporting the bank's oil, gas and mining
      investments, even though more conferences organized to
      gather information from concerned groups and individuals in
      Asia, the Middle East and Africa had not yet taken place.



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