NYTimes.com Article: Striking It Poor: Oil as a Curse
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Striking It Poor: Oil as a Curse
June 7, 2003
By DAPHNE EVIATAR
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
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
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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