Sample of assignment: What is the “oil curse”?

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Q1 What is the “oil curse”? Why do you think it develops?

 

What is the “oil curse”?

 

Oil is a curse. Natural gas, copper and diamonds are also bad for a country’s health. Hence, an insight that is as powerful as it is counterintuitive: poor but resource-rich countries tend to be underdeveloped not despite their hydrocarbon and mineral riches but because of their resource wealth. One way or another, oil – or gold or zinc – makes you poor. This fact is hard to believe, and exceptions such as Norway and the US are often used to argue that oil and prosperity for all can indeed go together.

 

The rarity of such exceptions, however, not only confirms the rule, but shows what it takes to avoid the misery-inducing consequences of wealth based on natural resources: democracy, transparency and effective public institutions that are responsive to citizens. These are important preconditions for more technical aspects of the recipe, including the need to maintain macroeconomic stability, manage public finances prudently, invest part of the windfall abroad, set up “rainy-day funds”, diversify the economy and ensure the local currency does not reach too high a price.

 

It all sounds sensible, and with Brazil, Ghana and others soon likely to become big oil players, we can expect to witness some rare test cases of these recommendations.

 

Unfortunately, for most underdeveloped countries, these suggested defenses are as utopian as the larger goal they are supposed to help achieve. Countries that already have all these institutional strengths need not worry about the resource curse. For the rest, like an autoimmune disease, the curse undermines the ability of a country to build defenses against it. Concentrated power, corruption and the ability of governments to ignore the needs of their populations make the curse hard to resist.

 

 

Why it develops?

 

Nigeria is a vivid example of this theory.

 

Over-reliance on the oil industry had a significant impact on the development of other industries in Nigeria. “Global Times” reporter should go to everyday in the life of local Indian supermarket chains to buy, the price of natural high. Some toiletries and a few pieces of pastry snacks will cost four or five thousand nairas (1 yuan or about 16 Naira). Grocery shopping is more like a war, not only to withstand more than ten kilometers drive to the outskirts of Liege markets, but also under the scorching sun and stall Mozuipizi bargain. Originally thought that Nigeria is the tropics, fruits and vegetables should be very cheap and other reporters to the vegetable market is not the case. In addition to the prices are high, the infrastructure construction in Nigeria is lagging behind. Even in Lagos in the affluent district senior apartment, electricity, water is also commonplace. One rainy season, the telephone line as dilapidated, soaked by the rain often “strike”, so the telephone network paralyzed. For the poor people of Nigeria, they can only live in simple houses with iron to build up the hot water supply and no electricity. In the slums of Lagos, you can see hundreds of house crowded and random structures together. The data show that 70% of the Nepalese people every day live on less than $ 1; the average person to eat a roasted cassava is a meal. Due to lack of medical facilities, diseases such as malaria, cholera and hepatitis, has claimed the lives of many people. Of course, Nigeria is also rich; they mainly rely on extracting oil from rags to riches merchants, government officials and tribal leaders. Their way of life line to the upper classes of society in Europe and America: live in luxury villas, open limousine to participate in the gatherings of all kinds of celebrities.

 

The situation in Nigeria is almost one by one to make a comment.

 

First, decision-making lack of transparency; rampant corruption;

Over the years, the winds blow in different oil interest groups, Nigeria’s economic policy formulation and implementation of instability, utilitarian and arbitrary characteristics. The fragmentation of the various policies, lack of coherence between them and the overall effect is difficult to obtain. A number of policies like the grass of the wall, the vacillating, and flip-flop. Policy in the implementation process often aliasing distortion, very different with the original intention, coupled with the implementation of breeding corruption, the intended purpose and effect is difficult to achieve the policy.

 

Second, over-reliance on petrodollars, one-sided pursuit of oil profit and missed opportunities for reform of the industrial structure, industrial and agricultural production is neglected and depressed.

 

Now, the oil industry revenues accounted for 95 percent of Nepalese foreign exchange earnings, 80 percent of fiscal revenue. As Nigeria’s Minister of Finance Nei Dadi Othman said: “oil let us become lazy … the past, we have the talent, now young people no longer do so, they fall.”

 

Too easily to the huge oil revenues, leading to just want to rely on oil-for-money to get revenue, and national economy is difficult to benign development, the result is a single economic structure, the decline of agriculture and the slow development of industrial manufacturing, food, industrial products supply can not meet domestic consumption needs of the market. Moreover, the huge oil revenues led to currencies overvalued, seriously damaged the traditional industrial and agricultural production, a strong impact on the exports of goods and crops.

 

Third, the allocation of oil revenues to the dispute, and frequent violence

 

Over the years, the Nigerian federal government and the oil-producing regions there are serious differences in resources, ownership and distribution of benefits. Some senior government officials use their power for personal gain, embezzlement of state property, lived a life of extravagance. Oil-producing regions because they can not get enough oil to the federal government income redistribution, it is difficult to improve their basic environment. Even of the majority of people can not benefit from oil development, only holding the golden rice bowl to eat. Although thanks to oil prices rose in recent years, the Nigerian economy has been dramatic growth, but at the same time, the growth of domestic impoverishment is shocking. Between 1990 to 2002, Niger’s per capita income grew by only $ 30 (if taking into account the price rises, this number would be a negative number); In the meantime, soaring oil prices per barrel oil prices over more than $ 30.

 

Thus, a despair spread in society generally, the violence began to rise, resulting in the entire country, especially the volatile situation in the oil-producing Niger Delta region, and frequent tribal conflicts, armed robbers rampage, kidnapping, extortion and piracy serious and destructive phenomenon. Also some local residents to predatory exploitation of foreign oil companies on the Nigerian oil and gas resources, damage the local environment often taken for their violent attacks on the ground. There are a number of armed groups through the occupation of the oil terminal export facilities, the destruction of the oil pipelines and kidnapping foreign oil staff and Nepalese employees, in order to blackmail the government to allow them to share the wealth of local resources, or put pressure on the oil companies, in order to increase jobs or improve treatment.

 

This kind of violence against oil exploration activities become a major concern, since the Nigerian oil industry since the late 1980s. Last year, Nigerian militants on oil and oil-producing equipment damage, the country’s oil exports reduced by at least 20%

Oil transportation is convenient, high energy density, and therefore the most important transport-driven energy. Today, 90 percent of transportation energy is dependent on oil obtained. In addition, it is too many industrial chemical products, raw materials, so it is one of the world’s most important commodities. Is an important factor in many military conflicts (including the Second World War and the Gulf War), accounting for the sources of oil.

 

Oil as the industry’s “blood”, is not only a non-renewable commodity, is indispensable to national survival and development of strategic resources, and have an immeasurable effect on the protection of national economic and social development and national defense and security. Increasingly acute contradictions between economic growth, oil countries pursued objectives, the development of unlimited and limited resources (mainly refers to the scarcity of non-renewable resources), and gradually as a constraint to the many strategic issues of national sustainable development. Super-economic properties of the oil, it led to aspire to the United States even at the cost of war to ensure its energy security. Oil has been an important factor to affect the country’s political orientation, and many wars in the history of war for oil.

 

Q2

Why was the World Bank’s participation in the Chad Cameroon pipeline critical?

 

Though within the $4.1 billion fund required to implement the project to build the pipeline necessary for the exploitation of the oil resource, the World Bank’s share was very small, but its participation is critical. Below we will try to rationalize such important to have a natural global organization to facilitate such large scale international investment with wide international involvements.

 

First of all, let’s review the nature of the World Bank as an organization. Established in 1944, the World Bank is headquartered in Washington, D.C. The organization has more than 9,000 employees in more than 100 offices worldwide. The bank is not a bank in the ordinary sense but a unique partnership to reduce poverty and support development. It comprises two institutions managed by 187 member countries: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD aims to reduce poverty in middle-income and creditworthy poorer countries, while IDA focuses exclusively on the world’s poorest countries. These institutions are part of a larger body known as the World Bank Group (worldbank.org 2012). From the nature of the World Bank, we can see that the World Bank have abundant experiences and it is set up with the mission to facilitate the underdevelopment economies by assisting similar international investments.

 

Secondly, the World Bank usually initiates the projects and tries to make the projects self-sustainable and participated by other parties which contribute to the continuation of the projects. For example, the World Bank had successfully contributed to a turnaround in Malawi, a small nation in Southern Africa, from being a food deficit country to one producing surplus food grains and overcoming a persisting and excruciating famine is one of the most dramatic incidents in the history of the battle against hunger by the African nations. Malawi has been in the world headlines since 2002 with reports of widespread starvation deaths and hunger related diseases. A large section of the population of this predominantly rural nation was forced to resort to eating banana stems and roots in a bid for survival (fanrpan.org 2009). News has shown that Malawi’s agriculture-powered economy grew by 6.7 percent in 2010 which is cheerful to the world (portaltoafrica.com 2012). This successful story again demonstrates that the World Bank like the UN as an influential global organization does not have to get heavy involvement into the a certain project, and by inviting the participation of the market players could also ensures that the certain projects would be finished with lower cost and also higher efficiency.

 

Thirdly, the participation of the World Bank would reduce the political risk and increase the confidence of the participating parties who do not trust the government of the Chad. As mentioned above, according to the theory of oil curse, the oil discovery and development in the underdevelopment countries tend to deteriorate the economy and social development of the countries where the oil field is discovered. Under such anticipated bad macro environment, it is reasonable that the interested parties such as the large global oil companies would hesitate which is understandable. And as a matter of fact, as early as 2005, Chad and Bangladesh had already topped the list of the world’s most corrupt nations among a slew of military dictatorships and West African oil exporters according to an annual survey by Transparency International. More than two-thirds of the 159 nations surveyed scored less than 5 out of 10, when ranked by business people, experts and analysts on their perceptions of bribery and misuse of public office. The two worst both scored 1.7 indicating the corruption was already very serious in 2005 (bloomberg.com 2005). Therefore, any parties would hesitate whether they should become part of the new oil exploiting activities considering the high possible political risks. Such risk could take the three major forms which could be deduced based on our above analysis: the first political risk is that the country government may threaten to terminate their cooperation since the government does not have good cooperation history with the international parties; the second political risk is that the government may impose negative policies over the oil related activities; and last but not least, the government officials could use means to request for bribery from these companies. The participation of the World Bank in this case could help reduce the political risk for three major reasons: first of all, the World Bank is known as one of the largest sources of funding in Africa in which the capital market is very much underdeveloped, therefore it is true that the government of Chad like many other governments in Africa has much linkage and dependency with the World Bank for funding, and because of such reliance, the government would respect and contribute to the smooth implementation of a project that has the involvement of the World Bank because the government does not want to break the relationship with the World Bank; secondly, the World Bank has closed relationship and interactions with the other nongovernmental organizations (NOGs) or cross government organizations such as the Food and Agriculture Organization of the United Nations which provides much assistance to the African countries, with the large cooperation network with the business entities or non-for-profit organizations, it is necessary to keep the good relationship with the World Bank even in the perspective of the Chad government.

 

Fourthly, the nature of the routine work of World Bank makes it a very good knowledge broker that assists the development of the underdevelopment economies. As indicated in its website that the World Bank has its own eLibrary which has the World Bank’s full-text collection of more than 6000 books, reports, journals and other documents on social and economy development of many countries and regions in the world (issuu.com 2011). The important role of the organization in creating and influencing the distribution of these professional papers and publications would mean that the World Bank has significant impacts over the large investments and other projecting decision in which the World Bank may not have significant direct involvement or investment but still its active participating could still be reflected through its wide, influential and reliable publications in term of various books, journals and reports as well as other types of publications and documents.

 

Last but not least, the World Bank also imposes its power and influences in the total investment and how the fund should be distributed in such a way that it assists the smooth carrying out of the relevant projects. It is believed that both the World Bank’s own lending and other donors’ decisions are shaped by the Bank’s research and analysis, and in particular, by Bank studies like the Country Policy and Institutional Assessments (CPIA) and Investment Climate Assessments (ICA), which rate countries largely on the basis of their economic policies and openness to foreign investment. Since many investors take their lead from the Bank, the institution’s financing decisions and evaluations of country development strategies affect borrowing country access to capital from a broad spectrum of sources. The Bank’s gatekeeper role is much stronger for aid-dependent countries without credit ratings than for countries that have access to international capital markets (bicusa.org 2010).

 

Q3

Does the World Bank have a right to demand that sovereign countries like Chad spend their oil revenues in ways the World Bank deems appropriate?

 

This question is actually not a discussion regarding the possibility of the World Bank’s intervention in the decision making by Chad government in term of how to rule its own country, but it is a problem regarding whether it is right or wrong for the World Bank as a neutral organization, hence we can see that this is actually an ethical question rather than an economy related issue. Below we will try to answer the question by referring to three major ethical theories: the deontological ethics, consequentialist and the justice ethics. Below let us begin the discussion with the justice ethics.

 

Ethics of justice

 

The ethics of justice deals with moral choices through a measure of rights of the people involved and chooses the solution that seems to damage the least number of people (Sherman 2007). Three major categories of justice theories include distributive justice, compensatory justice and retributive justice. Distributive justice concerns what some consider to be socially just allocation of goods in a society; Compensatory justice is an ethical principle that supports making up for previous wrongs by giving priority to those whose predecessors suffered and central to retributive justice are the notions of merit and desert (Kolm 2002).

 

According to the concept of the ethics of justice, right of the parties in a particular event should be respected and the right of them should be achieved and the handling of the conflicts of interest should also follow the rule that the majority of the involved parties should be respected. As in this case regarding the project of the oil exploitation in Chad, the answer is clear depending on how we identify the key stakeholders: if we consider that only the Chad authority, i.e. the government of Chad, the World Bank as well as the business companies participating this projects are the key stakeholders which have important and critical impacts over the issues and important decisions makings related to this project, then obviously, the World Bank is asking too much as a facilitator of this investment which is very much closed to a business activity like a political activity. Therefore we can come with the conclusion that the World Bank is abusing its bargaining power in this case and it is actually getting too over in the country management which is owned by the sovereign government like Chad. But in another perspective, if we include the people of the Chad into the group of key stakeholders then in this case, the conclusion could be totally different. Based on the assumption that quality of the life of the people in Chad would be largely damaged because of the existence of the “oil curse” which has been confirmed by many past experience, and there are reasons to believe that Chad will copy such undesired route, hence the interference by the World Bank is necessary and it helps to ensure that the proceeding of the oil exploitation project is benefiting the people as well as the oil companies and the government. Under such conclusion, there is an important assumption that the Chad government would like many other governments in the underdeveloped countries that it will exhibit the incapability in managing the country in the future. And obviously, under this case, the general believed idea and judgment is that the World Bank’s involvement would better ensure the goodness brought by this investment project by reducing and controlling the negative impacts of the above mentioned “oil curse”.

 

Deontological ethics

 

The word deontology derives from the Greek words for duty (deon) and science (or study) of (logos). In contemporary moral philosophy, deontology is one of those kinds of normative theories regarding which choices are morally required, forbidden, or permitted. In other words, deontology falls within the domain of moral theories that guide and assess our choices of what we ought to do (deontic theories), in contrast to (aretaic [virtue] theories) that — fundamentally, at least — guide and assess what kind of person (in terms of character traits) we are and should be. And within that domain, deontologists — those who subscribe to deontological theories of morality — stand in opposition to consequentialists (stanford.edu 2009).

 

According to this theory, as referring to our case regarding the oil exploitation in Chad, the World Bank should not intervene or demand the Chad government to tailor its government policies to the desire the World Bank which represents the major thinking of the western political forces because of their control over the World Bank, therefore based on this theory, the World Bank should not impose strong demand over the Chad government over its own country management practices.

 

Consequentialist

 

Consequentialism refers to those moral theories that hold that the consequences of a particular action form the basis for any valid moral judgment about that action. Thus, on a consequentialist account, a morally right action is an action which produces good consequences. The term “consequentialism” was coined by G.E.M. Anscombe in her essay “Modern Moral Philosophy” in 1958, and has since become common throughout English-language moral theory. Its historical roots are in utilitarianism, although earlier ethical theories often considered the consequences of actions relevant to ethical deliberation. Because of this historical tie to utilitarianism these two approaches are sometimes conflated (martinfrost.ws 2010).

 

Going back to our case regarding the rationality of the World Bank’s demand over Chad’s political and economic management over its own country, base on the Consequentialism ethical theory, it would be recommended that the World Bank should intervene the Chad government’s management if we assume that such interference would bring overall goodness to the ordinary people living in the territory of Chad.

 

In a world, application of the different ethics would bring different conclusions and hence the answer to this question would vary accordingly. Based on my personal view, the Consequentialism theory should be applied here considering benefit and interests of the Chad people who should be protected but are in the weak position in this scenario.

 

Q4

If the World Bank and Chad’s government fail to settle their dispute over amendments to the Petroleum Revenue Management Law, what should the consortium do? Should they make funds available to Chad’s government in defiance of the World Bank’s wishes?

 

The consortium’s strategy in case of failure to reach a consensus regarding the amendment of the Petroleum Revenue Management Law

 

If there should be a failure between the Chad government and the World Bank, there are three major strategies that the consortium could to resolve the dispute between the government and the World Bank. Before we talk about these two strategies which could be applied, we have to make the assumption that the consortium would prefer to insist on the involvement of the World Bank based on our understanding that an international organization like World Bank would play a critical role in ensuring the development of the oil exploitation project would goes well with low political risks.

 

The first strategy is to provide the World Bank with promises that the consortium would contribute to the economy development as well as poverty reduction in Chad by contributing part of the revenue to such a purpose by means such as setting up a charity fund. The rationality of this move is based on the mission of World Bank’s involvement in this case which is to ensure the oil activities benefiting the economic development and poverty reduction. And since this is the World Bank’s wishes, the consortium’s promises in contributing to such effort would to some extent provide more room for the World Bank to give in because the targets are supported and facilitated by the consortium which is a critical stakeholder in this case.

 

The second strategy that the consortium could approach in this situation is that it could initiate a three party summit and invite the government and the World Bank to participate, and in such summit the consortium could mediate between the two parties. One most important base that the consortium could rely on to play such a role to mediate the two parties is that it is obvious that both parties would like to achieve a consensus regarding the view that the funding should be prepared and the project should be started. While the dispute is regarding how the profit should be used as desired by the government and the World Bank, the consortium could try to manage the two parties’ expectation and try to make both of them to give in a little and reach a second best result accepted and agreed by all parties.

 

Should they make funds available to Chad’s government in defiance of the World Bank’s wishes?

 

There are two contradicting view of points here regarding the choice about whether the consortium should make funds available to Chad’s government in defiance of the World Bank’s wishes: on one hand, it could very likely be the consortium’s interest to fund the project even against the World Bank’s wishes because based on the needs of this single investment project the funding is necessary; on the other hand, making the World Bank unhappy about these companies’ decision and behaviors would make them fall in the lest preferred position by the powerful World Bank which could influence the future cooperation with the World Bank.

 

Base on the below several reasons I would recommend the consortium not to challenge the World Bank:

 

First of all, as mentioned above, the important role of the World Bank in creating and influencing the distribution of the professional papers and publications would mean that the World Bank has significant impacts over the large investments and other projecting decision in which the World Bank may not have significant direct involvement or investment but still its active participating could still be reflected through its wide, influential and reliable publications, hence, the consortium in the perspective of future cooperation with the powerful World Bank should take into the consideration of view of the World Bank and try to meet the requirement of the World Bank because of its strong power in the future business projects.

 

Secondly, without the participation of the World Bank, the political risk would be increased and thus the investment project would become unattractive and full of uncertainties and risks. In addition, the World Bank’s demand is to some extent in accordance with the interests of the consortium because the World Bank tends to bring in sustainable economy development in the Chad economy and benefit the society as a whole.

 

Thirdly, based on the understanding that both the government and the World Bank would like to see this project being implemented smoothly which could be their desire and the only different point here is how the profit should be distributed, therefore it is possible that the companies could persuade them to accept the second best solution that makes all parties happy though not within their expectations.

 

Q5

Subsequent to the signing of the pipeline agreement, world oil prices have increased substantially. Given the abject poverty of Chad, should the oil companies offer to increase the royalties paid to Chad’s government once its dispute with the World Bank is settled?

 

No, I do not agree with the point that the companies should increase the royalties paid to the Chad government once their dispute with the World Bank is settled and there should be an oil price increase. The reasons are given as following:

 

First of all, we need to identify the reasons behind the increase of the royalty paid. There are usually three sound reasons under such circumstances: to increase the royalty paid to enhance the governments’ interest and royalty in this project in term of the maintenance of a good partnership relationship; to assist the economic development and poverty reduction in a humanized perspective; or increase the royalty pay because it is in accordance with the relevant clauses as stated in the project contracts. If it should be the requirement of the contract, there is no doubt that these oil companies should have raise the royalty paid as requested in the contract. Below we will talk about the other two scenarios.

 

In term of under the reason of maintaining the good relationship with the Chad government, then obviously it is the business strategy and nature of the question will be to judge the ethics and rationality behind this decision in term of whether this decision is right or wrong. Again we apply the business ethics here by referring to the consequentialism ethical theory which holds that the consequences of a particular action form the basis for any valid moral judgment about that action and in this case we will consider the government, oil companies and the local Chad ordinary people as the key stakeholders whose interest should be protected and the choice would be best if it should maximize the overall benefits of all the key stakeholders. And please take note that if the key stakeholder identification is different, e.g. the local people would be excluded from the key stakeholder list in some perspectives; then the results would be totally different. Based on the assumption that the government, oil companies and the local Chad ordinary people are considered as the key stakeholders in this scenario in which the oil companies would like to increase the royalty paid to the Chad government for a business purpose. Again, here we will see two major different scenarios: if the pay increase is based on the additional amount of money given by the oil companies’ own money that they earn from the oil activities as an incentive pay to the government while at the same time resulting in no harm to the ordinary people, then we should say that such decision of increasing the royalty paid not only would not have any problems but also should be recommended and promoted because it is simply a business behaviors without doing harm to other key stakeholders, in particular the ordinary people whose rights and interest should be protected since they do not have any strong bargaining in the decision making relevant to the oil activities; in another scenarios, if such royalty paid increases are based on the assumption that the benefit given to the Chad’s people would be reduced because the oil companies use it to pay the government rather than paying the people since they do not influence the decision making. This is actually a distribution issue and since in such situations, only a small proportion of people’s interest, such as the government’s officials, based on the interest reduction in the ordinary people, we will say that such decision making is not ethical since it reduce the quality of life among the poor people who need such interest and benefits urgently.

 

As mentioned above one more reason behind the behavior and decision making of increasing the royalty paid to the Chad government is the assist their economy development and poverty reduction from a charity purpose. Obviously, under such scenario, it is recommended that the oil companies refer to the recent report over the management of the government to see whether it is capable to use the money in a good direction such as increasing the life quality enjoyed by the majority of the common people. And if these companies find out that the Chad government has still been listed as the top corruptive governments in the world like what happen in the history, then it could be unadvisable that these companies increase the royalty paid which contributes to the corruption problem.

 

 

 

List of reference

 

bicusa.org 2010. World Bank (IBRD & IDA). [online]: http://www.bicusa.org/en/Institution.Lending.5.aspx

 

bloomberg.com 2005. Chad, Bangladesh Top Most Corrupt Nations List, Survey Shows. [online]: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aC.wbvACKoW4&refer=top_world_news

 

fanrpan.org 2009. The Malawi success story As FANRPAN celebrates the Malawi story, we share with you the media extracts endorsing the success. [online]: http://www.fanrpan.org/documents/d00575/

 

issuu.com 2011. World Bank Online Resources and Mobile Apps. [online]: http://issuu.com/world.bank.publications/docs/onlineresources

 

martinfrost.ws 2010. Consequentialism. [online]: http://www.martinfrost.ws/htmlfiles/consequentialism.html

 

portaltoafrica.com 2012. Malawi:  World Bank offers Malawi turnaround plan. [online]: http://portaltoafrica.com/news/africa/general/world-bank-offers-malawi-turnaround-plan/

 

Sherman, K. 2007. Advocacy: Integrating the ethics of care and justice for students with disabilities. Michigan: Michigan State University Press.

 

stanford.edu 2009. Deontological Ethics. [online]: http://plato.stanford.edu/entries/ethics-deontological/

 

worldbank.org 2012. What We Do. [online]: http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,contentMDK:20103838~menuPK:1696997~pagePK:51123644~piPK:329829~theSitePK:29708,00.html

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