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The oil curse

Most of the world’s 20 largest oil-producing countries struggle with corruption and a lack of democracy. And oil plays an important – and unfortunate – part.

Stock photo of oil refinery.
DIRTY OIL MONEY: Discovery of oil creates both wealth and corruption, as UiB researcher Tina Søreide points out in this article.
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Statistically speaking, oil rich countries have lower economic growth, more authoritarian rule and less equality than countries without sizeable oil resources. A condition often referred to as the resource curse.

“A number of studies show that corruption, started or exacerbated by major oil discoveries, is to blame for a so-called ‘oil curse’,” says Postdoctoral Fellow Tina Søreide at the University of Bergen’s Faculty of Law.

Søreide did her PhD at the Norwegian School of Economics (NHH) and wrote on the causes and consequences of corruption. She has since worked at the Bergen-based Chr. Michelsen Institute (CMI) and the World Bank. One of the countries she particularly has focused on is Angola, Africa’s third largest oil-producing country after Nigeria and Algeria.

Luanda Skyline

In the last decade, Angola has experienced a formidable growth in oil revenues after a protracted civil war. In the capital of Luanda cranes move in perpetuity. Skyscrapers have popped up everywhere to create an impressive skyline.

But only a few of Angola’s 18 million population share in the oil boom. More than half of the population live below the poverty line, as defined by the UN. These poorest of the poorest make less than one Euro a day to meet their primary needs.

According to the UN, the 20 per cent richest Angolans receive eight times as much of the countries wealth than the 40 per cent poorest Angolans. Amongst the richest is the family of president José Eduardo dos Santos, whose daughter Isabel is ranked as Africa’s richest woman by Forbes magazine.

“Corruption is the main cause for the poverty and social ills of Angola,” Søreide says. “Oil is the primary cause for why the country is ranked as the 17th most corrupt in the world. Angola’s democratic system is not working.”

Angola is by no means a solitary example. Many of the world’s top 20 oil producing countries struggle with corruption and a lack of democracy.

Why is it that oil causes corruption?

“Like in many other oil-rich countries, Angola has been cursed with big oil revenues before proper control institutions were established and conditions for transparent business operations were in place,” explains Søreide. “Big oil revenues mean that more money is up for grabs and a weak control apparatus disables a healthy distribution of funds.”

The vanishing billions

Foreign oil companies operating in Angola, including Norwegian oil companies who have invested around 7.5 billion Euros, have contributed to this seizing of funds. Norway’s state-owned Statoil company alone pay 2.5 billion Euros in taxes annually to the Angolan state.  A survey by the International Monetary Fund (IMF) shows that between 2007 and 2010, 23 billion Euros left the Angolan economy without a trace. This represents one quarter of the country’s government budget.

“Once the oil creates a culture of money grabbing, the problem becomes hard to handle,” Søreide says.

What corrupt nations have in common are public institutions of poor quality, both before and after major oil discoveries. In effect this means a lack of independent legal and administrative units, no effective political opposition and no proper democracy.

“Corruption benefits those who control the income, leaving few incentives to implement effective control. In other words the oil wealth hampers the development of institutions and control mechanism that are needed to prevent corruption and redistribute wealth.”

(Translated from the Norwegian by Sverre Ole Drønen.)