The world's troubles in one word - oil

Of all the statements made by politicians in the past week, the most important came from Vladimir Putin. The Russian president's declaration that he would not bankrupt Yukos, the oil group, mattered because, for better or for worse, the fraud and tax-evasion trial of two big Russian investors has become a kind of proxy trial for capitalism in Russia. And Russia's progress, however flawed, has in turn become a proxy for the kind of halting but real progress to which the broken nations of the Middle East or Africa - including, of course Iraq - might aspire.

Regardless of which side you believed to be more corrupt - the overweening Mr Putin and his prosecutors or the Yukos tycoons - it was disturbing to see investors Mikhail Khodorkovsky and Platon Lebedev locked into a cage in their courtroom. If our models cannot progress, we can expect more misery, hostage-taking and war. Hence the intense interest in whether Mr Putin will smash Yukos.

The crucial nature of such decisions emerges in a forthcoming article by Nancy Birdsall and Arvind Subramanian in Foreign Affairs, the American periodical. The authors - Ms Birdsall heads the Washington-based Center for Global Development, Mr Subramanian is at the International Monetary Fund - offer a one-word explanation for the globe's diverse troubles: oil. An oil windfall may benefit a country with a developed legal culture - Britain, Norway and the state of Alaska. But in places where civic accountability, the rule of law and democratic process are not firm, windfall means wipe-out. The very presence of oil turns law-abiders into thugs, and pushes nations backwards into chaos, religious fundamentalism and despair.

The million Africans who died in the Biafran struggle in the late 1960s were the most tragic casualties of this dynamic. Their story was not merely about starvation or tribal conflict (as the press wrote at the time) but also the attempt by Nigeria's eastern Igbo people to control oil reserves.

The oil curse argument is not traditional development economics, which views such natural resources as blessings to developing countries - representing the equivalent of money in the bank, available for, say, infrastructure spending. Still, suddenly we are hearing about it - not only from Foreign Affairs, but in books and periodicals across the political spectrum. Its provenance is therefore worth review.

Economists on the left long ago began noting that imperial or colonial control of natural resources - the oil of the Middle East, the poppy fields in central Asia, the sugar cane in British Guyana, the tobacco in the American south - enabled them to oppress the locals. This view was the intellectual forerunner of the cartoon-like notion that the US wants to rule the world through Halliburton petro-dollars.

The market-oriented right tends to bridle at the idea that any capital, even petro-capital, is evil. Still in the last century free-market thinkers from Mancur Olson to Peter Bauer began to point out that postcolonial experience suggested that the natural resources, and not the colonisers, were the problem. Indeed, the absence of natural resources constituted an advantage. Japan, West Germany, Singapore all profited when they were forced to develop industrial or intellectual capital.

What Ms Birdsall and Mr Subramanian add to this is their work on the problem of civic institutions. They note that oil wealth relieves the state of pressure to tax (Saudi Arabia). The state therefore has no stake in private-sector creation of wealth or in citizens' day-to-day well-being. There is no need for a civic relationship - on either side. Property rights, contract law, reliable courts - to us, basics - seem dispensable. The state is free to bully. Or to steal.

What is more, the oil curse can occur even when the state and those who control oil resources are already distinct - for instance, in Russia. That is because government, in the end, does not really like competing power. Battles involving allegation of crime by individuals (such as at Yukos) may, in reality, be about the desire of national governments to vanquish a competing power centre (an oil company) or recapture control of it. This dynamic functions even when the parties involved swear their actions represent reform or justice (Mr Putin, perhaps).

Where does this leave Iraq? Ms Birdsall and Mr Subramanian reject privatisation of the oil industry, which, they posit, would create a corrupt Iraqi oligarchy. An international authority would control the oil fields and distribute revenues. The people's oil money would be their right. But it is hard to prove such an authority would be trustworthy (especially given the allegations about how the United Nations fulfilled its fiduciary duties in the oil-for-food programme).

Privatisation may still be the best path. After all, there are better ways to distribute ownership than the Russian method, where the loans-for-shares programme soured things.

Mr Putin may yet manage to create a trust-oriented economic culture in Russia. Then companies such as Yukos will eventually become tame and reliable. After all, a number of blue-chip US companies today have robber baron ancestors. For the moment, the very interest in the debate is itself a positive sign. If we can see how the Yukos affair, Iraq and the violence of the Igbo are linked, then we can also see that our biggest economic task is to lift the oil curse.

© Copyright 2004 Financial Times

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