Reverse the Curse: How Can Oil Help the Poor?

A version of this article originally appeared in the January/Feburary 2014 volume of Foreign Affairs. Read Diamond and Mosbacher’s response.

Larry Diamond and Jack Mosbacher (“Petroleum to the People,” Foreign Affairs, September/October 2013) rightly observe that the coming oil boom in Africa is, paradoxically, a frightening prospect for the continent’s poor and marginalized. If the so-called resource curse holds, this new surge of easy money will indeed “poison the prospects for development,” fueling corruption, inflation, and authoritarian regimes. The authors’ proposed solution, however, falls short. Diamond and Mosbacher suggest that governments could reverse the curse by distributing oil revenues directly to the people as taxable income. But doing so would not address the fundamental issue that gives rise to the resource curse in the first place: weak land rights.

The resource curse described by Diamond and Mosbacher is rooted in legal frameworks established primarily for colonial-era exploitation that vest all natural resources as property of the state. These frameworks were continued upon independence. This means that in most developing countries individual or community property rights only cover the topsoil and structures, but do not extend to sub-surface minerals, petroleum, water, air, trees, carbon, or other natural resources attached to the land. Instead, the state owns all natural resources and administers and profits from their extraction through a licensing system. This state monopoly produces the ill consequences associated with intense rent seeking. Governments grant companies access to explore for and extract oil or other resources. Local people who live on this land, and have traditional claims to it, rarely participate in contract negotiations and are often displaced so investors have access to the resources. In many instances the state invokes eminent domain and forcefully removes residents. This is not surprising: when the state owns all resources attached to the land the contrast in bargaining power is severe – the government and companies on one side, individual property owners and communities on the other. To further complicate matters for the poor, especially in Africa, most property ownership is informal and/or customary – based on traditional claims – so communities lack official title records or deeds to support these claims and ensure adequate compensation.

This contrasts markedly with the legal framework of developed countries, particularly the US, which have harnessed natural resource wealth and still managed to create strong economies, large-middle classes, and democratic societies. In these countries natural resources are a blessing, not a curse. In the US, resource rights are attached to the land. In most states, landowners have rights to the oil, coal, and natural gas below their land, the timber on, and the water that flows through, and can lease those rights to a third party. In no case does the government automatically own the resources below the surface. Instead, the state gains revenue from taxing the income of those benefiting, both landowner and company. Think of the basic premise of the TV series the Beverly Hillbillies – Jedd Clampett accidently shoots the ground and finds oil. He instantly gets rich and moves his family to Beverly Hills. This fairy tale is incomprehensible to citizens in the developing world.

The US system differs from some developed countries where the state owns all natural resources, such as Norway, Australia and Canada. But the context of extraction in these states is far different than what is seen in developing countries. Minerals and oil are either offshore or in sparsely inhabited interiors. They also are complementary revenue streams and represent a more recent addition to already sound governance and economic systems. The US experience offers a better lesson to developing countries, as economies and local democratic institutions were effectively developed in conjunction with intense extractive activities and in areas with major population centers. This equity in ownership and distribution of natural assets across a society, summarized crudely (pun intended) by the Beverly Hillbillies, is the mechanism that creates incentives for productive use and is the foundation of market economies and democratic societies.

While the grand solution proposed by Diamond and Mosbacher is innovative and better than the status quo, it would create other problems and further undercut the principle that resources should be tied to land (it has more relevance in the case of offshore oil extraction, which is of particular importance in the Gulf of Guinea). To start, extraction creates localized problems. The destruction of land and environmental pollution has a greater adverse effect on communities that live nearby. In Uganda, these are the minority Banyoro, Batwa, Bagungu and other tribes that depend on the resources around Lake Albert and are being pushed off their land. In South Sudan it is the Nuer and Shilluk tribes whose seasonal grazing land is displaced by oil fields. In Nigeria, it is the communities in the Niger River Delta whose livelihoods are destroyed by oil spills from nearby offshore platforms. In Peru and Colombia, Andean indigenous and local people that live above vast gold, copper, and silver deposits have been displaced for decades. Creating secure resource rights that tie both risks and benefits to land ownership allows rights’ holders to weigh the trade offs involved in developing resources and transact according to their utility. The state then assumes its more natural role as regulator. It is the most effective and efficient way to ensure that those occupying land are not disproportionately harmed. On the other hand, a cash-for-petroleum scheme would provide equal amounts of income to all people, whether affected by the extraction or not. And any attempt to provide more cash to those adversely affected would be virtually impossible without first establishing who has rights to what resources.

Tying resources to land is not an easy objective. To begin with, arable, surface land is already under increasing pressure from global land grabs for industrial farming and biofuels, without considering sub-surface resources. Vast swaths of countries such as Cambodia, Madagascar, and Sudan are already claimed by the state (often as a vestige of colonial-era land grabs), and leased to investors with no regard for those that have lived and used the land for generations. Strengthening land tenure for individuals and communities that use and live on land without formal recognition is the first step. This fight is being waged in communities around the world, including the growing attempt to recognize customary, communally owned land as having equal rights as individual, fee simple. Institutions like the World Bank, UN, and international aid agencies need to develop clear policies on land governance (the UN Voluntary Principles on Land Governance is a start), heighten the pressure on national governments to increase local ownership of land, and link trade agreements, aid budgets and loans to criteria for the recognition and protection of land rights. After this is accomplished, or even once the security of local ownership improves, countries should embark on a measured transition from state ownership to devolved land-based resource rights, ensuring that sufficient checks, corruption monitoring tools, and dispute resolution mechanisms (i.e., fair and efficient courts) exist. In Africa, Afghanistan, Indonesia and many other places, this also means recognizing customary or traditional land ownership systems and enshrining these communal arrangements in law with clear borders and rights. Support would also need to be provided to individuals and communities to negotiate beneficial concessions with private investors.

There are powerful examples of communities that are currently managing valuable natural resources – from forests to wildlife to fisheries – the Alaska’s Native Corporations, for example, or Namibia’s community-based natural resource conservancies. Empowering locals to manage resources, generate revenue, and contribute to the tax base would reverse the resource curse while avoiding the pitfalls of Diamond and Mosbacher’s cash-for-petroleum scheme. Doing so would address the cause of the curse, not merely its symptoms.

by Tiernan Mennen and Karol Boudreaux.

Haki is reversing the curse one community at a time through a global network of local NGOs. We help communities and individuals map their legal claims to land, provide legal representation to people that have had their land expropriated, and advocate for legal reforms that accord stronger devolved land rights and greater control of natural resources by communities.