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The petroleum and poverty paradox

We must work smarter to reverse the resource curse.

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Logic says that petroleum-rich countries should be rich. The oil-producing, less-developed nations that reaped a bonanza during the past few years of sky-high oil prices ought to be sitting pretty even as crude prices experience free-fall today. However, things aren't that simple.

Venezuela, for instance, thanks to mismanagement of its oil windfall, is suffering high inflation, a drop in petroleum production, and is talking of possible austerity measures, even though it is the Western hemisphere's largest oil exporter.

In fact, history shows that oil and natural gas reserves frequently can be a bane, not a blessing, for poor countries, leading to corruption, wasteful spending, military adventurism, and instability. Too often, oil money intended for a nation's poor lines the pockets of the rich, or is squandered on showcase projects instead of productive investments.

A classic case is Nigeria, the eighth-largest oil exporter. Despite half a trillion dollars in revenues since the 1960s, poverty has increased, corruption is rife, and violence roils the oil-rich Niger Delta.

The term "Dutch Disease" was coined after the Netherlands' economy weakened following the 1960s discovery of natural gas, thanks to a rising exchange rate and a fall-off in manufacturing. Even OPEC countries are not immune. As a group, their per capita gross national product actually dropped from 1965 to 1998, one study found.

This "resource curse," as economists call it, curses America, too. It worsens global poverty, which can be a seedbed for terrorism, it empowers autocrats and dictators such as Saddam Hussein, and it can crimp world petroleum supplies by breeding instability.

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