Why I Think Petroleum Revenue Cannot Buy Development

West Texas Intermediate closed above $70 a barrel last week for the first time in nearly a year, and the commentary in the financial press has settled into a familiar groove: which sovereign wealth fund will absorb the windfall, which Gulf state will accelerate its infrastructure programme, which African government will finally close its fiscal gap. The assumption underneath all of this is that at $70 oil, the development problem of the producing world is essentially a logistics problem — the money is there, it just needs to be routed correctly. I want to push back on that assumption, because I think it is wrong in a way that matters for anyone trying to understand what development banks can and cannot accomplish in resource-dependent economies.

The resource curse literature dates at least to the Prebisch-Singer hypothesis of the 1950s, though the modern formulation owes more to Sachs and Warner’s 1995 paper showing that resource abundance correlates negatively with growth even after controlling for the obvious confounders. Dutch Disease — the mechanism whereby commodity revenue appreciates the real exchange rate and hollows out the tradeable manufacturing sector — is the textbook explanation, and it is not wrong. But I think it understates the problem by framing it as a macroeconomic imbalance that can in principle be corrected through sterilisation, managed floats, and sovereign wealth fund design. Norway’s Government Pension Fund is the canonical counter-example: oil revenue invested offshore, the domestic spending impulse smoothed, the manufacturing sector preserved. The lesson drawn by development agencies is therefore that institutions can route around the curse. Build the right fund, write the right charter, staff it with technocrats insulated from politics. Problem solved.

The problem is that Norway’s institutional capacity preceded its oil wealth. Statoil was established in 1972 into a society with functioning property rights, an independent judiciary, competitive elections, and a civil service that had been professional for generations. The causal arrow runs from institutions to successful oil management, not the reverse. When the World Bank or the IMF advises Nigeria to model its sovereign wealth fund on Norway, it is recommending that a country build the output before it has the inputs. Nigeria’s Delta communities have been receiving oil revenue in various forms since the 1960s. What they have received in exchange is contaminated water tables, gas flaring that has made the Niger Delta one of the most polluted regions on the planet, and a federalised transfer system that has financed the consolidation of clientelist networks rather than the expansion of public services. The revenue is not the scarce resource. Accountability is.

Venezuela illustrates a different dimension of the same problem. Hugo Chávez’s misiones — the social programmes funded through PDVSA’s balance sheet rather than the national treasury — have produced measurable improvements in literacy and primary health access. By the narrow metrics of the Millennium Development Goals they are a success. But PDVSA’s capital expenditure has dropped sharply as social spending has risen, production capacity has stagnated, and the political economy of the programmes has made them extremely difficult to reform even as oil prices eventually fall. The misiones are financed at the margin by declining investment in the asset that generates the revenue. This is not fiscal management; it is asset stripping, and it is asset stripping that is politically popular, which is why it is much harder to reverse than a simple accounting error. Jeffrey Sachs has argued that Chávez is using the windfall as he should be using it, investing in human capital. I think Sachs is reading the output and missing the incentive structure that produces it.

For development banks, the implication is uncomfortable but I think correct: concessional lending to petroleum-dependent states in the expectation that oil revenue will service the debt is not development finance, it is a bet on commodity prices. The loan terms may be favourable, the project design may be sound, but if the state’s fiscal capacity is structurally coupled to a volatile commodity, the development outcome is downstream of something that no bank can control. The more interesting question — and the one that gets less attention than fund design and revenue management — is whether there are instruments that can build accountability institutions rather than assuming them. Tax effort, property registration, independent audit functions, subnational fiscal competition: these are boring compared to discussing sovereign wealth funds, but they are what Norway actually had before the oil came in. Getting the sequence right matters more than getting the fund charter right.