Martin Skancke is among the world’s leading consultants on the resource curse, commonly called ‘Dutch Disease’, wherein countries that discover oil and gas subsequently see a loss of competitiveness in other sectors of their economy. He has advised countries across the globe from Cyprus, to Ghana, to East Timor on the best way to manage newfound resources. Executive asked him if Lebanon could avoid going Dutch.
What are the most important steps to avoid wasting oil wealth?
Number one is starting with institutions. If you want to have good management of petroleum wealth you need good, well-governed institutions to deal with that — on tax collection, on revenue management, on macroeconomic issues.
Number two is thinking thoroughly about the macroeconomic impact of large and volatile petroleum revenues. It is easy to get carried away and think about the things you can do with oil money, but there has to be a more broad understanding of the macroeconomic implications of spending that money — in terms of how it will affect exchange rates, price inflation, wages. The spending of those revenues has very different macro-economic implications than the spending of other types of revenues from the non-oil sector.
In what way, specifically?
If you spend $100 in your domestic economy but finance that by taxing your local economy $100 you are essentially increasing demand by $100 but reducing the purchasing power of the private sector by taking out $100. The overall effect on the economy is not that great. But if you get $100 from the oil sector and spend it in the non-oil sector that doesn’t have that offsetting tax impact: there is no drag on domestic demand. The spending of these oil revenues has a much stronger expansionary effect on the economy. That is why you need to have a mechanism to phase the spending of oil revenues gradually.
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Is Dutch Disease inevitable?
Yes, but in a sense it is something that you want. If you think about the economy as traded and non-traded sectors, you have a production of non-tradeables — such as services, healthcare — and you have a sector of tradeables. When you get richer you want to consume more of both categories and the way to do that is to transfer some of your resources from the tradable to the non-tradable sector and use your oil to cover the deficit.
A certain lack of competitiveness can ensure resources are transferred into the non-tradeable sector and give you a more balanced consumption between the two. But if it goes too far you become vulnerable if and when revenues fall. These revenues are transitory in their nature and at some point they will fall. If you then have a very small tradable sector you will be running a very large current account deficit.
The Lebanese economy is very entrepreneurial. Will this be undermined by oil and gas?
Yes, the changes in exchange rates and prices and wages that bring about increased imports will bring about reduced exports. If you look at historical experiences, unfortunately resource-rich economies have had lower growth rates than resource-poor economies…[because] these resources tend to distort incentives to work, lower productivity growth, and are [often] spent on things with very low economic value like trophy assets — buying a dozen 747s.
What is the one most important thing to focus on?
Building a broad consensus … oil revenues will last for several years and the decisions you make will affect the country for decades ahead. There should be an effort to reach out across different political bodies, parties, interest groups and religious groups.
How dangerous is it for politicians to continue fighting?
It is very dangerous. Firstly, your bargaining position vis-a-vis the oil companies gets much weaker because they will have to factor in higher uncertainty and larger risk when they think about their investments. Secondly, the risk of macroeconomic instability is larger because investors will not know how spending will evolve over time if there is no broad consensus and no broad guidelines for it.
If political infighting continues, is it better for a country not to extract these resources in the first place rather than squabble over them?
On average that has been true. If you look at countries over the last 50 years comparing resource-rich economies with economies with few resources, unfortunately it is true that the ones without resources have tended to do better.
