The Worst Way to Use the Hydrocarbon Revenues
By Lykke E. Andersen*,
La Paz, 4 December 2006.
It is not quite clear which is the best way to use exceptional
oil and gas revenues
(1), but the worst way is probably for the government to use
expected future revenues as collateral to borrow money. This
would not only increase inequality and poverty during the boom
(see
How can $700 million in hydrocarbon revenues be bad for the
poor?), but also burden future generations with excessive
debt, which become difficult to service after the boom has
ended.
Ecuador is a scary example of that
(2). After discovering oil in the rain forest in 1967,
Ecuador quickly became the second biggest oil exporter in South
America. By 1974, oil accounted for half of all export earnings
(like Bolivia’s gas now) and approximately half of the
government budget. Annual GDP growth rates went as high as 25%,
and it was easy to obtain foreign loans for big development
projects. Billions of dollars were invested in roads and
industrial parks, hydroelectric dams, transmission and
distribution systems, etc. Public debt increased from $240
million in 1970 to around $16 billion thirty years later.
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When oil prices collapsed in the early 1980s, the public sector
was blown completely out of proportion. By 1981, public spending
was 20 times higher than the 1970 levels and debt servicing kept
increasing. Spending cuts had to be made, and by 1999, the share
of the national budget allocated to health had fallen to less
than three per cent, while debt service skyrocketed to more than
fifty per cent. Since the 1970s, the official poverty level grew
from 50 to 70 percent
(2).
In addition, the oil exploitation in the Ecuadorian rain forest
has been an ecological disaster. In 2003, a group of more than
30.000 indigenous Ecuadorians filed a $1 billion lawsuit against
ChevronTexaco, asserting that between 1971 and 1992, the oil
company dumped over 4.000.000 gallons per day of toxic
wastewater onto the land and into the rivers, and left behind
nearly 350 uncovered waste pits that continue to kill people and
animals
(3).
Unfortunately Ecuador is not an atypical case.
If leveraging the boom by taking on additional loans is the
worst possible scenario, then paying off debts might be the best
use of the extraordinary revenues. This would certainly reduce
future debt service at a time when fewer resources are
available, and thus smooth consumption levels over time. It
would also mitigate the immediate adverse effects of the gas
boom on income distribution and poverty levels, and it would
make the country less dependent on foreign donors, and thus
better able to make its own development decisions.
(*) Director, Institute for Advanced Development Studies, La
Paz, Bolivia. The author happily receives comments at the
following e-mail:
landersen@inesad.edu.bo.
(1) See new study: Andersen, L. E. (2006) “How
Best to Use the Extraordinary Hydrocarbon Revenues in Bolivia:
Results from a Computable General Equilibrium Model.”
Development Research Working Paper No. 14/2006, Institute for
Advanced Development Studies, La Paz, December.
(2) See Jochnick, Chris (2001)
“Perilous Prosperity” New Internationalist No. 335.
Or even more scary: Perkins, John (2004) Confessions of an
Economic
Hit Man.
Penguin.
(3) Ellin, Abby (2003) “Suit Says ChevronTexaco Dumped Poisons
in Ecuador” New York Times, May 8.
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Institute for Advanced Development Studies 2006.
The opinions expressed in this newsletter are those of the
author and do not necessarily coincide with those of the Institute.
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