Oil Windfalls: Blessing or Curse?

In an effort to get beyond merely anecdotal answers to the question posed in the title, Gelb looks in detail at the post-1973 experience of six capital-deficit oil exporters, Algeria, Ecuador, Indonesia, Nigeria, Trinidad and Tobago, and Venezuela. The answer should come as no surprise to anyone who reads the newspaper: the unprecedentedly large transfers of wealth to oil exporters left them "worse off than they would have been with a far lower, more predictable rate of increase in oil prices or, indeed, with constant oil prices." Gelb's detailed analysis results in a host of counter-intuitive conclusions: most of the windfalls were committed even before they were anticipated; oil-driven economies tended to cause non-oil economic activities to shrivel up; windfalls improved growth rates only in the brief period 1974-77; and richer oil-exporters spent more of their oil income for subsidies than did poorer ones. Gelb's gloomy but convincing analysis shows that even the apparent winners in the 1970s ended up losers.

Drawing conclusions from past mistakes, Gelb emphasizes two main points. First, "spending levels should have been adjusted to sharp rises in oil income far more cautiously than they actually were." Specifically, he suggests that about two-thirds of the windfall should have been saved abroad. (Kuwait was the only state that came remotely near to achieving this.) Second, plans to consume money in 1980 should not assume that oil will bring $100 a barrel in 1990; instead, spending policy should be "based on less than the expected price trend." Sage advice, to be sure - and all too likely to be brushed aside in the euphoria of the next commodity boom.