The Worst Way to Use the Hydrocarbon Revenues

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.

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.

Know of any similar ways hydrocarbon revenues can either help or harm future generations? Leave a reply below.

(*) Director, Institute for Advanced Development Studies, La Paz, Bolivia. The author happily receives comments at the following e-mail:

(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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