Will Brazil's New Oil Be a Blessing or a Curse?

by Steve Crabtree

Sixty-nine percent of Brazilians perceive increasing gap between rich and poor

WASHINGTON, D.C. -- Brazil’s state-controlled oil company, Petroleo Brasileiro SA, on Nov. 8 announced the discovery of a new “ultra-deep” oil field that may yield as much as 8 billion barrels of oil and natural gas. The announcement led officials to predict big changes in the Brazilian economy. “If this is confirmed, we will no longer be a ‘medium’ country, pursuing self-sufficiency and exporting a little,” said Dilma Rousseff, the Brazilian president’s chief of staff. “It will transform the nation to another level, with exporting properties like Venezuela, Arab nations, and others.”

Would that transformation be good for the Brazilian people? The answer may not be as straightforward as it seems. In recent years, economists and political scientists have pointed to a potential “resource curse” among countries rich in commodities such as oil or diamonds. The idea is that overreliance on such resources can actually have negative effects -- including eroding the country’s foundation for long-term economic growth, and weakening government accountability.

Economic Impact

In terms of economic development, the concern is that the windfall from the natural resource may reduce competitiveness and innovation in other sectors. This can cause the gap between society’s “haves” and “have-nots” to widen, as only a small number of people are well-positioned to reap the benefits of the new resource. In Brazil, this could mean the worsening of an already bad situation. The country’s income distribution is already unequal (as indicated by its high Gini index score) and most Brazilians feel it is getting more so; a recent Gallup Poll found that 69% of Brazilians feel the differences between the rich and poor are growing, while just 28% feel they are shrinking.

Part of the problem with the presence of a natural resource such as oil, economists say, is that it boosts a country’s currency, making imports cheaper and reducing the demand for domestically produced goods. Over time, the country’s economic infrastructure shifts toward production of the resource and away from entrepreneurship and the development of human capital. In Brazil, such trends could exacerbate existing problems such as a shortage of skilled labor and, as Gallup data reveal, a regulatory environment that may make most Brazilians view entrepreneurial activity as risky. At least two in three Brazilians say people starting a new business in their country cannot feel very confident they will do well or that rules and laws will not change all the time and cannot trust their assets and property to be safe.

Political Pitfalls

Another concern regarding resource-rich countries is that government accountability may decrease along with the need for tax revenue, leading to an increase in corruption and political patronage, and a weakening of democracy. Columnist Thomas Friedman went so far last year as to posit a “First Law of Petropolitics,” arguing that the pace of freedom in major oil-producing countries is inversely related to the price of oil.

Countries with strong rule of law and well-established governing institutions are presumably best able to resist such effects. Freedom House’s most recent report on political freedom and civil liberties suggests Brazil meets those criteria reasonably well. However, the report also notes that corruption remains a serious problem. Most Brazilians would agree: 68% of respondents say corruption is widespread in their government. Brazilians also exhibit a lack of faith in the country’s democratic process, which has likely not been bolstered by scandals such those that plagued President Luiz Inácio Lula da Silva’s 2006 election campaign. Currently one-fourth of Brazilians (25%) say they have confidence in the honesty of the country’s elections, a low figure relative to several other South American populations.

Bottom Line

The “resource curse” is a possibility for Brazil, but that doesn’t mean it’s unavoidable. Analysts have noted that attention to government accountability and transparency makes a huge difference. Recent changes to the political system may take on even greater importance now.

Petrobras’ new oil reserves may potentially improve the lives of millions, if the country’s new income is channeled in ways that support long-term modernization. That means increasing public investment in areas that help more Brazilians participate fully in the country’s economy, such as education and healthcare. Currently, 58% of Brazilians say they are satisfied with the schools in their area, and 42% are satisfied with the availability of healthcare. Dedicating some portion of oil revenues to raising those numbers would not only cultivate sustainable growth, but would signal to Brazilians that domestic contributions remain a principal factor in the country’s development.

Survey Methods

Results are based on face to face interviews with 1,038 Brazilian adults, aged 15 and older, conducted in July and August 2007. For results based on this sample, one can say with 95% confidence that the maximum margin of sampling error is ±3 percentage points. In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.

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Gallup http://www.gallup.com/poll/102703/Will-Brazils-New-Oil-Blessing-Curse.aspx
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