Can Brazil avoid the curse of its enormous new oil discovery?

In late August, Brazilian President Luiz Inácio Lula da Silva shocked foreign oil companies with a plan that would ensure a larger role for Brazil in exploring new oil reserves -- and a bigger share of the world's oil profits. Declaring this initiative as part of a move towards Brazilian economic independence, Lula said the profits would go to a new government development fund that would provide social services and payments to Brazil's still largely poor population. Naturally, Brazilian state oil company Petrobras (PBR) would play a large role.

But sudden oil wealth can do very bad things to a country, wrote Moisés Naim, editor of Foreign Policy, in a recent edition of the Financial Times -- unless, as economist Paul Collier notes, that nation has a political culture and structure strong enough to withstand the temptations of corruption created by a big injection of oil cash. Many countries that have experienced a sudden onslaught of huge natural riches has resulted in a stunted economy and a suffering populace. Brazil has become a solid democracy at the national level, but corruption remains endemic and highly visible. Can Brazil handle this gusher?
Monies, Lula said, would also go toward economic development initiatives that are not yet detailed. Bridges, roads, sewers, and other infrastructure would seem to be part of the plan; if executed in an efficient (or even semi-efficient) manner, such an investment could do tremendous good. But that depends on whether the money can actually reach its targets.

In countries like Norway, Canada, and Australia, where a long history of democracy has held sway, natural riches in oil and mineral wealth have been used to raise standards of living. But those countries are in the minority, according to Collier. For the much longer list of countries that lack a history of strong civil society and democracy -- Rwanda, the Congo, Venezuela, and the states of Central Asia and the Middle East -- a discovery of great natural wealth has generally led to great problems.

For Brazil, a quick glance north reveals an outcome it should consider carefully. Gen. Hugo Chavez of Venezuela has supplanted what was a young and corrupt democracy with a corrupt dictatorship. Chavez intended to do exactly as Silva plans -- to harness Venezuela's oil wealth to forward economic development, make lives better for the poor, and help diminish the yawning gap between the haves and the have-nots. But Venezuela is now an economic basket case, with inflation rates of 30 percent and real wages in freefall, according to The Economist. Its government's hostile attitude towards foreign oil companies has resulted in stagnant and declining oil production.

Naturally, those suffering the most are the very poor whom Chavez had promised to help with economic policies and augmented control over oil resources. To be fair, the price of oil has remained relatively low, and Chavez has no way of controlling this. But Venezuela is set to run a real deficit at over 10 percent of GDP: astonishing for a country with huge oil wealth.

What's the difference between Venezuela and Brazil? Lula is a better president, and he understands the importance of both good governance and relatively open markets in Brazil. He also understands that corruption (including within his own political party) makes reform and economic development difficult. Politically, Brazilians have seen an economy that has lifted millions out of poverty and into middle or working class, and the public has no stomach for a more state-controlled economy at this point.

Whether those two bulwarks are enough to ensure that Brazil's big oil bonanza can translate into a better-off average citizen and a more equitable economic distribution remains to be seen. Lula and any successors certainly have their work cut out for them if they want to keep the oil money clean, and keep one of the fastest-growing economies on the planet humming along.
Read Full Story
  • DJI25628.90-623.34-2.37%
  • NIKKEI 22520710.9182.900.40%
    Hang Seng26179.33130.610.50%
  • USD (PER EUR)1.110.00000.00%
    USD (PER CHF)1.030.00000.00%
    JPY (PER USD)105.390.00000.00%
    GBP (PER USD)1.230.00000.00%