Is oil bad for democracy?
Looking at the circumstances, you’d be tempted to think so. From Saudi Arabia to Nigeria to Venezuela, the leaders of countries that have great oil wealth seem to be political strongmen with significant state power.
It’s known as the resource curse: the tendency of resource-rich countries to have poor economies. They’re tied to a single, volatile commodity and the money from the dominant resource tends to corrupt the political system and distorts the economy.
But the counterfactual is Norway: a liberal democracy that steadily invests its oil wealth into a diversified portfolio of assets. Norway is a case-study in the right way to handle newfound wealth.
But absolute wealth tends to corrupt absolutely. Many studies have shown the relationship of resource wealth with political hegemony. This depends, though, on what society was like before oil was discovered. If it was a democracy before striking oil, little changed; democracy endured. But if the country was a dictatorship, the strongman was strengthened.
So don’t go looking for North Dakota to become a one-party state any time soon. It’s still a cautionary tale, though. Because like oil and water, oil and politics don’t mix very well.
Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!
Follow me on Twitter @GlobalMarketUpd