Israel has been in the news lately for record natural gas reserves off its western shoreline. Some of my friends are what I would describe as super-zionists – seeing things like “free money” for Israel through natural gas resources as unabashedly wonderful. Much like the American gas and natural resource boosters, these Israeli natural gas boosters tend to ignore potential costs of exploitation of natural gas resources. The New York Times had a recent article discussing this issue at more length. One of the significant issues in exploiting natural gas is the “resource curse” – a frequently overlooked, but significant, phenomenon in resource rich countries.
The Natural Resource Curse
Economists have long recognized that natural resources do not always result in increased GDP or quality of life for that nation’s citizens. For example, from 1965 to 1998, OPEC countries per capita growth declined on average by 1.3% while non-OPEC developing countries grew on average 2.2%. Additionally, natural resources are a frequent cause of conflict, and have often hurt countries and their residents rather than helping them.
One of the leading causes of the natural resource curse is that large amounts of natural resources provide the wrong incentives for governments. Whereas resource weak countries earn revenue through the productivity of its citizenry and laborers, some countries with significant natural resources collect most of their state monies through the exploitation and control of the natural resources – resource rich states are subsequently called “rentier states” meaning countries which “derive all or a substantial portion of their national revenues from the rent of indigenous resources to external clients.”
The “rentier” nature of natural resource rich states is one of the reasons why some of the worst dictators have risen to power in countries with vast natural resource wealth – for example, Libya, Iraq (under Saddam Hussein), Charles Taylor, and countless others. This is, of course, not to say that dictators cannot exist in resource poor countries – although in my limited research I was unable to locate any (even North Korea has significant natural resources) – merely that dictators came to power in resource wealthy countries in large part because of those resources.
Israel and Israelis must be wary of the significant potential that the Leviathan gas fields will harm the state and, more importantly, its citizens. Natural gas (and other resources) can be an important part of a nation’s economy, but when a nation becomes overly dependent on resource revenue, that resource may well become a curse. Perhaps most importantly, Israel has had great success in building a modern, first-world-ish, service economy (not withstanding the Heritage Institute’s relatively poor rating of Israel). Israel’s capitalist economy with strong social programs for the poor and a strong eduction system with (relatively) strong civil rights has fostered many start-up firms and has grown rapidly over the last sixty years. For example, oil rich Saudi Arabia had a per-capita gdp approximately the same as Israel in 1986. Currently Israel’s per capita gdp is greater than $26,000 per year while Saudi Arabia’s gdp is less than $15,000 – Israel’s gdp is more than 56% higher than Saudi Arabia. On a ppp basis (i.e., accounting for the relative cost of living), Israeli’s per capital gdp is nearly $28,000 while Saudi Arabia’s is only $23,900.
As Milton Friedman famously said: “there’s no such thing as a free lunch.” In other words, the money that Israel makes off its gas reserves will cost it – the question is merely how much and in what currency.