Treating the Symptom

Divestment seems to be the new fad on campus. But much of the argument over divestment has failed to look at problems that are intrinsic to resource wealth in poor countries. In almost all of the cases—Israel divestment excluded—the movement involves divesting from a mining or oil company that is doing business with some objectionable regime in the developing world. This isn’t surprising; political economy has shown that rare and valuable resources like oil breed corruption. While divestment may be appropriate in some cases, for example PetroChina and Sudan, in most cases it is an impractical option.

Most oil is located in countries that are undeveloped and have unstable or non-democratic governments. The problem with resource wealth is that it is concentrated in the hands of what is in most cases a non-democratic government, which can do with that wealth what it pleases. So, those in power have no incentive to improve the lot of the majority through democratic or economic reforms. In other words, oil can insulate governments that would otherwise have bleak long term prospects. The result is that oil-rich states develop a powerful, well-armed elite that can do whatever they please—which in the case of Burma, Sudan, and other states is generally an unpleasant mix of oppression, genocide, or warfare. Other states, like Saudi Arabia and other Middle Eastern countries, have successfully diverted the frustration of the populace into anti-western terrorism.

Development economists have called this phenomenon “the natural resource endowment paradox,” which holds that developing nations with the greatest endowments of natural resources frequently develop more slowly and unsuccessfully than similar nations with less natural wealth. These are also the countries with the most corrupt government and the least civil liberties. There are a number of theories as to why this is so, but the consequence is clear: with the exception of Norway, almost every oil-rich country is “shady” in some way.

This leads to a fundamental problem for oil companies: the world thirsts for oil and there is not enough in other countries to sustain worldwide demand. So, oil companies have no choice but to deal with these regimes. It would be hard to establish a code of ethical investment for all oil companies. After all, if some regime is too sordid or controversial for a publicly listed U.S. oil company, there are plenty of other national oil companies in countries that do not care much for human rights and are willing to make a quick buck without competition. Boycotts and divestment are meaningless unless there are harsh penalties for not complying. “Harsh penalties” generally mean government sanctions and not the shrill cries (or silent protest) of college students several thousand miles away.

Oil companies that are ethical do have some leeway in enforcing standards on the nations they work in. Unocal threatened to leave Burma when it heard reports that the government was using slave labor in the construction of a pipeline. Other firms like Encana Corporation in Ecuador have set aside funds for reforestation in areas near their oil fields. After all, a host government that has been sanctioned by most of the world has little left to lose except the income from investments made by those firms that will deal with them.

Divestment campaigns generally find that oil companies are easy targets since they have little choice but to work in these nations. The companies face an unenviable choice: stay in a nation, see what pressure they can apply to the local government and face protests from divestment campaigns at home or pull out to let another company with less of a media profile do the dirty work. Those that feel that divestment will have practical effects are deluded. The withdrawal of Harvard’s investment will temporarily change a firm’s stock price by some insignificant amount. Consequently, divestment is just a moral stand designed to garner media attention.

In the case of PetroChina, a moral move may have been warranted. But now that we have made our statement against genocide in the public eye, divestment campaigns have little practical consequence. If we start divesting from every oil company we find dealing with some questionable government, we will find ourselves on a slippery slope which leads us to divest from any company with a tie to the oil industry. Usually easy media targets will be singled out, which leads to the creation of a sideshow that distracts attention from the root of the problem—the national governments that sanction human rights abuses and corruption.

If we really want to starve the beast of these governments, there are two viable options: military force or reducing oil demand. Forced change of these governments is generally drastic and unpopular—no one is clamoring for invasions of Sudan or Burma. The other option is to give pause to how world oil demand could be reduced. While demand remains at current levels, these governments will get their money and very little can be done to change these governments that have no internal incentives to improve. Thus, if we want to make a real difference we should not vent our anger at oil companies but instead be examining our own lifestyles and choices.

Alexander B. Turnbull ’05, is an economics concentrator in Quincy House. Adam M. Guren ’08 lives in Wigglesworth Hall. They are both Crimson editorial editors.