Petro-States -Predatory Or Developmental?

ECON-Report no. 62/2000, Projectno.30091 Public ISSN: 0803-5113, ISBN 82-7645 -407-0 HOB/LLu/Thdmbh, KjR, 4. October 2000 FNI-Report no. 11/2000 ISSN: 0801-2431, ISBN 82-7613 -398-3 HOB/LLdTHa/mbh, KjR, 4. October 2000 Petro-states - Predatory or Developmental? Final report from research project financed by Statoil and the Petropol Programme of the Research Council of Norway ECON Centre for EconomicAnalysis P.O. Box 6823 St. Olavs plass, 0130 Oslo, Norway. Phone: +4722 989850, Fax: +47 22110080 Fridtjof Nansen Institute P. O.Box 326, 1326 Lysaker, Norway. Phone: +47 67111900, Fax: +4767 111910 DISCLAIMER Portions of this document may be illegible in electronic image products. Images are produced from the best available original document. Petro-states - Predatory or Developmental? Table of Contents: EXEC~IVE S~M~Y .....................................................................................l 1 mTRoDucTIoN ..........................................................................................5 2 PERFORMANCE OF RESOURCE-RICH ECONOMIES ...........................7 3 sEMcHmG FoREHLmATIoN .........................................................l3 4 THE ROLE OF THE STATE IN DEVELOPMENT ...................................17 5 COUNTRY STUDIES .................................................................................25 5.1 kerbaijm ...........................................................................................25 5.2 hgola .................................................................................................32 6 commGMEmMJm mmGoLA .........................................39 7 IMPLICATIONS FOR THE OIL INDUSTRY AND THE ROLE OF ExTEmMAcToRs ................................................................................47 REFERENCES: .....................................................................................................5l Petro-states - Predatory or DeveIopmental? List of figures Figure 2.1 Economic (GDP) growth in resource poor and resource rich countries. .....................................................................................8 Figure 2.2 GDP per capita in 1997 relative to 1975 .....................................9 Figure 2.3 Ranking of capital deficient oil exporting countries according to Human Development Index (HDI) . .............................................9 Figure 2.4 Corruption levels in selected countries ......................................lO Figure 3.1 Ratio of debt service to expotis ...............................................l4 Petro-states - Predatorv or Develor3menta1? List of tables Table 4.1 Nature of the state ......................................................................l9 Table 5.1 Governrnent expenditure on health and education ....................3 1 Table 5.2 Social indicators in Angola and sub-Saharan Africa .................37 Table 5.3 Government expenditure by functions, 1993 -97) ......................38 Petro-states - Predatorv or Deve!o~mental? Preface During the 1990s the agenda facing the international oil industry operating in the developing world has changed significantly. First, the issue of environmental consequences resulting from oil exploration had to be taken on board. Second, the challenges of human rights implications of petroleum led development couId no longer be brushed aside as irrelevant to business. Third, the whole range of questions related to economic and social development had to be incorporated into the official vocabulary of a number of trendsetting multinationals, inside and out- side the oil industry. The days are gone when an oil company could simply state that its job is to find and produce oil and get away with it. Whether the industry likes it or not, it will continue to be questioned on its track record on the environ- ment, human rights and socio-economic development. This new, expanded agenda requires a different understanding of the predicament of petro-states, the developing countries that are critically dependent on oil for their future prospects. They are no longer just resource rich territories but, equally important, countries caught in a development phase replete with social tensions, economic challenges and political contradictions. This is a challenge not only to the strategic planning of oil companies, but also to academic analysis. We need both better tools for understanding the interaction between economic and political variables and more empirical knowledge. In order to improve the situation, the Fridtjof Nansen Institute and Econ, Centre for Economic Analysis have initiated a series of studies on the political and economic development of petro-states, with particular focus on human rights and corporate social responsibility (CSR). Our intention is to develop a framework of analysis that integrates political science and economics in a coherent fashion and to produce free-standing country studies that are of interest in their own right, while simultaneously contributing to a better, general understanding of the issues. The present report is a comparative analysis of Angola and Azerbaijan, and is based on several specific studies of petro-state dynamics in the two countries. It concludes a project entitled “Petroleum states – predatory or developmental” which has been funded by the Research Council of Norway through its Petropol Programme and Statoil. Needless to say, these sponsors have no responsibility for the contents and conclusions of the report. Stavanger/Oslo, October 2000 Helge Ole Bergesen Torleif Haugland and Leiv Lunde The Fridtjof Nansen Institute ECON Petro-states - Predatory or Developmental? moving the present political leadership in Angola and Azerbaj’an into a developmental direction. Background Historical evidence shows that resource-abundant developing countries have performed markedly worse in terms of GDP development than resource-poor countries. From 1960-1990 the latter grew more than twice as fast as those more generously endowed by Mother Nature. A similar pattern is seen with respect to social indicators, with for instance oil-rich Afi-ican countries performing well below the Afi-ican average. Oil booms have increased public spending, but neither the poor nor the fiture (in terms of spending on health and education) have benefited. The rapid inflow of oil revenue seems to be strongly correlated with high levels of corruption. Recent research, moreover, points to a clear connection between abundance of natural resources and deadly conflict. Rather than being driven by political or ideological agendas, the current generation of civil wars is mainly fought over control of economic resources - most conspicuously these days in the form of diamonds and oil. Developing an analyticalframework How does one best account for this ‘paradox of plenty’? Why are the countries blessed by nature cursed by humans? The most common explanatory framework offered until recently has been connected with the Dutch disease phenomenon. This originates from the struggle of consecutive Dutch governments in coping with abundant natural gas-based revenues emerging in the early 1960s. The result was a lapse in fiscal discipline and a strong appreciation of the exchange rate 1 Petro-states - Predatorv or Develo~mental? leading to reduced competitiveness in other parts of the economy. A negative spiral of economic deterioration followed as debt problems constrained future- oriented investments in human and physical capital. While still relevant, accounting for the misery of newly oil-rich developing and transition economies requires a search beyond purely economic explanations. This is particularly salient for countries with a political and social-economic fabric as rudimentary as we see in Angola and Azerbaijan - the cases selected for scrutiny in this study. Drawing on scholars such as Aut y and Karl, an analytical framework is developed with main emphasis on two broad dimensions defining the nature of the state – the level of repression and the basic purposes for which its powers are used. By whom and for whom is it run? In more concrete terms the following variables are selected for empirical analysis in the country studies on Angola and Azerbaijan t) the division ofpower within the state, i~ quality and integrity of the state bureaucracy, iit) the role of civil society, iv) the location oj~economicpower and v) public spending on health and education. In sum, these variables will indicate whether a country has a tendency towards predatory or developmental features, based on two, contradictory hypotheses – ‘greedlock’ vs. benevolent oil state. It is not the intention to pinpoint the state of affairs at a particular point of time, but to study the direction of change. Predatoy or benevolent petro-states? The absence of functioning democratic institutions to check executive powers, bureaucracies permeated by corruption, weak civil societies oppressed by autocratic leaders and a closely-knit political, economic and military elite, all point towards the formation of a predatory state. Such a state is not inclined to ensure long-term investments in education and health services for the broader population. The fi-mdamental relationship between state and society becomes limited to handing out money, whenever needed to enlist support, and repressing dissent. No analytical framework should be deterministic, though. It is possibIe to foresee a transformation towards a benevolent oil state. Growing oil revenues can facilitate positive change by ‘greasing’ political and economic reform

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