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
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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 develop- mental 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 processes. New sources of political mobilisation may appear, reinforced by for instance international NGO alliances and the Internet. International oil companies and multilateral financial institutions - both alone but more promisingly by working in tandem, could be able to exert effective pressure on political regimes seemingly immune towards conditionality.
Azerba~an - tougher reforms needed to avoid &-eedlockf Applying our analytical fi-arnework to Azerbaijan reveals significant predatory characteristics but some signs of positive change. On the positive side, although flawed, elections have been held where it has been possible, up to a point, to challenge existing executive powers. New parliamentary elections are scheduled for November 2000. Its recent acceptance as member of the Council of Europe confirms modest political progress and strengthens the international community’s ability to support democratic change. Even if routinely checked and sometimes persecuted, opposition parties and advocacy NGOS are openly cnticising the government. Petro-states - Predatory or Developmental?
On the negative side, though, most formal democratic institutions remain paper provisions. Economic and political power is firmly in the hands of the president, who is free to use oil revenues to ‘grease’ a clientelist system with roots in a totalitarian past. In contrast, public spending on education and health has declined significantly throughout the 1990s. Transparency and accountability are all but non-existent features of politico-economic affairs. Only Nigeria and Cameroon perform worse on Transparency International’s ranking of the world’s most corrupt nations. Increasing oil revenues relieve the government of the need to heed IMF and World Bank demands for radical reform, and both institutions cut off major lending prograrnmes for this reason in early 2000.
Angola - both the ‘greed’ and the ‘lock’ inplace? Angola’s starting point is in many ways worse than that of Azerbaijan, due not least to a more malign civil war and conspicuously low literacy levels. The two countries feature as number 160 and 90 respectively on UNDP’S 2000 human development index, out of 174 countries. Together with other former communist governments, Angola instituted both political and economic reforms in the early 1990s. Implementation lags behind even that of Azerbaijan, though. Elections have not been held since 1992, and whatever existed of real political opposition has gradually withered away. The morale and performance of civil servants remain very low, and corruption is endemic. Civil society is weak, with NGO legitimacy hampered by dependence on foreign donors The ground is thus prepared for unchecked execution of presidential powers in political, economic and military terms. Hence, oil revenues trickle away to the privileged few, with little or no benefit to the broader population. As in Azerbaijan (but fi-om a lower starting point) public spending on health and education (measured against GNP) has gone down significantly since the early 1990s.
Pressure from international NGOS and multilateral institutions on the Angolan government is on the increase, however. Both the IMF and the World Bank have relaunched a dialogue on transparency of oil revenues and management. Civil society has shown new strength with a peace conference initiated by the Church in the summer of 2000. It remains to be seen, however, whether these still feeble signs of change have any chance of gaining momentum. Incentives may still be too weak for the current political leadership to change from predation and repression and start a process towards a benevolent oil state.
Challenges to internationaloil companies 1. Companies with a public commitment to much wider objectives than making profits face severe difficulties in oil producing countries with predatory governance features. The wider the gap between corporate aspirations for social development and human rights and local, real-life conditions the larger the challenge to the company in question. 2. The influence of the individual company is largely confined to its own business activities and its immediate surroundings. At this micro level, a company can ensure that its performance is in line with overall corporate objectives, not least in the key area of corruption.
3 Petro-states - Predatory or Developmental?
3. The risk to the reputation of a company is, however, to a large extent connected with perceptions of developments at the macro level, over which an individual corporation has very limited influence. 4. The oil industry will be much more effective in handling such risk, which is especially high in predatory states, if able to deal with the government on the basis of a common understanding and, preferably,, a joint strategy concerning governance issues. This will not exclude commercial competition, but establish self-imposed, industry-wide constraints and guidelines on permissible behaviour in dealing with corrupt governments. In the absence of such co-operation, governments can easily resort to divide-and-rule tactics. With such co-operation, governments dependent on oil revenues will face a strong incentive to change their ways. 5. Within such a joint framework, the oil industry can fiu-ther improve its leverage by seeking alliances with influential multilateral organisations, bilateral donors and other governments. Petro-states - Predatory or Developmental?
1 Introduction This study is about understanding the glaring contradiction between the natural abundance and the miserable social and economic conditions prevailing in most oil rich countries. How can it be that oil is not a blessing, but a curse? What is it about petro-states that makes it so difficult to turn abundant natural resources into affluent societies? On the basis of an account of current trends and the underlying forces, we seek to explore the scope for political choice. How strong are the forces that have tended to move emerging oil-rich states into predatory autocracies? What would it take to change course and transform petroleum resources into a dynamo for broad scale development of these societies? What is the scope of action of the international community, including oil companies, donors and organisations like the IMF and the World Bank?
We start out with a review of current knowledge about the performance of resource rich countries, which ends up in the petro-state puzzle sketched above (Chapter 2). We reassess how different analysts have sought to account for the paradox in their socio-economic development (Chapter 3), and subsequently proceed to elaborate our own analytic approach which revolves around the critical role of the state (Chapter 4). Explanations based on economic models (e.g. Dutch Disease) are not disregarded, but underlying political and institutional factors deserve more attention than have previously been given them. Our analytical framework leads us to two contrasting hypotheses for the development of petro- states, which in turn lay the foundation for the empirical comparison of the two cases we have selected for analysis – Azerbaijan and Angola (Chapter 5 and 6).
The two hypotheses are tested, and the two countries compared, by analysing developments along five variables: division of power within the state, the quality and integrity of state bureaucracy, the role of civil society, the location of economic power and the use of public funding. Finally, we return to the scope of action of the outside world in terms of influencing the management of oil resources and its impact on social, economic and political indicators (Chapter 7).
In any global sample of emerging petro-states, Angola and Azerbaijan present themselves as good case study candidates. They are situated in the most promising ‘new’ oil regions of the world. There are already worrying similarities with previous petro-states that have mismanaged rich resource endowments. The jury is still out, though, on whether Angola and Azerbaijan are locked in a vicious cycle of waste, corruption and repression, or if the abundant resources finally start trickling down to the population via transparent and accountable state institutions.
5
Petro-states - Predatory or Developmental?
2 Performance of resource- rich economies Historical evidence is clear and indisputable; natural resource endowment has not been positively correlated with economic development and social progress. Rather the contrary, international statistics show that countries rich in natural resources have had a performance which is markedly poorer than those countries that possess limited natural resources.
Economic development Taking Gross Domestic Product (GDP) as an indicator of economic development, resource abundant 1 developing countries have performed far worse than resource poor countries. In the period from 1960 to 1990 resource poor countries grew more than twice as fast as resource rich countries. The disparity in growth rates between the two groups widened throughout the 1980s and 1990s, inter alia as a result of the decline in crude oil and other commodity prices. The performance of sub-Saharan African countries has been especially poor, due in part to failure of diversifying out of slow-growth primary products exports into fast-growth manufacturing sectors. In both resource rich and resource poor countries large countries have done better than the small. This has coincided with a lack of open and liberal trade policies by the smaller countries.
Countries rich in minerals have done worse than non-mineral resource rich countries. In this regard one should note that the resource rent largely accrues to the state in mineral-rich countries, whereas this is to a lesser extent typical for non-mineral rich countries. Among mineral-rich countries our interest is with the oil exporting countries, and primarily so-called capital-deficient oil exporters.
An important subset of these countries, Iran, Nigeria, Algeria, Angola and Venezuela, have shown some strikingly similar development paths in the wake of petroleum revenue inflow despite major differences in political structure, and in economic, social and cultural conditions. All of them have shown a decline in per capita Gross Domestic Product (GDP) from 1975 to 1997, except for a minor improvement for Algeria, see figur 2.2.
1 There is no general consensus on the definition of resource abundance. Some studies use single measures such as: export dependence, per capita land area, Iabour force share. Others use dual measures (indices)such as: Export orientation and population size, per capita cropland and country size (see Auty, 1998 for reference), Petro-states - Predatory or Developmental?
Figure 2.1 Economic (GDP) growth in resource poor and resource rich countries.
A T- ......
Large Small Large Small Resource poor Resource rich
By and large oil exporters also appear to have uneven distribution of income and the inequality has increased over time. Nigeria and Venezuela have Gini index of 502. Only 8 other out of 70 developing countries surveyed in World Bank (1999) have income inequality as high as this. Algeria’s Gini index is 35, which is closer to the average for developing countries. Data are not available for Angola and Iran, but Angola probably would record income inequality as high or higher than Nigeria and Venezuela. Although the correlation between resource endowment and low economic growth is statistically significant (see Sachs and Warner, 1995), there are still countries that have done well through exploitation of mineral and other natural resources. One such example is Botswana. After the discovery of diamonds at the end of the 1960s the country has had an average per capita GDP growth of close to 5 per cent a year for the past two decades (IMF, 1999). Spending on education and health was increased and Botswana’s social indicators have improved considerably. Mortality rates for children have declined si=~ificantly and literacy has improved placing Botswana among the very best on these indicators in sub- Saharan Africaj.
Social indicators This contrasts sharply with the development of social indicators for African oil exporters. Angola, Algeria and Nigeria all have literacy rates below the average for developing countries, and life expectancy at birth in Nigeria and Angola (50 and 46 years respectively) remains significantly below the average for developing countries. This average has risen from 54 to 65 years in the period from 1970 to 1997.
2 The Gini index measures the extent to which the distribution of income among individuals or households deviates from a perfectly equal distribution, As defined here, a Gini index of zerc) would represent perfect equality, and an index of 100 would imply perfect inequality (one person or household accounting for all income or consumption).
3 The aids pandemic now threatens to undermine these achievements, ho~vever, as Botswana IS one of the worst hit countries in Africa.
8 Petro-states - Predatory or Developmental?
Figure 2.2 GDPper capita in 1997 relative to 197.S
5000 I-19751 4500 “M 4000 ~ 3500 2 & 3000 m .=; 2500 % Q 2000 n 8 1500 1000 500
0 — /wgola Nigeria PJgeria Iran Venezuela AI dev. Countr
According to the UN Human Development Index (HDI 2000) Angola and Nigeria are ranked close to the bottom of the list, respectively 160 and 151 out of 174 countries. Other countries included in figure 2.3 are better off but all of them have fallen in ranking from 1993 to 2000.
Figure 2.3 Ranking of capital deficient oil exporting countries according to HumanDevelopment Index (HDJ.
Angola 160 160 165 Nigeria 151 146 107
Algeria 107 109 69
Iran 97 95 66
Venezuela 48 44
1997 1993
Note: HDI consists of three dimensions: (i) longevity (measured by life exp. at birth), (ii) knowledge (measured by adult literacy rate and combined enrolment ratio) and (iii) standard of living (measured by adjusted per capita income in PPP$).
The performance in human development indicators is all the more striking as regards the considerable public revenues these countries are earning from petroleum sales and the size of their public budgets. Nigeria, Iran, Algeria and later Angola all substantially increased their public spending in parallel with
9 Petro-states - Predatory or Developmental?
rising oil export revenues. Education and health services barely benefited fi-om this increase. Once the level of public expenditure became unsustainable, in particular in the wake of external shocks in petroleum revenues, the painful adjustment policies had severe consequences for health and eciucation. Angola, Algeria, Nigeria and Iran have for the past two decades substantially reduced expenditures for education as a share of GDP (World Bank, 1999), this despite the high fertility rate and major increase in the group of children aged 5 to 15. Again this contrasts with other developing countries which on average have increased expenditure on education relative to GDP from 1980 to now.
Corruption Another important determinant of growth, which is correlated with resource endowment, is corruption. From figure 2.4 it is evident that oil exporters are well represented among countries with high rates of corruption. Angclla and Venezuela are not included in the survey behind the figure below, but there is evidence that corruption is rampant in Angola and also serious in Venezuela,. A survey of 99 states published by Transparency International ranks Venezuela as number 75 [99 the most corrupt).
Figure 2.4 Corruption levels in selected countries
Source: Economist Intelligence Unit. Statistical analyses further document the relationship between natural resource abundance and the level of corruption. Corruption is often found to depend on natural resource abundance, government policies and the concentration of bureaucratic power. Capital intensive natural resources comes out as an important determinant of corruption. Corruption has major damaging effects on economic activity. Arbitrariness and corruption among government officials is often a major hindrance to growth and non-oil investments. Tax collection rates and the management of public expenditure may also be seriously affected by corruption, with far-reaching social and economic consequences.
10 Petro-states - Predatory or Develo~mental?
Civil war and strife Civil war and strfe have also adversely affected resource rich countries. Studies by John Collier and others show that rebellion is more often caused by looting motives rather than genuine justice seeking - by greed rather than grievance. Rebellions are induced by the endowment of 100table resources. Strong evidence suggests that the share of primary commodity exports significantly affects the risk of war. According to Collier and Hoeffler (1999) a country with a quarter of its national income from primary commodity exports is four times more likely to experience war than a country without large primary commodity exports, By contrast, the authors conclude that the risk of conflict does not increase with the severity of. objective grievances. Rather, justice-seeking rebellion is often hindered by the “collective action problem”. Social fractionalisation and repression reduce the feasibility of collective action and hence reduce the risk of war and strife (Collier, 2000). Low education and a high proportion of young men is also strongly correlated with wars, so that the combination of large exports of primary commodities, low education, a high proportion of young men, and economic decline, between them drastically increase the risk of conflict. Economic factors are the main drivers. Although societies as a whole suffer economically from civil war, some small identifiable groups do well out of it. They thus have an interest in the initiation, perpetuation and renewal of conflict.
11
Petro-states - Predatory or Developmental?
3 Searching for explanation In sum, empirical findings suggest a strong correlation between a rich endowment of natural resources on the one hand and economic failure, corruption and conflict on the other. The challenge is how to account for this seeming paradox – why are those countries blessed by nature cursed by humans?
A common explanation for the economic deterioration that occurs with resource exploitation and exports is the Dutch Disease phenomenon.
Dutch Disease and economic policy Dutch Disease results from an appreciation of the exchange rate, caused by the large inflows of petroleum revenues, which again leads to reduced competitiveness of various non-petroleum sectors of the economy. Dutch Disease will often have particularly serious effects on the poor because traditional sectors such as agriculture and other production in rural areas will lose out to imports that become more competitive as a result of currency appreciation. A firther specialisation of the economy in the resource sector and production of non- tradeables (sheltered from international competition) occur due to escalation in public spending.
Dutch Disease earned its name after experiences the Netherlands made in the aftermath of large discoveries of natural gas reserves in the 1960s.4 The phenomenon is old, however; for example the economic decline of Spain following the exploitation of minerals in Latin America bears close resemblance to modem type Dutch Disease problems.
Dutch Disease effects surfaced among capital deficient oil exporters fi-om the late 1970s and in the 1980s. As in the Netherlands lack of fiscal discipline led to accumulated higher external debts with an ensuing debt service ratio which burdened public budgets and reduced opportunities to invest in human and physical capital. The countries were thus caught in a negative spiral of economic deterioration as low saving and lack of private sector investments inhibited a diversified economic growth.
4 See Neary and van Wijenbergen (1986) for a good account of the original Dutch experience in this regard.
13 Petro-states - Predatory or Develo~mental?
Figure 3.1 Ratio of debt service to exports.
. Algeria Iran Nigeria Venezuela All developing .cou ntries
Breaking this circle requires implementation of carefully designed economic policies. Governments need to offset the accelerating - oil related - capital inflows by increasing savings and investments elsewhere in the economy. In order to achieve this goal, the government must move steadily towards a fiscal surplus and promote continued economic diversification. This is generally seen as best achieved in economies exposed to market-based competition. It also requires capabilities of state institutions to design and implement consistent and complex economic policy programmed and the strength of politicians to nurture fiscal constraints. These are challenges that even advanced and rich petroleum exporters like Norway and the Netherlands have had hard times tackling.
Trade policy In a comprehensive review of economic literature, Auty (1998) outlines two models that attempt to capture essential patterns of development typical of resource-rich and resource-poor countries. The staple trap model associated with resource abundance traces a closure of trade policy and increasing specialisation in the structure of production. The efficiency of investments deteriorates and the accumulation of skills start to sta=gate. Educational provision lags behind and this contributes to higher income inequality which again has neg,ative impacts on economic development. The sequenced industrialisationmodei, associated with successful resource-poor countries, depicts a relatively open trade policy and a steady diversification of the economy into a broader range of manufacturing that proves resilient to external shocks. This development offers strong incentives to accumulate both physical and human capital.
Rent-seeking behaviour Both natural resource abundance and trade regulations give rise to corruption. They both stimulate rent-seeking behaviour which is an important determinant for a country’s level of corruption. Hence, corruption is determined within the economic system as a consequence of the interaction of economic interests and the use of policy instruments. Both theoretical and empirical work confirm these
14 Petro-states - Predatory or Developmental?
linkages and further validate the causal relationship between corruption and low economic growth, see Leite andWeidemann(1999).
The importance of institutional and political factors Much of the research on natural resource abundance and development emphasises phenomena like the Dutch disease and (the failure of) economic policies to cope with them. While important in their own right, such approaches have clear limitations when applied to developing and transition economies as they fail to take account of underlying political and institutional factors. There is a growing recognition of the importance of social and institutional capital which includes both civic spirit, political regime, legal system and ethical norms (see Auty 1998:24-27).
This wider aspect is even more pronounced in Terry Karl’s much-quoted study “Paradox of Plenty’’(1997). While acknowledging the importance and explanatory power of Dutch disease, she emphasises the need to capture the underlying political and institutional processes that set off economic and market dynamism portrayed in economic models. In her view, commodity dependence “shapes not only social classes and regime types . . .but also the very institutions of the state” which in turn has a profound impact on the economy. (Karl, 1997: 5)
It is this complex interaction between economic forces, resource endowment and political institutions that makes this subject matter so intriguing and so difficult to grasp. The term ‘institutional capital’ as defined by Auty can be defined so widely as to encompass almost the entire society, hence losing much of its analytical edge. In our view, it is essential to focus the analytical framework on the basic functions of the state and the key relations between the state and the surrounding society. Below we shall therefore attempt to conceptualise and operationalise the role of the state in such a way that the ffamework can be applied in the subsequent empirical analyses of two critically resource dependent countries, Angola and Azerbaijan.
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Petro-states - Predatory or Developmental?
4 The role of the state in development Ideological shifts and new paradigms The role of the state in promoting social and economic development has long been a subject of political controversy and academic dispute. In fact, there is hardly any question in the entire development discussion that has been so fiercely debated throughout the second half of the twentieth century. We have no intention of resolving the grand debate. It is worth taking note of, though, how ‘mainstream’ opinion has swung from a predominant state-centred view in the 1960s and 1970s to the liberalism of the 1980s and early 1990s and back again towards a ‘centrist’ position with the current focus on good governance and ‘enabling enviromnent’.
In economic research natural resources was at first seen as critical for development. Eventually the role of physical capital (machinery and equipment) was emphasised followed by a focus on human capital and knowledge and ideas embodied in machinery and equipment. Then for the last 10 to 15 years another shift of attention has occurred with increasing emphasis on the role of policies and the quality of a country’s institutions. Social cohesion is also increasingly put forward as a condition for economic growth and development.
In our view, these changes may reflect less real experience in the Third World than underlying ideological shifts in the western world. The challenge is, hence, to develop categories and an analytic approach that is more robust to changes in political fashions. Here is our attempt:
We shall try to capture the essence of state power (in developing or transition countries) by focusing attention on two dimensions of paramount importance to any study of development. First comes the level of repression, i.e. the powers available to and employed by the governing in relation to the governed, and, second, the overall purposes for which those powers are employed.
Level of repression This dimension is often referred to as ‘autonomy’ or level of centralisation. Whatever the terminology, the main point is to what extent the state is under the control of one entity (or whether power is shared) and to what extent the centre of state power also controls the surrounding societys. These are closely correlated –
5 Or, vice versa, to what extent a group outside the formal apparatus in reality controls the state.
17 Petro-states - Predatory or Developmental? the more power is concentrated within the state apparatus, the more likely that the entire society is under its control.
In our analytic framework this dimension is made up of four broad variables, as follows: . First, the division of power within the state itselfi to what extent is parliament and the judiciary independent of the executive powers which are normally concentrated in the hands of the president as chief executive? If courts are allowed to function without political interference, a crucial element towards distribution of power has been established. If parliament has real legislative powers and is accountable to the electorate, nck to the president, another counterweight to concentration of influence is in place.
● Second, the nature of state bureaucracy; is it honest and based on merit and achievement or susceptible to undue influence and corruption? . Third, the status of civil society in relation to the state; tcl what extent can mass media and NGOS voice criticism of the institutions and personalities in power? To what extent can meaningful political opposition be organised and power be contested in open and fair elections?
● Fourth, the location of the centres of economic power in relation to political institutions; to what extent do political and economic leadership ove:rlap? To what extent is economic decision making exposed to rent seeking by political actors? To what degree can political leaders interfere directly or indirectly in the distribution of resources that takes place in the market? This is particularly pertinent to the functioning of state owned ~lnancial institutions and parastatal enterprises and to the role of the state as regulator of economic activities (e.g. in granting permits and licences and in collecting taxes, levies and customs).
These four variables are closely intertwined and cannot be understood fhlly, nor analysed adequately, one by one. For example: Real distributior][ of power within the state is impossible without an independent civil society that is strong enough to guarantee transparency in government affairs through a free press and well- organised opposition parties. Such independence hinges, in turn, on the workings of the legal system. Without an independent judiciary, civil society will be in constant jeopardy.
An honest and competent bureaucracy is, likewise, a precondition for a pluralistic civil society and for preventing corruption in the economic sphere. Indeed, the fourth factor above – the relationship between economic and political power - illustrates this interconnect edness better than anything else. If a proper distinction between political and economic power is to be maintained, a society neecls both a parliament that can enact the necessary legislation, an open civil society that keeps track of events, an independent judiciary, and a competent civil service that enforces the rule of law. And conversely, in the absence of these preconditions, political power can be used at will for personal economic advantage.
6 This interconnectedness and the need for strong institutional links rooted in constitutional reform is underlined by Aron 1997.
18 Petro-states - Predatory or Developmental?
Purpose of state power While the first dimension captures the basic structure of state power and is intended to answer the question – who runs the state how? – the second is focused on the objectives for which the powers of the state are used –for whom is the state run? The simplest distinction here is between the few and the many. The resources available to the state can be used for a variety of purposes and in very different ways, depending on the priorities and objectives of the holders of power. This is most easily seen in terms of public expenditure, which can be concentrated for the benefit of a minority or dispersed to the advantage of the majority. The best indicator for this dimension is public spending on health and education which is probably the most important and effective way of sharing the resources of the state widely among the population.
If primary health and education is given priority, either over time or relative to comparable countries, we shall take it as an indication that the resources of the state in question are used for developmental pu~oses, If, conversely, these sectors are neglected in relative or absolute terms, there is reason to assume that the state has a predatory character. The term is deliberately used, following Evans 1992, to convey the impression of a state devouring its own resources not for public good, but for private benefit. Instead of extracting surplus in order to provide collective goods like health, education, physical and legal infrastructure, this type of state produces collective ‘bads’ like corruption, insecurity and illiteracy because its funds are diverted for other purposes. The predatory state is not necessarily poorer than its developmental counterpart in terms of available resources, but the majority of the population is definitely worse off and the gap between the haves and the have-nets is bound to grow.
By combining these two dimensions, we can characterise the nature of the state in the following manner:
Table 4.1 Nature of the state
Level of repression Low High Purpose of state power Predatory 1) 2) Develo~mental 3) 4)
Predato~ – low level of repression The state of type 1 is a traditional autocracy, for example in a feudal society or an agrarian subsistence economy. The level of repression is low and the surplus that can be extracted by the power of the state is severely constrained. Even if distribution of resources is skewed and tends to remain that way, this kind of society can be fairly stable over time due to the underlying, tacit social contract: The riders do not interfere much in the daily life of their subjects. The latter expect little good from the state, but are not exposed to much bad either.
19 Petro-states - Predatorv or Deve~oDmental?
Predato~ – high level of repression In the second type, the state is much more powerfid and uses its repressive instruments to collect significant resources from society, if necessary by physical means. In this instance, the two dimensions are apt to combine in a particularly malign manner, reinforcing each other in a vicious circle along these lines: Since the state has extensive repressive tools at its disposal, its ability to extract surplus from the population is prevalent everywhere, in taxation, foreign trade, exchange rate regime, regulation of economic activity etc. The bulk of the resources collected in this manner are controlled by the elite that runs the state, either for personal consumption, for savings abroad or investments in property or even production. Very little ‘trickles down’ to the majority of the population by way of public expenditure. This spending of public finds, instead of redistributing to the lower strata, reinforces the resources available to the elite and makes it possible to extend iiu-ther the powers of the state. Maintaining a repressive, basically unproductive apparatus is costly and requires constant access to new resources.
In addition, it is arguable that those who hold power in a predatory state tend to become more and more short-sighted. As the state becomes more oppressive and extractive, the elite get richer and more powerful, but presumably also more nervous. The more it takes advantage of its position, the more it stands to lose if it were ever to be toppled7. Hence, the need to continually strengthen and extend the repressive machinery. The basic motivation in this type of state is power and greed, which is combined in a self-fulfilling way that is very difficult to break. Even if the elite wanted to strike another bargain with the people, it WOUIC1be very hard to dissolve the old repressive ways without creating chaos. Establishing loyalty as an alternative to repression (cf. Wintrobe 1998) is extremely difficult in a society characterised by fear and apathy resulting fi-om systematic oppression.
Developmental – low Ievel of repression In the third type of state, repression is limited and public funds are used for the benefit of the majority, in particular through health and education. This provides the basis for economic and social development in the long run by raising the level of skills in the population at large. Over time, education on a broad scale will lead to demands for wider participation in the political system and a wider distribution of economic growth. Hence, this type of state will be inclined to sow the seeds of its own demise. A technocratic elite controls the state from the outset, but invests so much in education that after a generation it can no longer resist the demand for sweeping change of the kind that has taken place in South Asia in recent years.g It follows that this type of state has, presumably, a tendency towards instability as the use of state resources in the long run is likely to undermine even the relatively mild level of repression. This could, in turn, either lead to democratisation, as witnessed in Asia and several countries in Latin America in the 1990s, or to a higher level of repression in response to civil unrest.
7 “The g-eater the dictator’s power, the more reason he or she has to be afraid”, according to Wntrobe 1998:22.
8 For the case of Indonesia, see Tomquist 1999
20 Petro-states - Predatory or DeveIo~mental?
Developmental – high level of repression The fourth type of state is in many ways paradoxical; power is strongly centralised and all opposition effectively oppressed, but that power is not abused for personal gain in favour of a ruling elite. This is in other words a version of the Leninist ideal of the vanguard party that seizes absolute power in order to transform and develop the society as a whoIe – and in turn ‘withers’ away into the stateless and classless ideal. While Lenin intended to go for state type 4, he and more notably his successors soon ended up in type 2 (predatory- high level of repression). The European experience throughout the twentieth century underlines the old dictum that ‘absolute power corrupts absolutely’ to the extent that it is hard to envisage that a state over time can avoid that kind of distortion. However, it is arguable that Cuba under Castro, China and even Saudi Arabia are exceptions.
Effects of resource endowment: two competing hypotheses We underlined above that large natural resources seem to be strongly correlated with economic stagnation. In terms of the concepts elaborated above, this can be accounted for in the following manner: Oil revenues – or the prospects of fiture incomes from petroleum – raise the stakes and the ‘booty’ available to those in power. Once they are in control over the new flow of funds into the treasury, they can use this very resource base to reinforce their grip on the state, which is the most important source of income in the country. In this way, political and economic power merges so that it becomes impossible to distinguish the one from the other. Control over political institutions is both a result of and a precondition for economic wealth.
Under such circumstances, repression and predation go hand in hand. The former is a prerequisite for the latter and the personal fortunes acquired in the process of predation lays the foundation for perpetuating the repressive apparatus. This tendency is not dependent on natural wealth, but the temptation to combine repression and predation is much stronger if the revenues are very large and flow very quickly. The higher the revenue from oil, the more the elite has to lose and the more short-sighted it becomes. In short, the oil riches provide the motivation for a predatory elite to take power, and the means for the preservation of their position. Oil money makes bad government worse.
This line of reasoning folIows from the logic developed by Karl (1997). Oil dependent states are distorted in economic and political terms because their basic incomes do not originate fiorn regular taxation of productive activities. They are therefore not dependent on a middle class of taxpayers, nor on domestic entrepreneurs. As a consequence, they fail to develop the variety of mechanisms and relations that are needed to regulate taxation in a pluralist state. In the extreme, such states do not need their citizens, either for funds or for political support. The fundamental relationship between state and society then becomes limited to handing out money and repressing dissent. The typical petro-state belongs squarely in our type 2, the malign combination of repression and
9 An interestimz fictional example of type 4 is Orwell’s 1984 totalitarian state cum development
21 Petro-states - Predatorv or Developmental? predation. This is the essence of our central hypothesis, which we have dubbed the ‘greedlock’ hypothesis 10.
However, notwithstanding the findings referred in the introductory chapters, it is at least in theory possible to turn this argument upside down; new revenues can facilitate a gradual change from a predatory to a developmental state by ‘g~easing’ the reform process. With a larger cake to share, it is not necessary to take money away from the vested interests. An increase in public funds can thus make it possible for a reformist elite to move from predatory to developmental and, simultaneously, lower the level of repression. In terms of the typology elaborated above, this means moving towards a state of type 3 even if tic starting point is type 2.
While empirical evidence so far suggests that this is unlikely, we do not take the deterministic position that it is impossible. As an alternative to ‘greedlock’, we have therefore developed a competing hypothesis revolving around the benevolent oil state. In the empirical analysis, we shall be on the lookout for indications of developments that point in the opposite direction foom that predicted by the ‘greedlock’ hypothesis. Such indicators could be increases in public expenditure for education and other basic services, political liberalisation (more space for NGOS and independent media, more open elections), judicial reform, arm’s-length barriers between state regulatory functions and polilics (like the role of the national bank, foreign trade regime, the financial sector etc.), renovation of state bureaucracy and law enforcement agencies.
A particularly important and intriguing question in this regard is the role of the petroleum sector itself. On the one hand, it can be seen as an easy victim of the typical petro-state with its malign fusion of political and economic power, Indeed, the petroleum sector will, following the logic of the ‘greedlock’ hypothesis, become the epicentre of the political/economic system, the very place where the forces of predation and repression link up and lock inl 1.
On the other hand, the petroleum sector could, conceivably, have the very opposite impact. Oil revenues could, as mentioned, provide the financial freedom and scope of action that makes a redirection of public spending possible. If used deliberately for social infrastructure and education, the extra funds could. make a crucial difference in the pattern of public expenditure. Furthermore, the petroleum sector could in the interaction between domestic actors and the inte~mational industry unleash forces that would gradually, if not intentionally, undermine important elements of the repressive machinery that runs the petro-state. This could work through a number of mechanisms, such as . more transparency and technical competence in the state bureaucracy as a result of standards set by the international industry,
10 Term originally coined by former California Governor Ed Brown with reference to the political system in the United States.
1] This is the essence of the criticism repeatedly Ieve[led at international oil companies by NGOS accusing the industry of complicity in repressive regimes in oil rich countries.
22 Petro-states - Predatory or Developmental?
● a gradual increase in employment within and around the oil industry, spreading welfare effects more widely and potentially building up political pressures for change,
● more openness and sophistication in civil society following horn training and interaction with the outside world stimulated by a larger international presence.
Whether the impact from the petroleum sector with its large international component works in one direction or the other needs to be carefidly analysed in empirical terms. We shall, consequently, pay due attention to its role in the country studies below, as we will to the role of other govennnents, multilateral institutions, international NGOS and multi-stakeholder alliances in potentially greasing developments towards more benevolent oil states.
Research design Above we have outlined five broad variables, four connected with the repression dimension, one with the purpose of state power. Having established the main line of argument, we can now describe more explicitly the values associated with each of them, the indicators to be applied and the key questions to be raised in the empirical analysis that follows below.
1. Division ofpower within the state The opposite values along this variable will run from a pluralist system with institutional checks and balances on the one hand, to concentration of power around a small circle or a single individual operating outside legal constraints.
Key indicators: . status of parliament in relation to the executive – real legislative and budgetary control or a mouthpiece for the real holders of power?
● status and independence of judiciary: appointments of judges, competence and resources and, again, relationship to the centres of power
2. State bu~eaucracy Opposite values: competent, merit-based vs. corrupt and incompetent
Key indicators:
● recruitment and appointment, relationship to power centre(s)
3. Civilsocie~ Opposite values: pluralist and independent vs. oppressed and under state control
Key indicators:
● freedom of expression for independent mass media . strength and scope of action for NGOS
● openness and fairness of elections, at different levels
23 Petro-states - Predatory or Developmental?
4. Location of economic power Opposite values: pluralist, arm’s-length from political decision-making vs. coherent, symbiotic political-economic elite Key indicators and questions:
● Do economic and political elites overlap? Are top economic decision- makers appointed by those who hold political power?
● Can political leaders use control over economic decision-making for personal gain?
● Is decision-making concerning use of public resources transparent or secretive?
5. Use ofstatefunds Opposite values: for the benefit of the many vs. the few Indicators: . trends in public expenditure for health and education
In the empirical analysis we are not primarily concerned with revealing the state of affairs in a particular country at a specific point of time along any of these variables. That will in itself not tell very much, often just leadir~g to meaningless questions of half full versus half empty. Instead we shall concentrate on a.nalysing trends and the direction of change over time. We shall not ask: What’s the situation in country x right now, but rather; in which way is it moving? Is it emerging towards state type 1, 2, 3 or 4? In addition, we want to investigate the role of the petroleum sector in the trends we uncover by applying our two competing hypotheses in the following manner:
If a country is on the move towards state type 2, and if it cau be ascertained that oil revenues and the location of the petroleum sector within the state contributes to this development, then the ‘greedlock’ hypothesis is supported.
Conversely:
If a country is on the move towards state type 3 and it can be ascertained that oil revenues and the location of the petroleum sector within thle state contributes to this development, then the ‘benevolent oil state’ hypothesis is supported.
The two empirical studies below are based on a variety of sources. In the case of Angola, the main source is a study specifically commissioned for this project (Hodges 2000), which has been supplemented by other academic analyses and reports fi-om governmental as well as non-governmental organisations. In the case of Azerbaijan, we build on a previous study in which we have been involved (ECON Report 15 1999) as well as numerous other relevant sources. In both cases, we have conducted a limited number of interviews with carefully selected informants inside and outside government. As all of these were interviewed off the record, no references are made to the views expressed, but the interviews have nonetheless been very useful in interpreting the conclusions drawn by other analysts.
24 Petro-states - Predatory or Developmental?
5 Country studies
5.1 Azerbaijan In 1998, Azerbaijan’s GNP per capita was US$ 480. Its score in terms of key human development indicators is higher than most countries at comparable GNP per capita levels (UNDP, 2000). The following are some key indicators from UNDP’S 2000 Human Development Report, all in 199g figures: Population: 7.7 million Appr. population growth: 1?40 GNP per capita: US$ 480 Life expectancy at birth: 70 years Adult literacy rate: 99% Azerbaijan is caught in the crossfire of a number of political and economic conflicts: . Its geopolitical position places the country on the border between the Isl&ic and the Christian world, and simultaneously at one of the intersections between the Russian and American spheres of influence. Its leadership is strongly oriented towards Europe and the West, while most of the population is Turkish (or Russian) speaking and Muslim. . Its political and economic heritage is that of a post-Soviet society with the influence of 70 years of communist rule still visible. Yet, the country now strives to develop a modern market economy and democratic institutions. . Its ethnic composition has led to civil war over Nagorno Karabakh and dislocation of a major part of the population. The country is also w.dnerable in terms of the political instabilityy of the wider Caspian region.
Division of power within the Azerbaijani state Azerbaijan has a modern constitution that outlines the division of power between the legislative, judiciary and executive branches of the state. Independence of the judiciary and constraints on the power of the executive is in principle guaranteed. However, official practices and the prevailing political culture are not always in keeping with the country’s constitutional principles. The values enshrined in the constitution are not strongly rooted in the political culture of Azerbaij an, which is still dominated by the old (clan-based and communist) practices. Nevertheless, the modern constitution is a useful starting point for public mobilisation against presidential autocracy and is used both by the domestic opposition and by external players in this regard.
25 Petro-states - Predatory or Developmental?
The Presidency While the constitution awards considerable powers to the Presidency, the principle of separation of powers is recognised. In practice, the President stretches the limits of his constitutional authority. President Aliyev argues that Azerbaijan cannot afford a weak presidency and the instability this would bring. Undeniably, Aliyev has created a solid basis for political independence and stability - a precondition for democracy. His strong links with the West also has the potential to stimulate democratic behaviour. On the other hand, Aliyev’s personal power has grown considerably during his presidency. Aliyev’s autocratic style is not merely his own idiosyncrasy; he is also acting within a political culture that considers rule by decree as normal. This tendency towards personalised rather than institutionalised political power makes the emerging democracy in Azerbaij an very fragile. To a large extent, it is clan hierarchies, rather than democratic processes, that determine the way that power is exercised in Azerbaijan. Aliyev and the Yer-az clan have been in power in Azerbaijan over the past 30 years, with the exception of the first years after independence. Their influence stretches to almost all important positions in society. Criticisms of the current regime have appeared in the media and there are also signs of tension within Aliyev’s party, partly related to rumours that Aliyev’s son Iham will inherit the Presidency.
Elections and the national assembly The democratic role of the national assembly is first of all limited to the extent that 100 out of the 125 seats are based on districts and the remaining 25 ‘based on an electoral list system. The majority of the hundred are generally seen as appointed from the president’s clan. Altogether there are only 7 opposition deputies in parliament. The democratic credentials of the present political system are further hampered by the general inability of the parties to co-operate - be they in the president’s camp or in the opposition. This is partly due to the fact that political parties are assembled around neither ideology nor social interest groups, but strong personalities who are often engulfed in interpersonal rivalries. In other words, they are only to a limited extent modem political parties; more often than not they look more like factions. Still, they have potential to develop into democratic institutions. Some of the parties have a national network of local organisations, such as the NAP, the Azerbaijan Popular Front, the National Independence Party and the Musavat Party. Of the 40 registered political parties in Azerbaijan between ten and twenty are considered opposition parties. Electoral processes up till now have, generally, not lived up to the standards required by the international community. Parliamentary elections in 1.995 are generally seen as flawed. The presidential election held in October 1998 contained some major irregularities both during the presidential campaign period and during the election (OSCE, 1998). In December 1999 Azerbaijan had its first municipal elections since independence. Again there were allegations of widespread irregularities of the elections reported by observers fi-om the Council o:f Europe and by opposition parties. One of the major opposition players, the Azerbaijan National Independence Party, boycotted the poll to protest procedural violations during the election. Those parties that participated refused to acknowledge the validity of the published results.
26 Petro-states - Predatory or Developmental?
The next election of the National Assembly is scheduled for November 2000. In the run up to this election there have been major protest events in Baku by the opposition demanding passage of a new election law. Azerbaijani officials argue that the demands are unnecessary as amendments are already drafted to the existing election legislation, with input from the OCSE’S Office for Democratic Institutions and Human Rights. In March 2000 sixteen opposition groups signed a letter of protest to Kofi Annan and other global leaders asking for outside help in ensuring free and fair elections; help which they consider crucial to avoid an entirely flawed election process 12. On 20 July 2000 twelve opposition parties threatened to boycott the 5 November parliamentary poll if certain election laws are not changed and OSCE advice to this effect is ignored. Included in the protest is aIso concern that the ruling party may change the law on the Central Electoral Commission to facilitate government control of that body. Along another vein, though, Azerbaijan’s government got a boost in late June 2000 with the decision of the Council of Europe’s Parliamentary Assembly (PACE) to approve the long-standing bid by Azerbaijan to join the Council. The decision is expected to be endorsed by Council member governments in November 2000. Azerbaijan was voted in by a solid margin together with its arch foe Armenia. Following comprehensive examinations by independent observers, Council members seem to have become convinced that allowing for membership their membership will support democratic development and human rights in the two countries and peace between them. Critical voices have suggested that Azerbaijan shouId be kept out pending a satisfactory parliamentary poll implementation in November 2000, but simultaneity between the two countries was considered important in support of the precarious Nagomo-Karabakh peace process.
Independence of thejudiciary Despite the constitutional provisions for judicial independence, this is compromised by official appointment procedures and accompanying corruption. The President’s appointment of the Attorney General and prosecutors must be confirmed by Parliament. Since Parliament is very much dominated by the President’s party, the checks in this procedure are ineffective at best. The President also independently appoints all lower level judges, with each appointment limited to five years. The influence of the executive authorities, together with accompanying corruption in appointments, means that the justice system is widely discredited. Defence attorneys and prosecutors are now, by law, equal before the courts. In practice, however, the prerogatives of the prosecution still generally outweigh those of the defence. In 1997, the Council of Europe sent a group of lawyers to Azerbaijan to find out if there was conformity between the legal order of Azerbaijan and the Council of Europe’s standards of democracy, rule of law and respect for human rights. The group found it important to take into account the heritage of Soviet rule and the continuing conflict in Nagomo-Karabakh. In its report, it stated that it had “identified a number of areas in which the internal legislation or practice does not meet Council of Europe standards.” Nevertheless, it observed “considerable progress and signals pointing towards democratic developments.” The group also
12 Radio Free Europe, 16 March 2000 (intemet version).
27 Petro-states - Predatorv or Developmental?
stated that, above all, a “change of mentality of those in power who do not tolerate any form of opposition” is required, and emphasised the key role the courts have to play in checking violations in this field. The group reported that the only human rights problem the authorities admitted existed was that of poor prison conditions. The US official 1999 human rights report for Azerbaijan, finds little scope for celebration regarding the independence of the judiciary, nor on the human rights front in generalls. It claims that judiciary is corrupt, inefficient and subject to executive influence. In most instances, the report states, Government took no action to punish those responsible for torture, police violence, arbitrary arrest and searches and seizures without warrants - practices that were considered widespread. Overall, the report finds little or no progress with respect to the seriously deficient independence and integrity of the judiciary.
Quality and integrity of the civil service The capability of state institutions is generally weak. Lack of competence and familiarity with new laws and regulations are important factors. Subsequently this is aggravated by the current crisis within the education system. Pressures on education are partly caused by the economic crisis and the stabilisation programme, but made worse by corruption, which again is partly fuelled by declining salaries for teachers and professors. Corruption in the state bureaucracy is widespread and the principal cause of the weak quality of civil service. Important appointments are filled with allies of the President and his clan - patronage rather than merit determines promotion. Most positions need to be purchased and, once bought, yield a healthy inco:me from bribes. Anecdotal evidence suggests that the position of prosecutor can be sold for close to US$2 million and that a regular customs officer lhas to pay some US$ 100,000. Any attempts at reform are thus hampered by the personal financial stakes at risk. The character of corruption has changed and its scale has increased since the collapse of the Soviet regime, even though corruption was widespread under communist rule. The complex system of barter arrangements and accumulated inter-institutional debts also complicates the situation. Moreover, the salaries of public officials have declined markedly in real terms and this is naturally an encouragement to take bribes. Corruption is both vertical and horizontal, i.e. it covers a large range of civil services and professions and it comprises individuals at all levels in the hierarchy of an institution.
The role of civil society
Non governmental organisations (NGOS) The number of NGOS has grown markedly over the past few years to count about 1100 registered organisations in 1999. They still have little influence and do not play the crucial role as mediator between individual citizens and the holders of formal power. Organisations with direct connections to the regime are fairly strong, but these cannot really be seen as voluntary. Independent Azerbaijani organisations need external support. They eagerly seek links with Western and
13 us Department of State, 25 February 2000
28 Petro-states - Predatory or Developmental?
other international institutions, who have responded by establishing a presence in Baku. Government displays very little interest in listening to them, and can easily marginalise them by harping on their foreign links. The right to association is restricted by means of a requirement for political parties and religious groups to register. Over the last years, the Government has deliberately infringed on the right of individuals to form political parties and public associations and also silenced members of the political opposition. The Government has also from time to time prevented the registration of those political parties and associations which were critical of its policies. It also continued to cancel the registration of some legally registered associations, and large-scale peaceful public demonstrations still risk being either suppressed or refused. Moreover, the Ministry of Justice has denied registration to a foreign Christian group but allowed it to continue to function. However, without registration it is impossible to get a bank account, rent property and to act as a legal entity. This policy is supported by a law which prohibits religious “propaganda” by foreigners, and another which permits the production, importation and dissemination of religious literature only with the agreement of local government authorities. The overall situation with respect to religious freedom has improved lately, however, according to the latest US official human rights report, following President Aliyev’s commitment to do so in November 199914.
The media andfreedom of expression The new constitution from 1995 provides for freedom of speech and the press, and the censorship was officially abolished in 1998. Despite this, the Government continues to deny broadcasting licences to several organisations applying to open independent television and radio stations. The Government can create problems for newspapers since most of them are printed in the Government’s publishing house. Thus the self-censorship that journalists have exercised for years prevails. The Government controls most of the radio and television stations and opposition parties have virtually no access to these forms of media. In July and August 1999, authorities forced all but two of the regional television stations that were broadcasting without licences to close. While Georgia “’hndArmenia probably have a broader and more critical public debate, Azerbaijan is well ahead of other Muslim countries in the region. Azerbaijani newspapers cover a wide spectrum of political opinion. Progress is being made, particularly in the most important medium, television. The state- owned and politically controlled national television shows signs of a fairer and more balanced coverage. Independent radio and television stations are cropping up, even though opposed by the Government. Some people have access to satellite television. The intemet is an important mechanism for (potentially) unrestricted communication and association, although still only available to a fi-action of the country’s population. Despite the significant limitations on these freedoms, Azerbaijan has a foundation for public debate through the media and civil organisations. It remains to be seen if this foundation can be built on to create the institutions necessary to guarantee
14 US State Department, 25 February 2000
29 Petro-states - Predatory or Developmental?
civil and political rights. Freedom of expression in Azerbaijan currently faces two equally plausible alternative futures: one where public debate flourishes in a climate of tolerance, and another where the state continues to intimidate journalists and stifle fi-ee expression. So even if civil society in general is weak, and has little influence on the government, there are encouraging signs of a climate of political activism. that can form a counterweight to the Azerbaijani tendency towards personalised power.
Location of economic power While Azerbaijan has abolished the system of central planning, the economy continues to be dominated by the old structure with state c}wned enterprises controlling the majority of the country’s physical assets. A privatisation prograrnme was initiated in 1996 and had as its objective to sell two-thirds of state assets in the productive sector. Initially it proceeded at a quick pace. By January 1999 about 20000 small enterprises and more than 500 medium enterprises had been privatised through voucher auctions. The second stage of privatisation of the largely untouched medium- and large-scale enterprises has been postponed many times. The timetable for this privatisation, also including large banks, is uncertain and this is one reason why the IMF and the World Bank in early 2000 (February and March respectively) suspended key lending programrnes in Azerbaijan. Private sector development is further hindered by the lack of public sector reform, another reason for stopping Bretton Woods support for the fragile economy. Taxation and regulations as they are practised hamper private investments. Again corruption is of particular relevance and concern. Corruption often adck to the costs of commercial transactions, particularly where it is arbitrary and unpredictable. According to the consultancy Control Risk Group, Azerbaijan is ranked among the four most corrupt countries in the world. Although firm data is sparse, the incidence of corrupt activities has increased markedly since the Soviet regime collapsed in 1991. On Transparency International’s corruption index for 1999/2000, Azerbaijan features at the very bottom of the league (96 out for 99), on par with Indonesia and only surpassed by Nigeria and Camerc~on. In spite of serious impasse in structural reform by mid-2000, some headway has been made in the past. This may to some extent have reduced the opportunities for corrupt behaviour in parts of the public sector and generally imprclved the business climate. Both domestic and foreign trade regimes have been substantially liberalised with the abolition of the state order system, export and import quotas, licensing requirements and the export registration scheme. External tariff rates have been simplified with little dispersion. State-owned trading companies involved both in exports and imports, including the cotton monopoly, have been either privatised or liquidated. There are no legal obstacles to foreign investors repatriating profits earned in Azerbaijan to foreign bank accounts. Nor are there legal obstacles to converting local currency earnings to foreign currencies. However, distribution of profits from joint ventures is subject to an additional tax of 15 percent when transferred abroad. Foreign investors may also be required to put 15 to 25 percent of their operating capital into a “reserve fund” which cannot be withdrawn from the country while operations are ongoing in Azerbaijan. There are conflicting views on how damaging corruption is for economic activity and development of the private sector in Azerbaijan, although almost everybody
30 Petro-states - Predatory or Developmental?
agrees that the situation is serious. On the one hand there are indications that corruption is highly organised and that it is relatively predictable, at least for business operators. The World Bank and IMF also report that a number of regulato~ reforms have been implemented which should reduce the scope for taking bribes. Exarnples include abolition of the state order system, export and import quotas, licensing requirements and export registration scheme. Still, other regulations no doubt give public officials ample opportunities for corrupt activities. It has, for example, been reported in the press that some 110 Turkish companies left Azerbaijan k 1998, pointing to arbitrariness and corruption among government officials as well as an unclear and frequently changing tax policy, in addition to a slower than expected growth k the oil sector. All in all, widespread patronage and corruption continue to permeate public as well as private sectors, seriously inhibiting business developments and allowing for virtually total and discretionary control by the President and his executive branch of government as to how state revenues, increasingly from oil production, are spent. In theory, increasing resources might still be made available for the public good. What key figures for public spending tell about that story is discussed in the next chapter.
Trends in public expenditure Trends in public spending on health and education constitute our key indicators for deciding for whom tfie state is run, or in other words whether the state is moving in a developmental or predatory direction. Table 5.1 shows that Azerbaijan has experienced a dramatic fall in expenditure on these social services, both as share of GDP and in real terms.
Table 5.1 Government expenditure on health and education
Heaith 1990 1992 1993 1994 1995 1996 As share of GDP 2.9% 2.7?40 3.3% 2.4% 1.2?40 1.570 As share of total expenditure 7.3% 5.6% 6.0’70 4.6% 6.2~o 8.0?40 Index of real health 100 71 67 35 18 20 expenditure (1990=100) Education 1992 1993 1994 1995 1996* As share of GDP 6.4% 7.1% 4.9!/0 3.2!40 3.6’XO As share of total expenditure 13.4% 12.8’% 10.2% 14.3!40 19.2% Index of real education 100 83 45 27 24 expenditure (1992=1 00) * Figures for education expenditure in 1996 are estimated
Source: World Bank Poverty Assessment, 1997
UNDP’S 2000 human development report brings out an even more negative picture (UNDP 2000). Spending on health has gone down fi-om 2.6 per cent of GDP in 1990 to 1.2 per cent in the period from 1996-98. The same pattern is apparent for education, where spending falls from 7,0 per cent of GDP in 1990 to 3 per cent in the period from 1995-97. These figures provide little reason for optimism with regard to the country-wide distribution of benefits from oil revenues.
31 Petro-states - Predatory or Developmental?
5.2 Angola Angola is a poor country with human development indicator~~ far below most other countries at comparable GNP per capita levels. Below are some key figures from UNDP’S 2000 Human Development Report, all 1998 figures:
Population: 12.1 million
Appr. Population growth: 3!Z0 GNP per capita: US$ 380 Life expectancy at birth: 47 years Adult literacy rate: 42% Division of power within the Angolan state
MPLA, the victorious of the competing— guerrilla movements, soon after independence proclaimed Angola’s first constitution which establishec[ a one- party state in accordance with Marxist-Leninist principles and following its close relations with the Soviet Union. The MPLA took on the role of the revolutionary vanguard on the model of the Soviet communist party, which included full domination of all state organs and supporting “mass movements” for women, youth, trade unions etc. This domination of the party state was brutally reinforced by the purge of a rebel faction led by Nito Alves. In a rentiniscence of the Moscow trials in the 1930s, thousands were liquidated and the s:mall intelligentsia decimated.
By the late 1970s, a highly centralised system of political power emerged based on a small party elite with a predominance of military leaders, a heritage fi-om the war of independence and the ensuing civil war. Indeed, by 1979 the armed forces controlled the majority of the seats in the powerful Central Committeel 5. While a People’s Assembly was set up in 1980, with members appointed by the party, real power was concentrated around the President as the chief executive. This also included a centraliseds ystem of economic planning and management along Soviet lines. With the peace process in the early 1990s significant changes took place. The MPLA officially abandoned its Marxist-Leninist ideology and a new, post cold- war constitution was enacted. This proclaimed a multi-party system, respect for human rights, freedom of expression and association. On paper, the state also renounced its control over the economy. In 1992 elections were held both for President and for the newly established National Assembly. To the surprise of many observers and probably the government itself, MPLA achieved comfortable majonties16. As a result UNITA soon thereafter resumed the military conflict and the entire reform process was stalled. The new parliament never had a chance to establish itself as an independent political force and remains a hostage of the civil war. The splinter groups of nominal opposition members are totally dependent on the
15 Tvedten 1997:45. The membership of MPLA had shrunk from 60.000 in 1975 to 16.500 by 1979, which underlines its elitist orientation, and “peasants and workers were a clear minority” (idem).
16 A second round of presidential elections were planned since dos Santos won (scarcely) less than 50 percent of the votes, but this never took place. For accounts of the elections and the turmoil surrounding them see Tvedten 1997:51-61 and Maier 1996.
32 Petro-states - Predatory or Deve]oDmental?
government for basic amenities such as housing, cars and telephones. As a result of the war, many deputies have been increasingly isolated from the voters. Of the 220 deputies, 130 were elected on national lists. Of the remaining, more than half had by 1998 not visited their constituencies since the electionslT. The formal mandate of the Assembly expired after four years, in 1996, which means that its popular legitimacy, contested from the outset, becomes more and more dubious. Real power remains, despite the new constitution, with the President and has become increasingly personalised around Eduardo dos Santos who has held office since 1979. The formal government consists of a Council of Ministers appointed by the President and on paper accountable to the National Assembly. The latest MPLA Congress, held in 1998, decided to transfer formal powers fi-om the ministries to the presidential apparatus. In reality ministers are figureheads to be dispensed of by the President. Since January 1999 he has formaHy taken over the position of Prime Minister and remains commander-in-chief of the armed forcesls. In the constitutional void created by continuing civil war, power is not only personalised but increasingly exercised through informal channels and patronage by a small circle of political and military leaders around President dos Santos. Through an elaborate network of co-optation and clientilism this leadership forms a closely knitted group which also controls the commanding heights of the economy, especially the petroleum sector which is the backbone of the entire government, see below. At the local level, the government has never held elections envisaged in the constitution. Some local governors are notorious for abuse of power for personal enrichment, “turning their provinces.. into private fiefdoms”l g. The justice system suffers from the same weakness as the political. Many key provisions in the constitution that were intended to guarantee the rule of law, remain only on paper and related legislative reforms have not been enacted. The penal code from 1886 is, for example, still in place. At the provincial level, the court system is rudimentary even in formal terms. Weak capacity, lack of qualified staff and the ubiquitous problems of inadequate salaries and corruption plague the entire judiciary from top to bottomzo.
Quality and integrity of the civil service Since the 1980s, nepotism and corruption has pervaded the entire civil service. According to Tvedten, this has been less related to family connections than to loyalties developed among the military, dating back to the war of independence. To some extent, it has also been a reflection of ethnic affiliation. Whatever the motives, “recruitment tended to exclude people with relevant qualifications”2 1.
17 Hodges 2000:55.
18 Hodges 2000:49-54.
19 Hodges 2000:58.
20 Hodges 2000:66-70.
2] Tvedten 1997:49. Petro-states - Predatory or Developmental?
During the 1990s, this problem has been made worse by the continuing decline in civil service salaries. In 1999 it is estimated that the purchasing power of civil servants fell by 90 per cent, to a level where it is evident that ncl civil servant can even survive on an official salary, not to speak of a decent standard of living. As a consequence, petty corruption is found at all levels and in all sectors of society. Teachers charge parents for classes and textbooks and doctors patients for medical services and medicine. Police and customs officials take advantage of their positions to harass and extort bribes from individuals and businesses. Despite this, hardly any corruption cases have been brought before the courts, and, again, the relevant legislation on transparency and public audits remains a dead letterz2. In the media, petty corruption can be covered and exposed, but not the abuse that is widely believed to take place at higher levelszs.
The role of civil society During the party-state era the very notion of civil society was anathema to the MPLA regime with its Soviet style mass movements operating from the top downwards as instruments for the ‘vanguard’. With the peace process, constitutional reform and the general political ‘thaw’ in the early 1990s, space was suddenly created for independent voices. Dozens of political parties and numerous NGOS sprang up. The established churches began to play a new role, on the political as well as the social scene. Independent media saw the light of day for the first time since independencez4. New laws of association. and mass media enacted in 1991 provided formal guarantees for these newly won freedo:ms, but, again, reality worked differently with the resumption of civil war. NGOS continued to develop, but most of them were linked to international aid organisations involved in service delive~ for foreign donors. The capacity of national NGOS remained limited, in terms of management, logistical capacity and diversification of funding. Among trade unions, very few have been able to establish an independent organisation of any importance. The teachers’ union, Sinprof, though, has led several strikes during the 1990s. Both structural reasons (e.g. the limited size of the formal sector of the economy) and repression by the government serve to hold back the development of organised labour as a democratic force. Within the media, the liberalisation that began in the early 1990s is now in an ambiguous state. The state remains in control over television and the major daily newspaper, Jomal de Angola, but smaller independent papers and radio stations have been allowed to operate. Some of these keep testing the limits of the government’s tolerance, at times with fatal outcomes. Two journalists have been assassinated after uncovering corruption scandals, and arbitrary detent ion and harassment is a constant threat to the independent media. The government has
22 Hodges 2000:75-79.
23 Unfortunately, Angola is not covered in Transparency international’s corruption index or by other international comparative corruption surveys that we know of. This contributes to the problems in documenting the level of corruption in Angola, and in making meaningful comparisons with countries such as Azerbaijan.
24 Tvedten 1997:135-137.
34 Petro-states - Predatory or Developmental?
issued explicit warnings against ‘anti-patriotic’ reporting and there is no effective recourse for protecting freedom of expression in the courts25. In a report published in late June 2000, Amnesty International expresses deep concern with respect to freedom of expression in Angola2b. Amnesty claims that at least 30 journalists have been summoned for questioning since January 1999, and many have been kidnapped, physically harassed or faced threats of physical harm. On 31 March 2000, Rafael Marques, a freelance journalist, was sentenced to 6 months in prison and a heavy fine for defamation. Voice of America’s office was attacked by armed assailants in June 2000, and in July 2000 two VOA journalists experienced theft of key equipment by people believed to be police ofllcerszT. Amnesty concludes that Angola has failed to meet its commitments to uphold press freedom and other human rights, and that the government lacks the political will to implement this commitment. On the positive side, by mid-2000 civil society is seemingly more active than before in pushing for peace - with clear-cut messages conveyed to both the government and UNITA. The Congress for Peace, organised by church groups and attended by other NGOS, senior opposition politicians and international observers, took place from 18-20 July 2000 at the Catholic University in Luanda.
Location of economic power With the abandonment of the state-controlled economic system and the party- state, a formal opening was made for developing a market economy, but again the main changes remained paper provisions. In formaI terms, the economy was liberalised and to some extent privatised, but in reality the closely knit political- military elite that has run the country since independence retained full control. Formal ownership and state management has simply been replaced by private enrichment and political patronage. The most important mechanisms in use by the vested interests include
● Privileged access to foreign exchange and the system of fixed rates facilitating so-called ‘round tripping’ by which purchasing power could easily be doubled or tripled. This practice was, however, curtailed with the currency reform of 1999 that approximated the official to the parallel exchange rate. . Similarly privileged access to government credit especially through a state bank ostensibly involved in development of agriculture and fisheries. When its operations were suspended in 1999, the funds distributed were considered lost for the state and remain in the hands of the selective group of recipients.
● Privatisation of state property soon became another way of enriching the elite, including both urban real estate of prime value and attractive commercial plantations. These were often transferred to powerful individuals for nominal amounts and thereafter turned into private fortunes.
25 Hodges 2000:75-79.
26 Amnesty International: Freedom of expression on trial, AFR 12/08/00, June 2000.
27 The Media Institute of Southern Africa, 21 July 2000.
35 Petro-states - Predatory or Developmental?
. Diamond concessions have served as a particularly notorious mechanism for enrichment of the well-connected. Concessions awarded to members of the elite and their families form the basis of joint operations with foreign partners who take all the risks and cover all the costs. Trading diamonds has been one of the principal avenues of enrichment by the elite and prc~fits were to be made by making deals across politico-military Iineszx. . Military procurement in the order of US dollars 5 billion since 1992 is another source of bribes and rent-seekingzg. It is known that secret arms deals are handled by companies closely connected with the political-military leadership. Since these are normally not accounted fcir in any official budget, purportedly to keep military planning confidential,, commissions and profits can be collected without public knowledge. The most important nexus between the political-military elite,, economic power and the public purse is, however, the petroleum sector itself. By providing 70-90 per cent of government revenue (depending on the international oil price) and 90 per cent of exports, oil is the cornerstone of the Angolan economy. The state oil company, Sonangol, is both regulator of public policy and participant in licences in production sharing agreements with international oil companies. The company has some 5000 employees who benefit from special arrangements for schools, clinics, supplies, imports and scholarships for their children abroad. Such expenses are deducted from taxes and therefore never enter into public accounts. In addition, the international companies pay large advance bonuses when major deals are signed, in 1999 reportedly 870 million dollars, which has not been fully accounted for in public budgets. It has been reported that a considerable share was channeled into the Fondation Eduardo des Santos, a quasi-official fund controlled by the president and widely suspected of distributing patronage and support to his clients30. The largest and most important extra-budgetary operations take place in complex financial transactions between Sonangol, the National Bank and the Finance Ministry. Since Angola has a heavy debt burden and therefore problems with access to ordinary commercial credits, a large part of its foreignl trade is ‘based on short-term, oil backed loans which are not recorded in any official document. IMF has estimated unrecorded expenditure to close to 40 per cent c~fthe government budget for 1997. This combination of large capital flows, secrecy and absence of accountability provides ample opportunity for rent-seeking. Analysts and observers are in agreement that, again, the spoils are shared with the same closed elite -- the top echelons of the government and the armed forces – the ‘oil nomenclature’ in the terminology used by leBillion and Ferreiras 1. This term is used to underline the exclusive and stable character of the group of beneficiaries that constantly exploit the system by virtue of their positions and connections.
28 Hodges 2000:139.
29 LeBillion 2000:15.
30 Major foreign companies operating in Ango[a are expected to contribute 100.000 dollars annually to this fund. If this is the case, its resources are of considerable magnitude compared with public funding for health and education.
31 This fusion of political, military and economic power is also underlined by Tvedten 1997:62-63.
36 Petro-states - Predatory or Developmental?
While the centre of economic power is in the hands of the privileged few, the large majority of the population remains outside the formal economy. A recent survey of the Iabour market in Luanda shows that even in the capital aImost two thirds of the work force is employed in the informal economy, most of whom are categorised under ‘retail commerce’ – i.e. the army of street vendors of every conceivable kind. Small-scale manufacturing and crafts are almost non-existent for Iack of credit, bureaucratic harassment, corruption and to some extent competition from cheap importssz. The barriers to establishing productive employment in the formal economy seem to be very high and very effective in excluding whatever entrepreneurial initiative may still be found in the population. This also means that the tax base for the government is very constrained as most of the formal sector is made up of public employees, whose salaries are already below the subsistence level. Although a bleak picture indeed, the year 2000 has seen some developments that could move things on to a more positive track. Increased civil society engagement for peace has already been mentioned. Along another vein, the various domestic and international critics of the present government in Luanda have high expectations of the IMF Staff Monitoring Program (SMP), which was initiated finally on 3 April 2000. Human Rights Watch, for instance, believes that..’’the monitoring agreement represents a positive first step in establishing transparency and accountability within the government of Angola”33. Although it is too early to judge where the SMP process is heading, the agreement on the programme itself is at least a sign that the Angolan authorities accept international scrutiny and monitoring of key resource flows. Trends in public expenditure As our main indicator of the objectives of the state, we need to review briefly the pattern of expenditure on basic social services in Angola. The starting point is bleak indeed with most social indicators below the Aftican average, as shown in table 5.2 Table 5.2 Social indicators inAngola and sub-SaharanAfrica Sub-Saharan Indicators Year Angola Africa Life expectancy at birth, 1996 (years) 1996 51 42 Under-5 mortality rate (per 1,000 live births) 1996 170 274 Net enrolment ratio, 1st6 classes of basic education: Total 1996 61 50 Boys 1996 66 52 Girls 1996 56 48 per cent of pupils reaching the 5ti class of basic 1996 67 30 education Adult literacy rate: Male 1995 67 50 Female 1995 50 30 Source: Hodges 2000:35
32 Adauta de Sousa 1998, Hodges 2000.
33 Human Rights Watch, New York, 26 June 2000.
37 Petro-states - Predatory or Developmental?
The figure for primary education is especially alarming with em-olment ratio not only well below comparable countries in the region, but also on decline compared with the post-independence peak twenty years ago. This implies that cwer two thirds of children will reach adulthood with four years or less of education, and thus without having consolidated the basic skills of reading and writing Adauta estimates that 21.7 per cent of children under 14 in Luanda have never attended school, which “is due to a large extent to the high level of Government disinvestment in recent years in the area of education’’J4. This downward trend is clearly reflected in the figures for government expenditure.
Table 5.3 Government expenditure byfunctions, 1993-97)
1993 1994 1995 1996 Est. 1997 Inpercent of total Education 7.2 2.8 5.1 4.6 4.9 Health 5.8 3.8 5.7 3.0 3.1 In percent of GDP Education 3.8 1.8 2.9 2.5 2.8 Health 3.1 2.3 3.3 1.6 1.8 Source: Hodges 2000:1 I3
With GDP, depending on oil prices, hovering around 5-6 billion dollars,35 this means that total spending on education stands at less than US$ 200 million annually. It has been reported that about one third of this is allclcated to (overseas scholarships,36 which leaves appr. 130 million to be shared among an estimated 6- 7 million children below 15. This is only an illustration of the fact that both education and other basic social services in Angola are in ruins as a direct result of government negligence37. According to the World Bank, social spending increased incrementally in 1998 and 1999 (from a low level indeed), which the Bank considers totally insufficient. In the background documents for its Angola Second Social Ac~ion Funcl Project (FAS II), approved in July 2000 and expected to be effective in September 2000, the World Bank expects that the IMF Staff Monitored Programl (running from 3 April 2000) will increase budget allocations to health and education substantially38. The FAS II project itself, financed on IDA terms, has a budget of US$ 33 million (the government and bilateral donors will provide anotlher US$ 14), which will be aimed at capacity-building and restoration of social and economic infrastructure of communities affected by conflict. In addition to the implementation of the IMF programme, an increased willingness of the Angolan government to prioritise social spending is mentioned as an explicit condition for launching the project.
34 Adauta 199718.
35 UNDP 2000:5 projects GDP for 1999 to 5.294 million dollars.
36 LeBillion 2000:16.
37 Unfortunately, recent official reports from sources such as the UN and the World Bank (e.g. HDR 2000) leave only blank spaces for most Angolan social indicators. It is thus difficult to attain more updated figures on trends in social spending.
38 The World Bank, Angola project information (web-based), July 2000.
38 Petro-states - Predatory or Developmental?
6 Comparing Azerbaijan and Angola Angola and Azerbaijan constitute two of the most challenging tests of modern petro-state development. Do they serve to confirm the pessimistic “greedlock thesis” as developed in chapter four above, with revenues trickling away instead of trickling down? Or do we recognise steps towards benevolent oil states, supported by international institutions and a new generation of socially responsible energy corporations? The aim of this chapter is to shed light on these basic questions by comparing Angola and Azerbaijan against the backdrop of the analytical fi-amework presented above.
How different starting points? There are broad similarities as well as some striking differences between the two countries. The key reason to group them together for our purposes is, of course, the dominance of oil in the economy and expectations that the real oil boom has just started. They have already developed important characteristics of what is often termed (capital-deficient) petro-states (Karl, 1997), while there is still scope for breaking the vicious cycle of oil-dependency. Angola leads the way in terms of present attraction to the global oil business, but Azerbaijan is definitely not lagging fhr behind.
Both countries are poor in terms of GNP per capita; $380 for Angola versus $480 for Azerbaijan (UNDP 2000). They also continue to share the fate of prolonged and deadly civil wars, although the Angolan conflict stands out as the most widespread and deadly one. In that sense, a solution to the civil war is even more crucial to turn the vicious cycle in Angola than in Azerbaijan. The last decade has seen economic and political transition processes taking place in both countries, while there is still a long way to go to satisfy basic demands for political and economic governance. Their relationships with the UN and international financial institutions are gradually broadening, but in a typical on and off process characterised by deep controversies.
One important difference in our context is that of key welfare and human capital indicators. UNDP estimates Azerbaijan’s life expectancy at birth by 1998 to be 70 years, while the corresponding figure for Angola is down at 47. Adult literacy rates differ even more dramatically: 99 per cent versus 42 per cent. Overall, Azerbaijan ends up as number 90 while Angola ranks as number 160 among the 174 countries covered by UNDP’S 2000 human development index. In a general way, therefore, Azerbaij an’s population stands a far better chance of influencing
39 Petro-states - Predatory or DeveioDmental? the turn of events, for instance through the participation in public debates about political fhtures, and through voicing demands for a large slice of the cake in terms of oil revenues.
The discussion below will bring out more details in this regard along the five variables analysed in the previous chapter, and assess to what extent the situation is changing in a “predatory” versus “developmental” direction. We are also seeking for clues as to how the impacts of resource endowments (primarily oil and gas) may condition (lack of) progress.
Division of political power In neither of the two countries are the democratic institutions assumed to Iimit or balance executive power, functioning according to anything like democratic ideals. Azerbaijan comes out better than Angola, though, not least in that elections, albeit imperfect, have been held recently (1998) where the sitting president faced some real oppositions. The country is alscl opting towards national parliamentary elections in November 2000. The June 2000 Council of Europe invitation for Azerbaijan to join the organisation confirms expectations that political developments are moving in the right direction. This boost of Baku’s democratic image was tempered, though, by criticism by the US State Department and OSCE of serious deficiencies in Azerbaij an’s electoral law, and whether opposition parties will (or can) participate in the upcoming election is highly uncertain40. Corruption and lack of integrity of the judiciary are still funcbrnental problems in Azerbaijan; which is probably where the Council of Europe will put the heaviest pressure on Azerbaijani authorities. Pending significant improvements in this area, NGOS and opposition parties aiming to check the @olitical as well as economic) powers of government still lead a dangerous life.
As for Angola, Hodges (2000) underlines that there has been no return to the overtly totalitarian one-party system that preceded the political reforms of the early 1990s. However, the National Assembly does not yet provide a really effective system of parliamentary accountability. There have been no elections for eight years. Democratisation of Iocal and provincial government is, according to Hodges, postponed indefinitely, and more or less war-related repression has instilled renewed fear and alienation in the population. Human rights abuses occur on a wide scale, committed by both sides in the conflict, and”the justice system is too weak and corrupted to uphold the rule of law even in the parts of the country where it formally functional. While a definitive ending of the war would remove an alibi or a pretext to curb democratic fi-eedoms, the virtual absence over the last years of efforts to stimulate political and judicial reform throws the political will to move on this into serious doubt.
The potential for external influence on political and judicial refcmn differs in one important way between Angola and Azerbaijan. While the UN and multilateral
39 This in contrast also to the situation in neighboring Kazakhstan, where president Nazarbayev was re- elected in early 2000 with 99 percent of the vote.
40 BBC Worid Service, 25 .lI.@ 2000.
41 Hodges, 2000, p 144-149 (concluding chapter).
40 Petro-states - Predatory or Developmental?
development banks have some political leverage in both countries, there is no parallel in Angola to the pressures exerted by institutions such as the Council of Europe and OSCE in Azerbaijan. Such institutions are admittedly relying more on carrots than on sticks. Their potential in “shaming” governments into political and human rights reform should not be underestimated, though, particularly in cases where govemtnents at least seemingly give high priority to be ‘acceptable players’ in the world community. The statement that they would Iike to join NATO is just one testimony to this from the Azerbaijani leadership’s point of view. On the other hand, the complex rows within SADC on the Congo war and the electoral troubles in Zimbabwe demonstrate the potential but aIso the present limitations in Afi-ican regional organisations in influencing democratic progress within their member states. The international community has significantly fewer channels by which to influence Angola than is the case with Azerbaijan.
Quality and integrity of the civil service Similarities are more striking than differences when comparing the quality and integrity of civil services in Angola and Azerbaijan. And the picture is bleak indeed. Corruption and cronyism are permeating the very offices whose mission it is to manage and distribute public resources for the common good. The government can buy its way through the bureaucracy in pursuit of their own (often selfish) aims, and civil servants widely demand bribes or tips from the public for the provision of services.
An important driving force behind the state of affairs is si~ificant salary reductions due to inflation and budget cuts. Increasingly, and particularly in Angola, households can no longer rely on civil servants’ salaries for their survival. The problems are confounded by significant payroll increases and proliferation in public ministries and offices, and the drain on scarce talent by the emerging (if still smaIl) private sector. The increasing arbitrariness and abuses at the hands of civil servants further tarnishes the image of the public administration, and makes it even more difficult to recruit highly needed expertise.
On the face of it, Azerbaijan stands better placed than Angola in terms of redressing the decline in public administration quality. The dramatic differences in literacy and education quoted above put this country at a clear advantage when it comes to the quality of human capital and the recruitment base for a gradually improving public service. In Angola, on the other hand, only 2,6 per cent of the civil servants have first degrees, compared to about 15-20 per cent for Afi-ica as a whoIe.lQ For Azerbaijan to realise its advantageous starting point, however, requires basic changes in political governance and division of power, and the (hitherto lacking) political will to implement urgent reforms.
Bilateral and multilateral donors as well as international oil companies are all increasingly engaged in efforts to improve the quality of civil service, albeit from a low starting point. State oil companies and the official energy administrations are naturally subject to investments to this effect. Sustaining this sector may have some positive knock-on impacts on the wider system. The flip side, though, may be a further demoralisation of the larger part of the administration, as talent and
42 UNDP Human Development Report, 1998.
41 Petro-states - Predatory or Developmental?
resources concentrate in the relatively speaking lucrative oil sector. This represents an important challenge to international institutions with econo]my-wide mandates such as UNDP and the World Bank.
The role of civil society Civil society organisations in both countries still face considerable constraints on their ability to wield political influence and hold those in power accountable to democratic and developmental ideals. The civil war constituting a clearer pretext for such repression in Angola than in Azerbaijan, both governments, restrict certain NGO action by law. They also allow badly disciplined police forces to intimidate political activists as well as journalists, sustaining a cllimate of fear that encourages self-censure and discourages peacefid protest. Human rights abuses are widespread, and the political will to rectifi this situation appears almost non- existent. Moreover, as elsewhere in the developing world, donors with the best of intentions often risk becoming liabilities to domestic NGOS struggling to :maintain Legitimacy visa vis governments sceptical of foreign influence.
Political traditions moulded in anti-pluralism marxist one-party state pasts and (for Angola) low literacy levels are other reasons why civil society is still comparatively weak in the two emerging petro-states. The weakness is not uniform, though, and repression is definitely less severe than it was ten years ago. Newspapers do criticise government (in)action, corruption and the tendency of oil resources to, trickle away rather than benefiting the public at large. The July 2000 peace congress in Angola, which came out with clear demands cm the government as well as UNITA, gathered at least 200 representatives of opposition parties, church groups and other NGOS. Donors, international NGOS and oil companies are joining forces for the first time in learning exercises as to how to support civil society in weak states without undermining its legitimacy4q.
Although few people in Angola and Azerbaijan still have intemet access, its potential for effective use by NGOS is probably si~ificant. Azerbaijan’s government seems to have realised intemet’s civil society mobilisation potential. This has earned it a place at the 20 Enemies of the Internet list developed by Reporters Saris Frontiers (RSF). According to RSF, “although there are privately owned ISPS in Uzbekistan and Azerbaijan, their operations are controlled by the telecommunication ministry, which is responsible for chastising those who speak out against the government’’ll. As international NGOS such as C{lobal Witness are increasing the pressure on international oil companies and oil-rich governments, however, intemet may soon create highly effective links between professional outside critics and ii-ail but growing domestic NGOsJj. The governments in Angola and Azerbaijan are still retaining control in key areas, hut thanks to bold media groups and the intemet, their monopoly on information and ultimately on the formation of the political agenda, is increasingly at risk.
43 The Global Compact as convened by the UN Secretary General is one important forum to this effect; the World Bank-initiated Business Partners for Development is another. This latter group includes a socalled cluster on oil, gas and mining companies, which is currently chaired by CARE International with BP and the World Bank as co-convenors.
44 Reporters Saris Frontiers, August 1999.
45 See, for instance, Global Wimess 1999/2000.
42 Petro-states - Predatory or Developmental?
The location of economic power Few political leaders have more economic power at their virtually complete discretion than those leading petro-states. Oil wealth provides them with enormous resources to buy off opponents, build alliances and dispense favours to clients. The high stakes involved (in terms of political survival as well as private wealth) provide formidable incentives to shy away from accountability and transparency of economic transactions. Oil wealth reduces the need to impose unpopular taxes on those whose loyalty a government tends to depend on, although particularly in the case of Angola one may argue that a petro-state really does not need widespread popular support. The potency of pressures tlom international bodies such as the World Bank and IMF also withers away as oil money fills the government’s coffers.
In the absence of effective controls on political leaders’ use of oil money, the likelihood is high for states developing a predatory character and in so doing supporting the ‘greedlock’ hypothesis as outlined in chapter four. The discussion above has shown that Angola and Azerbaijan share many negative features in this respect. The presidents retain real control of resource flows in the absence of transparency and accountability in the fledgling privatisation processes or other efforts at placing economic governance at arm’s length from political leaders. Informally, the lack of transparency allows for few barriers in the manipulation of oil revenues to satisfy elite interests and finance the (often dubious) means of retaining power. Both leaders wield control through networks of allegiance dating back to their totalitarian pasts in the 1970s and 1980s.
However, the virtually complete and discretionary executive control over oil revenues is increasingly under pressure. The positive siagns identified aIong the other dimensions discussed above (e.g. civil society mobilisation) imply growing demands for influence on public spending. Dos Santos and Aliyev nmy therefore be forced to end ignoring the goodwill of international financiaI institutions, economically as well as politically. As of mid-2000, a window of opportunity exists with the ongoing IMF Staff Monitoring Programrne, which aims to enhance economic governance not least through installing a sense of transparency in the use of public finances. The resumption of the World Bank’s second social action find project might also contribute in the same direction, in that the Bank seems to believe that there is now a momentum for improving Angola’s record in this area - albeit from a very low level.
In Azerbaijan, on the other hand, the World Bank and IMF suspended major lending prograrmnes in the spring of 2000 quoting lack of progress on key economic governance indicators. Although we are left to speculate on why exactly the Azerbaijani government chose to defy international pressure in this respect, the increasing flow of oil revenues reduces the incentives for Aliyev to comply with demands from Bretton Woods institutions. This disincentive is a serious challenge to any hope of enhanced international influence on petro-state governments. As long as oil money keeps flowing in, the governments in Baku and Luanda have little problems in bearing higher than normal interest charges and short maturities. These are the disadvantages of saying no to IMF that most other poor countries cannot afford to ignore. The irony is that those who might need the toughest doses of conditionality are those who can enjoy the luxury of ignoring it.
43 Petro-states - Predatory or Developmental?
Public spending on health and education While the other four variables concern the question of -who rzms the state how?-, the fifth one looks at the objectives for which the powers of the state are used -for whom is the slate run? As argued in chapter 4 above, public expenditure can be concentrated for the benefit of a minority or dispersed to the advantage of a majority. We chose spending on health and education as the best indicators of political will to share the resources of the state widely among the pc}pulation. Moreover, our analytical framework suggests that positive developments along the four variables just discussed would be conducive to improvements in the score on this fifth variable, in the form of less repression and thus enhanced scope for political mobilisation for better welfare policies.
Unfortunately, the survey of public spending in chapter five makes depressing reading. Public spending on education and health as a percentage of IGNP has decreased significantly throughout the 1990s in both Angola and Azerbaijan. For Azerbaijan, UNDP’S 2000 Human Development Report confirms health and education down more than 100 per cent in 1996-98 as compared to. 1990 (with health expenditure at 1.2 per cent of GNP in 1998!). Figures for Angola are broadly similar, having dropped down to 1.5-3 per cent of GNP in the late 1990s. The poor people of Angola saw social sector spending down from 20 to about 10 per cent of socalled executed budget expenditure tlom 1993-97, while military spending was up in the same period from 24 to 36 per cent46. We also saw that social indicators for Angola are conspicuously low in a comparative sub-S aharan African context, and the developments in public spending provide little evidence of positive changes in that regard.
Towards predatory or benevolent petro-states? Towards the end of chapter four, we stressed the point of not being deterministic about the future of petro-states. The possibility was elaborated to turn the greedlock thesis on its head, or in other words to give the emerging petro-states the benefit of the doubt. This would happen if the increasing oil revenues available were used to facilitate a gradual change from a predatory to a developmental state by ‘greasing’ the economic and political refbrm processes. We also stressed that our aim is not to reveal the state of affairs in a particular country at a specific point in time, but to analyse trends and the direction of change over time.
The question now in summing up is what the comparative analysis of Angola and Azerbaijan conveys about change in developments along the five variables discussed above. To what extent have we found reasons to reject at least elements of the greedlock thesis condemning the population of petro-states to continued repression and economic misery? For both countries, unfortunately, our analysis does not provide convincing evidence of developments towards a more benevolent petro-state. Some rays of hope exist, though, and the situation looks somewhat better in Azerbaijan than in Angola. The positive elements of the Azerbaijani picture are first of all a literate population, although reduced spending on education threatens to spoil some of the achievements of the past. In short,
46 Hodges 2000:37
44 Petro-states - Predatorv or DeveloDmenta]?
literacy increases the potential to mobilise people for necessary reform. Moreover, developments on the political arena, although mixed and with setbacks, may be moving in the right direction. An important test will be whether a combination of internal and external pressures manages to force the ruling elite to ensure a free and fair election in November 2000. But any substantial change in the present ruling elite’s performance can only come about in a longer term perspective. This is not least because of the deepIy entrenched politico-economic grip on power by the Aliyev regime, where historical loyalties built up over decades can now be lubricated with new-found oil riches.
There are even less reasons for optimism in Angola. The basic welfare indicators are already so low as to require nothing short of a miracle even for the best of political regimes to change. By 2000 to rank significantly below the sub-Saharan Affican average in terms of human development is a bad starting point indeed. The war is a welcome pretext to resist demands for economic and political reform. But it is a real drain on resources and also on the hope and vision needed for a plagued population to turn the vicious cycles around.
There are, though, reasons to doubt whether the present regime in Luanda is prepared to change its path of predation, patronage and corruption, even in the absence of war. Sadly, the concentration of resources in the elite is probably more pronounced and more powerfhl than ever. According to UNDP social inequality has risen from very high to new extremes. In 1995 the richest fifth of the Angolan population received ten times higher incomes than the poorest twenty percent. In 1998 ‘the difference had increased to 37 times’QT,which makes Angola one of the most unequal and divided societies in the world.
The real power – and the real face of power – is, furthermore, clear in the figures referred above on public spending for health and education. In a period of increasing oil production and revenue generation to the state, the government has chosen to “disinvest” (to use Adauta’s term) fi-om basic social services which are in dire need in the population. The requirements of the war explain parts of the picture, but is no real excuse for this. It is, consequently, hard to avoid the conclusion that in Angola in the 1990s maintaining and in crucial ways reinforcing a repressive apparatus has gone hand in hand with continued and even increasing predation of the resources available to the state. This follows the logic of our ‘greedlock’ hypothesis. The partial and ambiguous political and social improvements have become more than offset by the increasing concentration of political, military and economic resources in the ruling elite. Both the ‘greed’ and the ‘lock’ are, tragically, in place.
47 UNDP 2000:1
45 — Petro-states - Predatory or Developmental?
7 Implications for the oil industry and the role of external actors The impoverished population of Azerbaijan and even more so Angola are the main victims of the two countries’ succumbing to the malign temptations of petro- state governments. At the same time, the seeds of hope, and of change, are also to be found with the individuals, community associations, religious groups, political activists and honest civil servants struggling to transform oil riches from a curse to a blessing. This is why so much attention has been given in the previous chapters to developments that might stimuIate political and economic change. Still, in a rapidly globalising world, the potential influence of foreign stakeholders is likely to be on the increase.
It is a general proposition that after the cold war the oil companies are the only external players with a tangible stake in the future of Angola and Azerbaijan. We will challenge this point of view below, but there is nothing to take away the global oil industry’s prime position in this respect. Many observers are currently focusing on international oil’s blame for the current state of affairs in petro-states. Our starting point is to take the presence and commercial aspirations of oil companies as a matter of fact. The aim is to discuss what role companies may play, if any, in moving Angola and Azerbaijan onto a more sustainable path. The typicality of this question is definitely increasing. While it was common until recently to leave the private sector alone and burden governments and international organisations with demands for welfare delive~, the corporate social responsibility agenda (CSR) is presently facing companies with political expectations unheard of only some few years back.
How can oil companies contribute to shifting Luanda and Baku’s course from predatory to developmental? We have indicated above that the interaction between the industry and its domestic counterparts, public and private, could have positive impacts by setting new standards and transferring technical and managerial competence, in addition to local employment effects. Positive impact may follow partly from various forms of projects, be they add-ens to core activities or stand alone projects e.g. in support of community development. A multitude of interesting partnerships are forged these days for such between oil companies like Shell, BP, Chevron, $tatoil and Norsk Hydro and everything from multilateral organisations to solidarity groups and human rights advocates. Just as important along this vein is to be good corporate citizens in the communities
47 Petro-states - Predatory or Developmental? where companies operate and in the way they conduct business. Again, a large number of NGOS and consultancies are stimulating such devel.opments through carrot- as well as stick-based approaches. Independent monitoring and certification of company behaviour is rapidly becoming big business, and puts increasing pressures on companies to transform CSR fkom rhetoric into ‘business practice.
A significant limitation of the approaches just described, though,, is that the main impact from petroleum activities is of a macro scale, primarily connected with generating the revenue that keeps the predatory state alive. At this kwel, the influence of individual companies is severely constrained, particularly because of their position as commercial competitors. Asking what the government intends to do with its signature bonus, is not likely to improve the standing of a company in its future relations with the authorities, whose goodwill it will continue tcl depend on as long as it operates in the country. Likewise, refising to make contributions to the social fund that bears the name of the President (in the Angola.n case), would hardly bode well.
In assessing the macro level impacts, companies can conclude either that they are none of their business or that they do have a responsibility y for the overall effects of oil revenues on the state. According to Le Billion, the former answer seems to carry the day among oil expatriates in Luanda at presentQs. We know, however, that several of the largest international companies have expressed unequivocal support for the highest ethical standards, underlining time and again that they are committed to the people, not to the government of the countries where they operateAg. If they want to take this seriously in the case of Angola and Azm-baij an, what do they do when it is clear that oil revenues tend to trickls away instead of trickling down? Like it or not, they have to face the basic problems inherent in the predatory state – lack of transparency and accountability leading to abuse of public power and corruption of public money on a grand scale. If – and this is a big if - they accept this as part of their agenda and implicitly part of their responsibility, they can begin to search for constructive measures.
While individually companies can do little at the macro level, collectively they are likely to have tangible leverage. The governments in Baku and Luanda are totally dependent not only on current oil revenues, but on the increases that are planned to follow from future activities. These operations are more and more demanding in technological and financial terms, particularly in Angola, and can only be carried out by a selective group of international companies. If these were to formulate common positions on financial transparency, sound business practices and budgetary accountability, for exampIe of the kind proposed by Global Witness, the government would have to listen and respond. As a group such companies could probably have more influence on the state of Angola than any other external actor, because the governments need them more than any other. This potential influence gives the industry both responsibility and a very interesting scope for action, especially if co-ordinated with other actors.
48 Le Billion 1999:24-25.
49 For a review of Shell’s trendsetting conversion see Tangen, Rudsar and Bergesen 2000,
48 Petro-states - Predatory or Developmental?
Alliances with the IMF and the World Bank Its closest and most immediate ally, if it were to choose a course of action along these lines, would be the IMF and the World Bank. The former has for years tried to enter into meaningful discussions with the Angolan government on public finance reform. As we have seen above, the parties agreed in April 2000 on a so- called ‘staff monitoring programme’ including monitoring of the impact of oil revenues on government budgets and finance. This could be an important beginning of a process that could eventually lead to limitations on extra-budgetary operations and the pervasive secret abuse of public finds, which is probably why the government has resisted co-operating with the IMF for so long.
Now that the government is faced with a very tight foreign trade situation and commercial credits, even the very costly ones, seem to dry up, the government apparently has little choice but to accept the first bitter medicine prescribed by the IMF – setting a proper diagnosis for the illness that plagues the state budget. In the Angolan context, such a scrutiny could potentially have a devastating impact and it cannot be taken for granted that it will actually be carried through. There are probably competent officials within the government that would like to see it realised, but they face the powerful vested interests that do not want to be held accountable for their use of public money. In this internal stand-off, the position of the international oil industry would be a very strong voice.
We also saw above that the situation in Azerbaijan is different in the sense that both Bretton Woods twins suspended key lending programs and thus levers of influence in early 2000. This may indicate that increasing oil revenues make non- performance vis a vis Bretton Woods affordable to a government searching for ways to get around demands for enhanced transparency and accountability. If this is right, the onus is definitely on the international oil business which at least indirectly are providing the pretext for Baku to resist IMF and World Bank demands.
This illustrates why it is so important to view community projects undertaken or financed by oil companies operating in Angola and Azerbaijan in a broader perspective. As individual measures, their impact is confined to the limited number of direct recipients, but if they are carried out within a larger context of a coherent industry strategy for promoting openness and democracy, the potential for influence is much larger. In this way, the industry could both work for change from the top downwards through the government, in close co-operation with the IMF and others, and from the bottom upwards by giving resources and setting examples of proper behaviour vis-a-vis their direct counterparts in business or in the communities where they work. Such a deliberate two-pronged strategy supported by all major companies, with endorsement from other external actors of importance, could have a real impact.
The broader internationalcommunity Other external actors could reinforce such pressures at the macro level and promote good practices at the micro. Governments and donors could work towards the same goals of transparency and accountability in their discussions with the respective governments. They can support small scale changes by promoting civil society initiatives and public sector reform at various levels, such
49 Petro-states - Predatory or Developmental? as the human rights programmed run by UNDP in both countries. While laudable in their own right, such initiatives would remain a drop in the ocean if not co- ordinated, however discretely (discreetly?), with external pressures at the macro level. Without the latter, micro projects can easily be seen as mere expressions of a guilty conscience. Within a larger strategy, they make sense.
A gradual process of linking up otherwise isolated countries into structures of global governance may also provide positive impetus. Even if controversial on some accounts, Azerbaijan’s recent (summer 2000) invitation to join the Council of Europe represents a potentially important lever of political pressure for democratic change. Work by the OSCE, UN organisations i~d international NGOS have hopefully laid a foundation for this new membership to make a tangible impact. Installing a similar amount of political poter~cy into :regional organisations like SADC is a long shot, though, but a process of gradual political maturing to this effect should not be discarded altogether. Importantly, any effort at political pressure from abroad depends on a fertile receptive ground domestically. In this regard, the situation in Angola is improving, albeit slowly. For example, the rapid spread of the intemet may come to provide key links between progressive forces for change within petro-states and (hopefhlly an increasing number o~ concerned global citizens.
Conclusions with respect to the role of oil companies 1. Companies with a public commitment to much wider objectives than making profits face severe difficulties in oil producing countries with predatory governance features. The wider the gap between corporate aspirations for social development and human rights, and local, real-life conditions the larger the challenge to the company in question. 2. The influence of individual companies is largely confined to its own business activities and its immediate surroundings. At this micro level, companies can ensure that its performance is in line with overall corporate objectives, not least in the fight against corruption. 3. The risk to the reputation of a company is, however, to a large extent connected with perceptions of developments at the macro level, over which an individual corporation has very limited influence. 4. The oil industry will be much more effective in dealing with such risk, which is especially high in predatory states, if it is able to deaI with the government on the basis of a common understanding and, preferably, a joint strategy concerning governance issues. This will not exclude commercial competition, but establish self-imposed, industry-wide constraints and guidelines on permissible behaviour in dealing with corrupt governments. In the absence of such co-operation, governments of petro- states can easily resort to divide-and-rule tactics. With such co-operation, governments dependent on oil revenues will face a strong incentive to change their ways. 5. Within such a joint framework, the oil industry can fwlher improve its leverage by seeking alliances with influential multilateral organisations, bilateral donors and other governments.
50 Petro-states - Predatory or Developmental?
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