The Politics of Oil Nationalizations

University of California Los Angeles The Politics of Oil Nationalizations A dissertation submitted in partial satisfaction of the requirements for the degree Doctor of Philosophy in Political Science by Paasha Mahdavi 2015 c Copyright by Paasha Mahdavi 2015 Abstract of the Dissertation The Politics of Oil Nationalizations by Paasha Mahdavi Doctor of Philosophy in Political Science University of California, Los Angeles, 2015 Professor Michael L. Ross, Chair This dissertation is about the institutional choices governments make to man- age their petroleum wealth. It is about the determinants of these choices, but more importantly, their consequences for effective governance and how they ex- plain variations in political outcomes in oil-producing countries. I begin by de- scribing several different institutional pathways { involving national oil companies (NOCs) and their varying characteristics { that governments can take in extract- ing petroleum and regulating its production. My goal, then, is to show how these seemingly technical institutional choices can have profound impacts on governance, ranging from effects on state revenue collection to incentives for corruption to ultimately the survival of the regime itself. To this aim, I collected original longitudinal data on the formation of NOCs in 62 countries since 1900; data from U.S. Department of Justice transcripts on the prosecution of corrupt practices in the energy sectors of 80 countries in the 2006-12 period; and existing cross-national data on government revenue capture from the sale of oil and natural resources. I analyze the determinants of NOC formation in the first empirical chapter, where I use Bayesian analysis informed with interview-based data from oil consultants to test and confirm leading theories of state revenue-maximization as the primary determinant of expropriation. In the following chapter, I analyze the process of extortion in the oil sector where ii I show cross-nationally how NOC institutional design influences bribery to high- level government officials. In the penultimate chapter, I expand on the governance consequences of NOCs by showing that nationalization ultimately increases state resource revenues, creating pathways for regime stability and duration. In the last chapter, I discuss the theoretical implications of my argument and findings. I make two broad claims in this dissertation. First, while there is much agree- ment that oil is not always and everywhere a curse for political development, there is little consensus about the specific conditions or institutions that do and do not matter. I help turn the \institutions matter" phrase from a vague stylized fact into a well-measured, clearly-specified phenomenon. Second, when it comes to the production of natural resources, classical economics theories would suggest that state intervention will lead to inefficiency, lower outputs and therefore lower revenues. In contrast, I argue and show evidence that some forms of state intervention { that is, certain types of NOCs { actually increase both production levels and revenues when compared to periods of no state intervention. Taken together, my dissertation applies novel ways to measure and test theories about oil's conditional effects on politics that are widely circulated but often assumed rather than tested. iii The dissertation of Paasha Mahdavi is approved. Michael F. Thies Mark Stephen Handcock Daniel Simon Treisman Jeffrey B. Lewis Michael L. Ross, Committee Chair University of California, Los Angeles 2015 iv To Megan v Table of Contents 1 Petroleum, national oil companies, and governance ::::::: 1 1.1 Introduction..............................1 1.2 Explaining petroleum's effects on governance............4 1.2.1 The oil \curse"........................4 1.2.2 Always and everywhere a curse?...............7 1.3 The argument in brief........................ 11 1.4 Measuring nationalization...................... 21 1.4.1 Timing and duration of nationalization: NOCs....... 21 1.4.2 Institutional characteristics: not all NOCs are the same.. 26 1.5 Plan of the Dissertation....................... 32 2 Why do leaders nationalize the oil industry? ::::::::::: 38 2.1 Introduction.............................. 38 2.2 What factors determine oil nationalization?............ 42 2.3 Data, methods, and research design................. 50 2.3.1 Data.............................. 50 2.3.2 Empirical methods...................... 53 2.4 Results................................. 54 2.4.1 Statistical findings...................... 54 2.4.2 Resource nationalism in Iran vs. Saudi Arabia....... 63 2.5 Conclusion............................... 74 2.6 Appendix 1: Model specification................... 76 vi 2.7 Appendix 2: Additional tables.................... 78 3 Oil and extortion: Not all NOCs corrupt ::::::::::::: 83 3.1 Introduction.............................. 83 3.2 Theory and expected implications.................. 86 3.3 Data.................................. 94 3.3.1 National oil company data.................. 94 3.3.2 Corruption data........................ 100 3.4 Methods for measuring and predicting corruption......... 107 3.5 Results................................. 110 3.6 Discussion............................... 116 3.6.1 Is there evidence of spurious correlation?.......... 116 3.6.2 Alternative explanations................... 122 3.7 Conclusion............................... 125 3.8 Appendix 1: Additional figures & tables.............. 128 3.9 Appendix 2: Combining FCPA and CPI scores using a measurement model.............................. 139 4 Revenues and regime stability: Do NOCs prolong regimes? :: 147 4.1 Introduction.............................. 147 4.2 Government revenue and regime stability.............. 148 4.2.1 Stability through spending.................. 149 4.2.2 Politics in the economy: state intervention......... 152 4.3 Research design & methods..................... 156 4.3.1 Overview........................... 156 vii 4.3.2 Data.............................. 157 4.3.3 Testing and modeling: verifying the argument that NOCs increase stability....................... 168 4.4 Results................................. 171 4.4.1 Nationalization increases natural resource revenue and government capture....................... 171 4.4.2 Increased revenues and regime stability........... 175 4.4.3 Stability through revenues and nationalization....... 179 4.5 Discussion............................... 181 4.6 Appendix: Additional figures and tables.............. 184 5 Conclusion and the road ahead :::::::::::::::::::: 198 5.1 Introduction.............................. 198 5.2 Summary of the argument and evidence.............. 198 5.3 Theoretical implications....................... 202 5.4 Empirical implications for oil-producing countries......... 208 5.5 Future research and the road ahead................. 210 5.5.1 Testing other pathways to regime stability......... 210 5.5.2 Determinants of different NOC types............ 212 5.5.3 Other institutional characteristics.............. 212 5.6 Conclusion............................... 214 viii List of Figures 1.1 National oil companies (NOCs) across the world, 1905{2005....3 1.2 Institutions over time: Percentage of NOCs by type, 1947-2005.. 29 1.3 Oil production, before and after establishing a producing NOC compared to before and after establishing a non-producing NOC. 31 2.1 Determinants of NOC formation: Model results from Bayesian analysis................................ 56 2.2 Year-to-year changes in predicted probability of NOC formation, 1959-60 and 1973-74......................... 58 2.3 Predicted probabilities of NOC formation for selected countries over time.................................. 60 2.4 Determinants of NOC formation: Alternative model specifications 62 2.5 Oil production in the 1930-1950 period, Iran compared to Saudi Arabia................................. 64 2.6 Oil revenues collected by the Iranian government versus the British government, 1911-1950........................ 65 2.7 Ratio of collected oil revenues between foreign and host state, Iran versus Saudi Arabia, 1938-51..................... 70 3.1 Oil and perceptions of corruption in 2011-12............ 84 3.2 FCPA penalties and perceptions of corruption among major oil producers, 1997-2013......................... 106 3.3 Distribution of FCPA penalties in logged U.S. dollars for 39 oil- producing states............................ 110 ix 3.4 Determinants of corruption in the oil states: Model results from Bayesian bivariate outcomes (SUR) analysis............ 112 3.5 Determinants of corruption in the oil states: Predicted probabilities of FCPA violations.......................... 113 3.6 Distribution of FCPA cases by regulatory structure........ 125 3.7 Determinants of corruption in oil states: Model results from Bayesian bivariate outcomes (SUR) analysis { posterior distributions.... 135 3.8 Determinants of corruption in oil states: Additional model results from Bayesian bivariate outcomes (SUR) analysis { posterior distributions, continued (2)....................... 136 3.9 Determinants of corruption in oil states: Additional model results from Bayesian bivariate outcomes (SUR) analysis { posterior distributions, continued (3)....................... 137 3.10 Determinants of corruption in oil states: Residual analysis of Bayesian bivariate outcomes (SUR) model results.............. 138 3.11 Measurement model specification visualized............ 140 3.12 Determinants of corruption in the oil states: Results from Bayesian

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