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Volume 20 - 2012 Lehigh Review

2012 Understanding the : Why Some Get More Sick Than Others Karen Timmerman

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Recommended Citation Timmerman, Karen, "Understanding the Resource Curse: Why Some Get More Sick Than Others" (2012). Volume 20 - 2012. Paper 9. http://preserve.lehigh.edu/cas-lehighreview-vol-20/9

This Article is brought to you for free and open access by the Lehigh Review at Lehigh Preserve. It has been accepted for inclusion in Volume 20 - 2012 by an authorized administrator of Lehigh Preserve. For more information, please contact [email protected]. UNDERSTANDING THE RESOURCE

CURSE: Countries rich in natural resources often suffer from the “resource curse”: negative effects that Why Some Get More high reserves of these resources have on economic, Sick Than Others political and social institutions. Although richness by Karen Timmerman in oil is presumed to bring national prosperity, at times it is detrimental to the country due to corruption and overdependence on revenues. This study seeks to understand how some countries manage this curse better than others by examining the varied experiences of three of the world’s largest oil-exporting countries: , and Kazakhstan.

Tire Gina Mason 33 “Ten years from now, twenty years wish to compare the impact of oil revenue to 87.4 million barrels a day, with the most from now, you will see: oil will dependence on each country’s economy rapid of growth occurring in developing and social and political institutions, and countries.4 The reliance on fuel of nations bring us ruin…Oil is the Devil’s I will attempt to explain the differences such as China and India to connect their excrement.” in both the severity and causes of the re- emerging markets around the world will source curse in each case. I will also pres- only increase in the years to come, putting he Venezuelan co-creator ent the steps that each country has taken, pressure on oil exporters to meet this de- of OPEC, Juan Pablo Pérez if any, in an effort to reduce and reverse mand without succumbing to the paradox Alfonzo made this statement the consequences of their overdependence of plenty. at a time when Venezuela’s on the substance that makes the world go The resource curse has several different economy was booming and round. causes and effects that each contribute in Tthe revenues were flowing in due to the different ways to the growing dependence high oil prices of 1973, and so his com- The Resource Curse on oil rents, which cause poor economic ment seemed out of place. Before analyzing its effects, the resource growth and decreases efficiency of social However, Alfonzo had made a star- curse must be defined. The increased and political institutions. The explana- tlingly accurate prediction for the future; reliance on revenues from oil exports by tions include the change in the role of the in the many decades since the first discov- countries that suffer from this paradox of government towards the market, especial- ery of oil in Titusville, Pennsylvania, to plenty is harming their economies and ly after nationalizing part or the whole of where so many had rushed for the chance populations so much that, if not checked, their oil industry and the increasing power at profiting from this new lucrative busi- it could ultimately lead to civil strife and of elites and interest groups who use the ness, the world has seen the economies war. I shall characterize the resource curse oil rents to keep their positions. These and institutions of some major oil-export- using the explanations posited by Terry changes have a number of negative effects ing countries falter and fail because of Lynn Karl, one of the forefront scholars on such as the distorted economic growth an increasing reliance on oil revenues to the idea of the paradox of plenty. She de- characterized by Dutch Disease and the run the nation. This inverse relationship fines the resource curse as the “inverse re- increasing difference in economic income between dependence on natural resource lationship between high natural resource that forces a majority of the population exports and the economic growth rate of dependence and economic growth rate.”2 into poverty. a region is known by many names, includ- In addition to examining the economics The first explanation of the resource ing the paradox of plenty, the “devil’s ex- of the resource curse, Lynn also focuses curse is the change in the role of the state crement,” and the resource curse.1 Though on the “social and political relations aris- towards the market. Revenues from oil its impacts can be devastating on the econ- ing from [the] utilization [of oil].”3 The exports are received by the state in the omies and livelihoods of oil-exporting immense wealth that oil exploitation can form of royalties and rents from foreign nations, the resource curse does not affect bring may cause the political and social companies or taxes and profits from every oil-producing country in the world. institutional structures to change in a way state-owned companies. These revenues There have been many countries through- that negatively affects the economy. The give the state less incentive to establish a out history, such as Australia and Norway, focus of this paper is on the export of the system of taxation on their people, taking who depend on the export of single-point point source nonrenewable natural re- away some accountability for government natural resources such as oil for revenues source that is oil: a black, sticky substance spending. Because the state is receiving its but have not been afflicted by the negative that went from being used as a lubricant, money directly from the oil trade, it does consequences of the resource curse. In a light source and even as a weapon in not feel the need to show budget transpar- this paper I shall examine the resource medieval wars to the liquid that has ency for the general population, as the curse and the impact it has had on three pushed globalization to a new level and money belongs to the state, which leaves of the world’s largest petroleum exporters: has opened up a vast world economy. In more room for corrupt spending. In order Venezuela, Nigeria and Kazakhstan. These an age where the demand for oil is grow- to pacify the people, the government will three nations, each the largest petroleum ing every day, large are seen as embark on massive infrastructure projects exporter within its region, suffer from this enormous assets for the countries they are and increase social welfare, relying on oil resource curse to some extent but with found in. In 2011 global consumption had rents to fund everything. vastly different causes and consequences. I increased the most since 2004, up by 3.1% The elites and interest groups who are

34 the lehigh review in control will also use oil rents to rein- the development of other sectors of the and the increase in productivity can lead force their place in society in order to reap economy. Countries that once depended to innovation for the future. By contrast, the benefits. The state begins to exhibit upon agriculture for a large percentage of in a high rent model the profits from oil rent-seeking behavior in order to maintain their exports may suddenly find it cheaper exploitation are received and dispersed of the status quo of the regime and to accrue to import their food from another country. in large amounts very quickly in order to the short-term benefits of oil exploitation. The government may place subsidies and gain maximum short-term benefits. The This increased reliance on oil rents to fund taxes on these industries in a protectionist money is spent in frivolous and corrupt projects and fuel corruption can have attempt, but this merely serves to continue ways on costly projects and to keep the disastrous effects on a state’s economy, to decrease competitiveness and also plac- elites in the political power positions they hold. With the oil industry as capital and technologically intensive as it is, few jobs In an age where the demand for oil is are created, and poor funding for educa- tional systems leaves a population of rural growing every day, large oil reserves are laborers watching the distance between seen as enormous assets for the countries high and low income increase as foreign workers are hired by oil companies and they are found in. education is completed in foreign coun- tries. The rent-seeking sector, by making especially with the world’s fluctuating oil es an additional burden on the oil sector poor investments and not bothering to prices. to provide funds for these policies. If not correctly jumpstart the economy “cor- Due to events and wars occurring reversed, Dutch disease can become per- rodes the viability of the primary sector throughout the world, oil prices can be petuating, “provok[ing] a rapid, even dis- upon which it increasingly depends.”7 In very volatile at times, with the West Texas torted, growth of services, transportation, addition, a government may also invest Intermediate price for a barrel rising from and other non-tradeables while simultane- little back into research and innovation in $41.51 in 2004 to $99.67 in 2008, and ously discouraging industrialization and the oil industry, over time decreasing pro- then falling back down to $61.95 in 2009.5 agriculture,” which could eventually lead duction levels and efficiency. Oil exporting countries that sometimes the economy to collapse.6 The high level of foreign workers and depend on exports for up to 90% of their In addition to the dominance of oil in low domestic employment is also a result GDP can see great periods of profitability the export sector, rent-seeking behavior of the presence of foreign companies since during booms turn into economic trends causes the income gap to increase and the beginnings of a nation’s oil history. that take a turn for the worse when de- poverty levels to rise due to the capital- Most oil-exporting countries lacked the mand drops and prices fall. A government and education-intensive characteristics technical skill and capital to extract and could set its yearly budget according to of the oil industry. This can be explained refine oil from their fields, and thus out- predicted oil prices, but there is always the through the rent cycling theory. This idea side companies were awarded concessions chance that prices could fall and the previ- compares the differences between the ef- and employed their own workers to ex- ous surplus could turn into a deficit. fects of low and high oil rent revenues. In tract the precious natural resource. When The rent-seeking behavior of the state a low rent model, the incentive to create the oil industry took off, it caused a rise in can also have harmful consequences for wealth is highly prevalent because the gov- the wages of the few employed by the oil the domestic economy. A major result ernment relies less on oil rents to sustain industry which left the rest of the popula- of the social and political institutional itself and thus must invest in growing its tion out of work and watching their na- changes that the resource curse can cause economy by other means. Dutch Disease tion’s resources be controlled by foreigners. is known as “Dutch Disease.” This phe- is not affecting the competitiveness of For these reasons, especially due to poor nomenon is seen when all non-oil exports non-oil and labor-intensive manufactured economic management by the government, are rendered both domestically and inter- goods, and so the government will expand the population of an affected country may nationally non-competitive due to rising these sectors, which in turn increases the become very disgruntled with the way exchange rates. An abundance of natural diversification of the economy and de- oil rents are being spent, and this could resources gives a country easy access to creases income inequality. There will be a lead to increased violence and even war. large revenues and growth, but ignores higher demand for domestic skilled labor As the majority of the population sinks

35 into poverty and the per capita income of sector of Venezuela while neglecting racy,” which she describes as “established the country plummets, a small minority traditional domestic sectors such as the through elite bargains and compromises… reaps the benefits of the nation’s oil fields. agriculture industry. By 1950, agricultural [that] ensure their survival by selectively If the government does not become fully exports comprised of less than one-tenth meeting demands while limiting the scope accountable for their people or provide of the country’s GDP.11 of representation in order to reassure budget and revenue transparency for their In 1943, the Fifty-Fifty Agreement was traditional dominant classes that their financial transactions, the population may pushed for by Venezuela, who wanted to vital interests will be respected.”13 This rise up against the elites in the form of at- see royalties and taxes “raised to the point form of democracy impacted Venezuela’s tacks on individuals and oil infrastructure, at which the government’s take would dependence on petroleum in several ways; terrorism, and even civil wars and coups. about equal the companies’ [Royal Dutch/ rigid political institutions were produced Countries that suffer from an overde- Shell and Jersey] net profits in Venezu- that kept barriers to admittance high, so pendence on oil export revenues will see ela.”12 At the same time, the Hydrocarbons that the elites in power positions could different levels of severity of the resource Act was passed, giving the government continue to keep their place and use oil curse depending on how the country is greater control over oil revenues. This rents for their own purposes. However, run. I shall examine the effects of the re- Act established a new income tax on the large amounts of social spending occurred source curse on the countries of Venezuela, mining industry in order to fund the in order to pacify and provide jobs for Nigeria and Kazakhstan and compare many recently created state agencies. This the working class. This social spending, the three in order to explain the reasons revolutionized oil revenues for the Ven- which includes spending on education, for the variance in the intensity of the re- ezuelan government; rather than handing health, and housing among other sectors, source curse and its effects. out concessions in return for a chunk of increased from 11.4% under Jiménez to the profits the state could now determine a much higher 31.4% of total spending Venezuela how much of a cut it would take, and the in 1973.14 Despite this, by 1973 there was At the end of 2010, Venezuela was the fact that the money came from oil rather much discontent apparent in the popula- largest producer of petroleum in South than from taxing the citizens meant that tion. The political parties and government America and the ninth largest producer in the state could be a bit more secretive with were highly centralized, leaving little the world, with a 15.3% share of the total their spending. The foreign oil companies room for newcomers and limiting repre- proven world reserves.8 This country has went from the ones in control to a posi- sentation, and the economy was balanced had a long history with oil; discovered in tion in which they had to comply with the in the direct of the few wealthy elite. 1914 at the Mene Grande field, the natural national government, lest they risk being In the mid-1950s, the rises in produc- resource was first seen in production for thrown out of the business. For the next tion in the and import con- export in 1917, with ten years, Venezuela witnessed a surge trols in the United States led to a flooding and as the major players in in production while at the same time of the markets, and prices plummeted, its extraction and refinement. Oil’s share spent millions of dollars on the import along with Venezuela’s oil revenues. Juan of exports rose dramatically from 1.9% of consumer goods from countries such Pablo Pérez Alfonzo, Venezuela’s Minister to 91.2% between 1920 and 1935 and by as the United States. Pérez Jiménez, who of Mines and Hydrocarbons at the time, 1929 Venezuela was the world’s largest oil ruled Venezuela from 1948 to 1957, used had realized the imminent dangers of exporter.9 In 1926, oil had surpassed the this influx of oil to his advantage. Jiménez the resource curse; he got together with value of coffee and other agricultural com- reduced social expenditures and poured Abdullah al-Tariki of and modities to become the most important the oil revenues into projects of his own, founded the Organization of Petroleum export to the Venezuelan economy. This is causing the economy to drop due to un- Exporting Countries in 1960. OPEC was a perfect example of Dutch Disease; with necessary expenditures and overspending. an attempt by the world’s largest oil-ex- oil taking over as the major export, and a Public outrage at his poor fiscal policies porting countries to, through the imposi- lucrative one at that, by 1940 the Venezue- was increasingly mounting as Venezuela tion of export quotas, coordinate policies lan government found it cheaper to import headed towards massive debt. and keep world prices stable in such a their food rather than to rely on their once In 1958, Jimenéz was overthrown in volatile and ever-changing market. strong agricultural sector.10 The apprecia- a coup and Venezuela became a democ- The First Oil Shock in 1973, a result of tion of the bolívar in relation to the U.S. racy. Karl defines the type of democracy the fourth Arab-Israeli War and the Arab dollar encouraged a growth in the import present in Venezuela as a “pacted democ- oil embargo, sent oil prices skyrocketing,

36 the lehigh review increasing Venezuela’s fiscal income per barrel of exported oil from $1.65 to $9.68 between 1972 and 1975. This led to mas- sive increases in government spending.15 When Carlos Andrés Pérez of the Acción Democratica party won Presidency in 1973, he began to implement his plans for La Gran Venezuela, which consisted of income increases and job creation along with a push to diversify exports through the expansion and nationalization of other industries. However, most of the jobs cre- ated were for the national government, which doubled in the first five years of his rule, calling for an increase in petrodol- lars to fund their wages. Pérez also called for the nationalism of the oil industry and succeeded in 1976 when the newly cre- ated state-owned oil company known as Petróleos de Venezuela S.A. (PDVSA) took over concessions of foreign companies.16 At this time in history, Venezuela and the other OPEC and non-OPEC countries were profiting greatly from the high prices of the first oil shock. Carlos Pérez seized this moment to complete his vision of a modern and industrialized Venezuela fueled by the large amounts of incoming oil rents. There was also a rise in wages and new employment opportunities in oil-exporting countries, which increased consumption at a rate of 7% between 1970 and 1979. Despite the expulsion of Backlit, Gina Mason most foreign workers from Venezuela’s oil industry however, only about 37,000 In 1974, the Venezuelan Investment increased to 53% of GNP from 9% as a jobs were provided to the domestic labor Fund was created to accumulate oil result of poor fiscal policies in Perez’s gov- force.17 By the late 1970s, on the eve of the revenue and foreign exchange reserves. ernment.20 The increased revenues of the coming oil glut, the surpluses turned into However, the government also saw the oil booms of the 1970s were used to fund deficits. Spending has grown out of con- fund as a bank for their large public sector social spending and massive infrastruc- trol, and during the 1980s oil glut, a result projects. Although the Fund did accrue a ture projects that had been budgeted poor- of declining consumption due to the high modest amount of income, rather than be- ly and ended up being enormous wastes of prices of the oil shocks and over-quota ing used fully to improve the economy and petrodollars. Wanting to increase spend- production from OPEC countries, prices lives of Venezuela’s citizens, the Fund was ing come election season but faced with a dropped to $13.00 per barrel in 1986 and “an executor of the government’s plans and lack of funds due to debt, the Pérez gov- Venezuela’s oil revenues fell with them, wishes,” meaning that oil was still being ernment relied upon floating debt, which putting Venezuela into massive debt, with used for wasteful projects and corrup- did not have to be recorded in any official “the ratio of debt to GNP reach[ing]… [a] tion.19 manner. This allowed for an augmentation high of 65.3 percent” in 1987.18 Between 1970 and 1994, foreign debt in government spending, for which float-

37 ing loans accounted for $10 billion. These The effects of the resource curse in Ven- cy. However, symptoms of Dutch Disease short-term, high-interest loans, combined ezuela seem to be caused by rent-seeking were beginning to present themselves as with increasing interest rates and a falter- behavior and poor government spending agriculture’s share of GDP dropped form ing economy, catapulted Venezuela’s debt of oil rents. Dutch Disease is rampant, 68% in 1965 to 35% in 1981 while the gov- to 69.7% of GNP by 1989.21 In exchange with the once flourishing agricultural ernment invested heavily in services and for new loans, the Venezuelan government sector taking a back seat to oil exports. Al- manufacturing.24 In addition, government eliminated many non-tariff barriers, cut though the Venezuelan government seems investment in the manufacturing sector subsidies and increased the domestic price to put a lot of revenue into public spending demonstrated a waste of at least two-thirds of petroleum. This caused an uprising by projects, many end up being ineffective of oil revenues, with only 35% of capacity the people of Venezuela, who rioted in and costly. Venezuela’s case of the resource utilization in manufacturing investment the capitol of Caracas in February of 1989. curse needs to be cured before it spins fur- in the mid-1980s.25 Pérez’s plan backfired; wages dropped ther out of control. In 1984 a series of military coups began as unemployment and rose to again, leaving the Nigerian government unprecedented levels, ushering in an at- Nigeria open to much corruption until 1999, when tempted coup in 1992. Nigeria is a country that in this day is free presidential elections led to a victory Hugo Chávez was elected President in filled with poverty, disease and violence for General Olusegun Obasanjo, who was 1998 and three years later passed a series that upon closer inspection can point to committed to eliminating corruption and of laws aimed at strengthening govern- the resource curse as a large factor in these promoting democracy in Nigeria. ment control over PDVSA. This was met negative aspects. The Movement for the Survival of the with a great amount of resistance and Nigeria gained independence from Brit- Ogoni People, led by Nigerian activist Ken in April 2002 PDVSA employee went ain in 1960 and the new government had Saro-Wiwa protested against the govern- on strike, to which Chávez responded the role of unifying a nation that had over ment and Royal Dutch/Shell in the 1990s by firing executives and cleaning house. 250 ethnic and linguistic groups. In 1966 a because of the lack of benefits from oil rev- Production levels decreased and the oil military coup put Colonel Yakubu Gowon enues given to the Ogoni people and the industry was producing at one-third of in power, which caused Christian Ibos in massive environmental damage caused by its normal levels. Violence struck in 2002 the east to declare independence from Ni- oil extraction. In 1992 the Movement de- when an attempted forty-eight-hour coup geria, sparking a civil war in 1967. In 1975, manded over $10 billion in previous royal- occurred, and although Chávez quickly another coup put Army Brig. Muritala ties and damages from Shell, Chevron and came back to power, protests in Miraflores Mohammad in charge and civilian lead- the Nigerian National Petroleum Country as well as rioted in the streets, causing oil production to slow to 10,000 bbl/d as Shell While Nigeria has had the potential to removed all employees from Ogoniland. In 1994, four Ogoni chiefs were murdered drastically improve its economy and living and the Nigerian government placed the situation by taking advantage of revenues blame on Ken Saro-Wiwa and eight oth- ers, executing them in 1995 to the protests from petroleum exports, it instead has of the international community. In 2009, neglected the majority of the people. Shell reached a $15.5 million settlement with the relatives of the Ogoni nine, who claimed that the oil company had aided left nineteen dead and many more injured, ership was put into control in 1979, with and collaborated with the Nigerian gov- and it has since been suspected that pro- Alhaji Shehu Shagari elected as president. ernment in the murder of Saro-Wiwa.26 Chávez forces may be to blame.22 Because of the variation of regimes in such The Movement for the Emancipation The GINI index, which measures income a short time, the economy of Nigeria did of the (MEND) is one of the inequality on a scale of 0 to 100, with 0 not fare well. largest insurgent groups in the area and representing prefect equality, gave Venezu- Into the oil booms of the 1970s and the in 2006 was involved in the kidnapping ela a 41 in 2009, down from 49.5 in 1998, early 1980s, Nigeria enjoyed an improving of foreign oil workers. The group has con- which is still a very negative rating.23 economy and the push for more democra- tinued to kidnap and stage attacks on oil

38 the lehigh review pipelines in order to protest the lack of de- try’s rulers, which is equivalent to the total from the exploitation of the oil fields in velopment and distribution of oil revenues aid sent to Africa in this time period.30 their land. The insurgent groups fighting to the Delta region as well as the immense While Nigeria has had the potential to the government and international oil com- environmental degradation caused by oil drastically improve its economy and living panies only exacerbate the ethical and re- exploitation. A 2007 report by the Coun- situation by taking advantage of revenues ligious tensions in this diverse nation, and cil on Foreign Relations found that “in from petroleum exports, it instead has attacks on pipelines and workers threaten 2003, some 70 percent of oil revenues was neglected the majority of the people. Only oil production. In order to reach optimal stolen or wasted, according to an estimate 36% of the Nigerian population is esti- production in this world of increasing de- by the head of Nigeria’s anticorruption mated to have access to electricity, while mand, the Nigerian government must real- agency.”27 In retaliation, militant groups the rest generate it themselves or live with- ize that their citizens are in desperate need such as MEND engage in kidnapping and out.31 Like Venezuela, Nigeria has no need of a change. This nation can no longer run oil bunkering, in which they tap pipelines for much human capital as the oil industry for the few at the expense of many. and steal crude oil to sell on the market. is very technically intensive. It is ranked The group insists that the government give 91st in Newsweek’s study of the World’s Kazakhstan 50% of the oil revenues from the Niger Best Countries, with a dismal grade of Unlike the previous two countries, Ka- Delta back to its people and declare they 65.54 in education, and also ranks around zakhstan has exhibited much more pru- will not stop attacks until this happens. the 90s in health, quality of life, economic dent behavior when it comes to the oil President Goodluck Jonathan took over dynamism, and political environment.32 revenues it accrues. Kazakhstan has the in 2010 after his predecessor died and won Wikileaks released a summary on both the second-largest reserves and pro- again in 2011. As Vice President in 2008, Nigeria’s governmental corruption and duction capacity in all of the former Soviet he was quoted as saying that “the over- the health of the president as reported by Republics.34 With the development of its dependence on oil has put an unpleasant Shell’s executive vice president for Africa three largest fields, Tengiz, Karachaganak bracket in [Nigeria’s] national economic Ann Pickard. She spoke of the increasing and Kashsgan, Kazakhstan has the poten- freedom.”28 Currently, Nigeria is the larg- problems Shell had hiring oil tankers, as in tial to become one of the world’s top five est oil producer in Africa and the tenth 2009 there were eighty incidents of piracy producers. At the end of 2010, Kazakhstan largest in the world, with the oil sector in Nigeria. Piracy has become a huge prob- had proven reserves of 38.9 thousand mil- compromising 78% of total revenues, lem in the Niger Delta, with an oil tanker lion barrels at 2.9% of the world total and while the non-oil sector holds only 15%. being seized a little over a month ago so 9th in ranking.35 The Tengiz, which lies From 1990 to 2000, Nigeria’s annual per- attackers could take its oil. She reported along the northeast chores of the Caspian centage growth of GDP was a mere 2.4%, instances of oil buyers paying members of Sea, was discovered in 1979 and is Ka- worse even than Ghana, who had averaged the National Petroleum Corporation and zakhstan’s largest producing field. It pro- 4.3%. The GINI index gave Nigeria a score the Nigeria government bribes to lift oil.33 duced 492,000 bbl/d of crude oil in 2009 of 43.7 in 2011, down from a high of 50.6 Oil rents have had a large impact on and has been in development since 1993, in 2006.29 the Nigerian economy and livelihood of when a forty-year joint venture between In 1999, President Obasanjo set up two its people and out of those studied in this Chevron and the state-owned KazMunay- agencies in order to increase transparency paper, this country seems to suffer the Gas was created that later became known and reduce corruption. The first was the worst from the resource curse. The govern- as Tengizchevroil when it expanded into Independent Corrupt Practices and the ment is clearly deeply involved in the oil a four-company consortium in 1997. Its Related Offences Commission, the duty industry, using revenues for corrupt prac- sister field, Kashagan, is an offshore field of which was to receive and investigate tices and eliminating anyone that stands found in the north of the . It is complaints, taking legal action if neces- in their way. The suspicious execution of being developed by an international con- sary. The second agency was the Economic the Ogoni nine and Shell’s later settle- sortium called North Caspian Operating and Financial Crimes Commission, which ment with their families shows how the Company and has estimated reserves of was established with the purpose of root- Nigerian government and oil companies eleven billion barrels of oil.36 ing out corruption among the government will take extreme measures to secure their Before it declared its independence in and elites in Nigeria. The EFCC estimates interests in the area. The people of the Ni- 1991, Kazakhstan had spent the majority that between 1960 and 1999 over $400 bil- ger Delta live in extreme poverty and see of the twentieth century as a republic of lion was stolen in oil revenues by the coun- none of the benefits and solely the damage the . Its industrial sector con-

39 Sea Foam, Gina Mason

40 the lehigh review sisted of large enterprises that were inter- rights to purchase shares in any energy about 79% of revenues to the Fund. In dependent with businesses in other USSR project, allowing the state to legitimately the mid-2000s, Kazakhstan began us- regions, and the breakup of the Soviet purchase part of British Gas’s share in ing the development funds to improve Union left much of Kazakhstan’s industry Kashagan production and bid for 33% of infrastructure and support agricultural useless. After the collapse of the USSR, the Canadian-based PetroKazakhstan. development in an attempt to boost the newly elected President Nursultan Naz- This gave KazMunaiGaz a larger role in economy. Many national funds were cre- arbayev focused much of the state’s efforts the participation of the state-owned com- ated, including the National Innovative on developing the economy of Kazakhstan. pany as both an investor and a partner.37 Fund and the Small Business Develop- Due to Kazakhstan’s marginalized role In 2007 President Nazarbayev amended ment Fund, in an attempt to diversify the in the economy of the Soviet Union, this the “Law on Subsoil and Subsoil Use,” giv- economy. At this time tax reforms took new country was left with an underde- ing the government the right to change or place, which reduced taxes for the non-oil veloped economy. However, Kazakhstan revoke national resource contracts if they industries in an attempt to diversify the had a resource that could potentially push were deemed to be a threat to national se- economy. High oil prices towards the end the economy skyward or drive it into the curity. In 2008, Tax Codes were proposed of the decade meant that 86% of revenues ground: oil. that replaced royalties with a mineral ex- could go to the Fund with a large chunk Even though Kazakhstan’s oil fields had traction tax, rent taxes with export duties, of profits going towards investments in opened up to the world in a time when and announced that there would be no education and welfare. Indeed, in the 2010 the majority of oil companies were state- future production-sharing agreements.38 study by Newsweek of the world’s best owned due to the 50-50 Agreements of the However, the bulk of future oil production countries, Kazakhstan received a 91.35 in past, this Caspian Sea country had priva- predicted for the future would take place education, ranking 14th on earth.40 The tized much of the petroleum sector and in fields under production-sharing agree- National Fund of Kazakhstan is one fac- opened up its fields to foreign investors. ments, such as those in Kashagan and Ka- tor in the fight against the resource curse; This was due to the lack of another source rachagnak. by saving the majority of oil revenues as of export revenues beside oil and the lack In 2001 the National Fund for the Re- public assets and using approved transfers of technical and managerial skills needed public of Kazakhstan was created with for non-oil economic developments, Ka- to develop the oil industry, which ush- the purpose of negating the impact of zakhstan largely avoided the symptoms of ered in the joint venture of Chevron and volatile oil prices on the economy and to Dutch Disease and did not suffer the large KazMunaiGaz to manage the Tengiz field. save a significant chunk of the oil revenues income inequality that can clearly be seen The country also signed two production- for future generations. It is owned by the in Venezuela and Nigeria. sharing agreements with international Ministry of Finance and is managed by In 2006, the Kazyna Sustainable De- companies to develop the Kashagan oil the National Bank of Kazakhstan, who velopment Fund was created with the aim deposit and Karachagnak field, with the keeps 75% of the Fund’s assets in a sta- of increasing industrial competition and state-owned company KazMunaiGaz bilization portfolio in the form of liquid diversity through innovative economic holding shares in each. assets and 25% in savings in the form of development. The Samruk State Holding At the turn of the twenty-first century, high return long-term securities.39 All Company was also created at this time in the Kazakh government began to venture revenues from oil exports first go to this order to enhance the accountability and towards a more protective stance towards fund, and from there a specified amount efficiency of asset management by the state. the energy sector. Rising oil prices had known as the annual guaranteed transfer The two joined together in 2008 to become spurred economic growth, and the gov- is put into the state budget. In order to Samruk-Kazyna Welfare Fund, a 100% ernment of Kazakhstan was ready to take avoid sucking the Fund dry, it is stipu- state-owned holding company that con- on a larger role in the petroleum indus- lated that no more than one-third of the solidates the majority of the state-owned try. In 2004 it changed its tax structure, Fund’s total assets may be withdrawn at enterprises in Kazakhstan.41 The creation increasing the government’s share of oil once and that the budget must be used for of this Fund was required as a result of revenues to 65-85% by including an excess development projects. Between 2001 and the 2007 financial crisis and its impact on profit tax and imposing a new tax on im- 2008, the National Fund grew to $13.7 bil- the Kazakh economy. In the mid-2000s, ports and limiting foreign companies to a lion from $1.345 billion. In the early years Kazakh banks began to excessively invest maximum of 50% participation in projects. of the decade, Kazakhstan was running abroad due to the favorable credit ratings The new tax laws also gave the government under a very tight fiscal policy, diverting of banks caused by high commodity prices

41 and the lack of local funding. During mid-1990s to secret bank accounts man- resource on a lesser degree than Venezuela the financial crisis, the quality of banks aged by both President Nazarbayev and and Nigeria could be the country’s late assets was questioned and Kazakhstan’s Nurlan Balgimbaev, the former prime arrival to the oil trade. Kazakhstan did economy was threatened with a recession; minister and oil minister of Kazakhstan.43 not fully become an oil-exporting country thus the Samruk-Kazyna Fund was cre- However, Giffen’s defense claims that in until its independence in 1991. This means ated in order to avoid a crisis in the nation. his job as economic advisor the President that it had the time to observe other oil This Fund issued securities that were sold Nazarbayev the American was working exporting countries’ strategies of the pre- to the National Fund in order to increase under the approval of senior officials in vious century and perhaps avoid the same domestic investment and reduce reliance Washington. Although both the Ameri- economic and political mistakes that had on foreign funds. can government and the oil companies send others spiraling down through the Unlike the other two nations studied in have denied any connection to Giffen’s paradox of plenty. this paper, Kazakhstan has been experi- illegal dealings, this case shows that the encing pronounced economic growth due corruption in Kazakhstan is caused by oil Finding an Antidote to economic reform and foreign invest- revenues and demonstrates the possibility When looking to the future, it is impera- ment concentrated in the energy sector. of corruption in foreign nations.44 Years tive that these countries quickly learn The majority of this growth has occurred later in 2007, UK banker Robert Kissin to better manage oil revenues with full starting at the turn of the twenty-first was accused of playing the part of the transparency and accountability in order century. In 2003, the GINI Index gave Ka- middleman who helped Texas oil service to keep up with increasing world demand zakhstan a score of 31.5, which improved company pay $4 million in without falling victim to the resource to reach 26.7 in 2009, relatively low rates bribes to the Kazakhstani government in curse. A measure that would be effective at compared to Venzuela’s 41 and Nigeria’s exchange for an oil contract.45 keeping the resource curse at bay would be 43.7.42 Kazakhstan has suffered the least from managerial independence for state-owned Despite the avoidance of the economic the paradox of plenty. For the most part oil companies. Today, many of the mem- effects of the resource curse, Kazakhstan it has had positive economic growth and bers of the oil industry are also govern- has still fallen victim to the corruption the government has invested heavily in the ment officials; in fact, the head of Venezu- that can be caused by the massive rev- welfare of its population. The creation of ela’s PDVSA is also the Minister of Energy enues oil exploitation brings in. James the National Fund has shown to be very and Petroleum.46 This encourages rent- Giffen is an American merchant banker effective at saving rents for the future and seeking behavior, as there is easier access for the government to oil revenues because of close political connections. By eliminat- The largest problem that Kazakhstan ing the clear governmental influence in the oil industry, rent-seeking behavior will suffers from is the corruption present in decrease, as the oil rents will then be part both its government and the international of a private industry with commercial in- terests. Hiring should be merit-based and oil companies operating in the area market-driven to encourage true competi- tion for recognition in the industry. who in 2003 was accused of overseeing the demonstrates long-term thinking, rather There are also many international issue of bribes from oil companies such than the short-term rent seeking behavior organizations that have been formed in as Mobil, BP, and ConocoPhillips of the previous two countries examined. order to encourage transparency and bet- to the Kazakhstan government in return The largest problem that Kazakhstan suf- ter economic management of revenues by for access to oil reserves. In violation of fers from is the corruption present in both oil-exporting countries. One such group the Foreign Corrupt Practices Act of 1977, its government and the international oil is the Extractive Industries Transparency Mr. Giffen was alleged to have been paid companies operating in the area, with Initiative, or EITI, which was launched tens of millions of dollars for negotiating much evidence of bribes being given to in 2002 at the World Summit for Sus- deals between the American oil compa- officials and even President Nazarbayev for tainable Development and is the major nies and the Kazakh government and lucrative concession contracts. One reason international force behind the urging for also transmitted over $60 million in the that Kazakhstan has suffered from the transparency in revenues and government

42 the lehigh review accountability from the extractive indus- tries.47 The principles of this organization When looking to the future, it is imperative promote the use of “natural resource wealth [as] an important engine for sus- that these countries quickly learn to better tainable economic growth that contributes manage oil revenues with full transparency to sustainable development and poverty reduction.”48 One may become a candidate and accountability in order to keep up with country by fulfilling five requirements increasing world demand without falling including implementation of EITI ideals, and may become a compliant country after victim to the resource curse. a validation period. Out of the nations studied in this paper, so far Nigeria is the only compliant country, but Kazakhstan is before any of these nations can reach full twined with the politics of the oil industry. on its way, having become a candidate in production capacity, they must overcome There exist huge gaps between the living 2010. the resource curse. This will be slightly situations of the rich and the poor, which easier for Kazakhstan, who has learned the falling economies and the intense gov- Conclusion from those before it and seems to suffer ernment control over the oil industry only Venezuela, Nigeria and Kazakhstan have from elite corruption rather than the nega- worsens. These countries must reconcile much to look to in the future. All three of tive economic growth and inequalities their aspirations to reap the benefits of oil these countries are currently among the seen in Venezuela and Nigeria. The latter wealth with the sensible ideals of profit highest world exporters and producers of two represent more extreme cases; Vene- maximization if they are to rid themselves oil and their output has the potential to zuela and Nigeria have both been victim to of the resource curse. increase in the decades to come. However, many coups and riots that have been inter-

Striations Gina Mason

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