Oil-Led Development: Social, Political, and Economic Consequences
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Oil-Led Development: Social, Political, and Economic Consequences TERRY LYNN KARL Stanford University Stanford, California, United States invested assets. They are the equivalent of what most 1. Introduction noneconomists consider to be monopoly profits. rentier state A state that lives from externally generated 2. Definitions: Oil Dependence, Resource Curse, Dutch rents rather than from the surplus production of the Disease, and Rentier States population. In oil-exporting states, this is measured by 3. Poverty and Social Welfare Consequences of the percentage of natural resource rents in total Oil-Led Development government revenues. 4. Oil-Related Changes in Social Structure rent seeking The efforts, both legal and illegal, to acquire 5. The Rentier State access to or control over opportunities for earning rents. 6. Oil, Political Stability, and State Capacity In oil-dependent countries, rent seeking refers to wide- 7. Social and Environmental Impacts at Regional and spread behavior, in both the public and the private Local Levels sectors, aimed at capturing oil money through unpro- ductive means. 8. Petroviolence and Civil War resource curse The negative growth and development 9. Conclusion outcomes associated with minerals and petroleum-led development. In its narrowest sense, it is the inverse relationship between high levels of natural resource Glossary dependence and growth rates. corruption Though often used interchangeably with rent seeking, corruption is more narrowly defined as the misuse of public power or resources for private gain, Proponents of oil-led development believe that and it is generally illegal. Dutch disease Named after the negative effects of the countries lucky enough to have ‘‘black gold’’ can North Sea oil boom on industrial production in The base their development on this resource. They point Netherlands, this phenomenon occurs when resource to the potential benefits of enhanced economic booms cause real exchange rates to rise and labor and growth and the creation of jobs, increased govern- capital to migrate to the booming sector. This results in ment revenues to finance poverty alleviation, the higher costs and reduced competitiveness for domes- transfer of technology, the improvement of infra- tically produced goods and services, effectively ‘‘crowd- structure, and the encouragement of related indus- ing out’’ previously productive sectors. tries. But the experience of almost all oil-exporting oil-led development An overwhelming dependence on countries to date illustrates few of these benefits. To revenues from the export (and not the internal the contrary, the consequences of oil-led development consumption) of petroleum, as measured by the ratio tend to be negative, including slower than expected of oil and gas to gross domestic product, total exports, and the contribution to central government revenues. growth, barriers to economic diversification, poor rent In Adam Smith’s classic definition, this is unearned social welfare indicators, and high levels of poverty, income or profits ‘‘reaped by those who did not sow.’’ inequality, and unemployment. Furthermore, coun- According to economists, rents are earnings in excess of tries dependent on oil as their major resource for all relevant costs, including the market rate of return on development are characterized by corruption and Encyclopedia of Energy, Volume 4. r 2004 Elsevier Inc. All rights reserved. 661 662 Oil-Led Development: Social, Political, and Economic Consequences exceptionally poor governance , a culture of rent development model of today is significantly different seeking, often devastating economic, health, and from the role that energy played in the late 19th and environmental consequences at the local level, and early 20th centuries in the United States, Canada, high incidences of conflict and war. In sum, countries and Australia. In those earlier and more successful that depend on oil for their livelihood eventually experiences, mining and oil exploitation contributed become among the most economically troubled, the only a very small percentage of total economic most authoritarian, and the most conflict-ridden in output, never dominated exports, and never came the world. anywhere near the magnitude of dependence that characterizes contemporary oil-led development. While leaving a considerable regional impact, oil 1. INTRODUCTION and minerals were never the motor of development. Today, to the contrary, oil-led development means Oil is a commodity with special characteristics. that countries are overwhelmingly dependent on These include its unique role as both the common revenues gleaned from the export of petroleum. This natural heritage of a country and the motor of global dependence generally is measured by the ratio of oil industrialization, its depletability, its price volatility and gas exports to gross domestic product; in and consequent boom–bust cycles, its especially high countries that are sustained by petroleum rents, this capital intensity and technological sophistication, its figure ranges from a low of 4.9% (in Cameroon, a enclave nature, and the exceptional generation of dependent country that is running out of oil) to a profits that accrue to the state and to private actors. high of 86% (in Equatorial Guinea, one of the The combination of these factors produces what has newest oil producers). Dependence is also reflected in been called ‘‘the paradox of plenty’’ or the ‘‘resource export profiles, with oil in dependent countries curse.’’ This is not due to the resource per se, which is generally making up 60–95% of a country’s total simply a black and viscous substance, and it is not exports. Oil-dependent countries can be found in all inevitable. A resource boom can be beneficial or geographic regions of the world, although they are detrimental: Norway, an oil exporter, has used the most commonly associated with the Middle East benefits of North Sea petroleum to earn the highest and, more recently, Africa. place on the United Nations Development Program’s Oil-dependent countries suffer from what econo- list of best development performance, whereas other mists call the ‘‘resource curse.’’ In its simplest form, exporters, such as Nigeria and Angola, are clustered this refers to the inverse association between growth near the bottom. Instead, what matters for the social and natural resource abundance, especially minerals consequences generated by petroleum dependence and oil. This association repeatedly has been are, first, the type of preexisting political, social, and observed across time and in countries that vary by economic institutions available to manage oil wealth population size and composition, income level, and as it comes onstream and, second, the extent to type of government; it is so persistent that has been which oil revenues subsequently transform these called a ‘‘constant motif’’ of economic history. institutions in a rentier direction. Because almost Specifically, countries that are resource poor (without all proved oil reserves exist in less developed petroleum) grew four times more rapidly than countries, where administrative institutions tend to resource-rich (with petroleum) countries between be weak (only 4% can be found in advanced 1970 and 1993, despite the fact that they had half the industrialized democracies), the probability of the savings. Similar findings have been replicated resource curse is exceptionally high. through a study of the members of the Organization of Petroleum Exporting Countries (OPEC), using a different and longer time period, from 1965 to 1998. 2. DEFINITIONS: OIL OPEC members experienced an average decrease in their per capita gross national product (GNP) of DEPENDENCE, RESOURCE 1.3% per year during this period, whereas lower and CURSE, DUTCH DISEASE, AND middle-income developing countries as a whole grew RENTIER STATES by an average rate of 2.2% per year over the same time. Moreover, studies show that the greater the Mineral (especially oil-led) development is often dependence on oil and mineral resources, the worse promoted as a key path for developing countries the growth performance. Finally, countries depen- seeking sustained economic growth. But the oil-led dent on the export of oil have not only performed Oil-Led Development: Social, Political, and Economic Consequences 663 worse than their resource-poor counterparts; they Perhaps most important, petroleum may be one of have also performed far worse than they should have the hardest resources to utilize well; countries given their revenue streams. dependent on oil exports seem particularly suscep- The causes of this resource curse are a matter of tible to policy failure. The reason lies in the weakness debate, but the negative association between growth of preexisting institutions in places where oil for and oil and mineral wealth is not attributed to the export is found, their frequently authoritarian mere existence of the natural resource. Oil in itself character, and the ease with which they can be cannot encourage or hinder growth. Instead, this transformed by an overwhelmingly powerful export association is less direct and, though the weight of sector. Generally, oil rents produce a rentier state— various specific causal mechanisms is still debated, it one that lives from the profits of oil rather than from is generally attributed to some combination of the the extraction of a surplus from its own population. factors. First, oil windfalls can hurt other sectors of In rentier states, economic influence and political the