Coping with oil revenues Jan Osička 1980s: financialization of energy • Globalization of the oil market • Oil market‘s exposure to financial markets • Oil glut of 1985 • Falling prices reveal macro-economic importance of oil 000 020 040 060 080 100 120 140 1861 1870 1879 1888 1897 1906 1915 1924 1933 1942 1951 1960 1969 1978 1987 1996 2005 2014 Nominal (USD/b) Real (USD2013/b) Lecture outline • Developing countries, oil and state-building • Developed countries, oil and changes in economy Developing countries: the resource extractive state concept • Hossein Mahdavy (1970): The Pattern and Problems of Economic Development in Rentier States: The Case of Iran. • Presumption: Tax extraction and redistribution is the core of the Government – people relationship. The backbone of modern state building… Government Accountability Taxes People …altered by oil-revenues Royalties Government IOC License Pacification Nothing People Export structure, the case of Angola "Tree map export 2009 Angola" by R Haussmann, Cesar Hidalgo, et. al. - Electronic Complexity Observatory, MIT Media Lab and the Center for International Development at Harvard University. Oil and gas exports as a share of government income • South Sudan 98% • Iraq 97% • Eastern Timor 94% • Bahrain 91% • Libya 91% • Alaska 90% • Saudi Arabia 90% • Kuwait 83% • Angola 79% • Azerbaijan 74% • Algeria 70% • Nigeria 70% • Gabon 64% • Qatar 53% • Iran 50% • Trinidad & Tobago 44% • Kazakhstan 39% • Mexico 33% • Russia 28% • Camerun 25% • Egypt 10% www.resourcegovernance.org Pacification: the „stick“ and „carrot“ way Royalties Government IOC License Pacification Nothing People The „stick“ pacification • Government policies centered around its physical survival • The legitimacy is derived from arms expenses (defence against internal and external enemies) • Revaluated currency • Oil revenue distributed within the governing strata only (cronyism) • Domestic problems ignored or delegated to the international community • Benefits for the population practically non-existent External enemy, the case of Chad • 4/75 president Tombalbaye (1960-1975) calls for national disobedience, fearing a coup • 4/75 president Tombalbaye is killed in a coup supported by France (in reaction to the U.S. oil companies finding oil in the country) • President Habré (1982-1990) supports the U.S. companies in exchange for protection from the U.S. • President Déby (since 1990) – former close collaborator of president Habré, supported by France he removes Habré from the office and awards oil exploration/production licenses to French companies. Domestic problems and benefits for the population Angola • Oil production 2000-2004: 0.75 mbd => 1.2 mbd • Approx. 1 billion USD/year diverted from the government budget (according to Global Witness) • Humanitarian crisis 2000-2004 at the end of the civil war (1975-2002): millions of people survived only due to the international aid (World Food Program) Nigeria • Oil revenues 1984-2009: 300 mld. USD • Average income in 2009: 1 USD/day • In real terms: average income in 2003 was lower than in 1960 The „carrot“ pacification • Typical for consolidated regimes • Main threat stemming from cross-generation cohesion (the young need to accept the regime) • Maximum benefits for the population Benefits for the population • Free • Education • Healthcare • Accommodation • Heavily subsidized • Energy • Gasoline • Retirement • 80% of salary after 20 years in public sector • Taxes • Non-existent Division of labor according to citizenship: • UAE • 0% of foreigners in the public administration • 0.04% of the UAE citizens in the private sector • Average sallary in Bahrain 2008: • Citizens: 15,000 USD/y • Foreigners: 5,000 USD/y Developed countries: Dutch disease Developed countries: Dutch disease The Netherlands after vast natural gas exploitation in the 1960s. Key point: resource development can actually hinder economic growth/development GDP Time Oil exports commence Growth without oil Growth with oil Dutch disease The Netherlands after vast natural gas exploitation in the 1960s. Key point: resource development can actually hinder economic growth/development Dutch disease Nontradable Tradable Dutch disease Nontradable (services) Tradable 1 (industry) Dutch disease Nontradable (services) Tradable 1 (industry) Tradable 2 (energy) New expanding tradable sector emerges Dutch disease Nontradable (services) Tradable 1 (industry) workforce Tradable 2 (energy) Direct deindustrialization: workforce movement Dutch disease (3) wages (2) money (1) wages Nontradable (services) (4) workforce Tradable 2 (energy) Tradable 1 (industry) Indirect deindustrialization 1: workforce movement Dutch disease Prices (set locally) Nontradable (services) Prices (set regionally/globally) Tradable 2 (energy) Tradable 1 (industry) Indirect deindustrialization 2: price difference induces currency appreciation that hinders tradable goods exports Dutch disease: summary Dutch disease: some statistics Gylfason, T. (2001): 162 countries, 1965-1998: + 3% of export in the expanding sector => - 1% of total export + 5% workforce in the expanding sector => - 1% of foreign direct investment Dutch disease: some statistics Mehrara, M (2008): 13 oil exporters, 1965-2005: Growth in oil revenues: • smaller than 18% per year: + 10% in oil revenues => + 1,3% other GDP • larger than 18% per year: + 10% in oil revenues => - 2.1 % other GDP Growth in „other“ export, 1980-2000 East Asia and Pacific 212% Botswana 139% Chile 99% Iran 46% Norway 15% Camerun 0% Venezuela -8% Algeria -17% Nigeria -24% Kongo -52% Stevens, Dietsch (2008): Resource curse: An analysis of causes, experiences and possible ways forward. Findings In developing countries, oil revenues can amplify existing conflicts, destabilize societes and prevent state-building and institutions-building from taking place. Alternatively, it can conserve societies in economically underdeveloped, yet welfare abundant state of being. In developed (industrialized) countries, oil revenues can compromise the added value-producing industries and alter the economic development of a country. Oil is good, when: • Strong institutions exist before it is developed • Oil revenues come gradually • Oil revenues are managed thoughtfully