the national leaders had access to much more wealth
Civil wars
as the value of resource wealth increases, the risk of conflict first rises — and then falls
when the central government can control it
rebels can either be suppressed or bought off
oil found offshore is much better for that reason
no one can really control it
but oil doesn’t cause civil war
only intensifies conflicts in existing countries
mechanisms
rebels might get their hands on the resource — they want their independent state
they now have money to pay for the war
if the govt controls the wealth, there is more of a reason to capture the state
Conclusions
a lot of evidence to support three broad claims:
higher levels of petroleum income lead to more durable authoritarian rulers and regimes
more petroleum income increases the likelihood of corruption
petroleum and perhaps other natural resources triggers conflicts when found in regions dominated by marginalized ethnic groups, particularly in poor countries
What’s needed?
more transparency
dealing with fluctuating prices
invest more in other sectors
help with basic health and education
make it easier to be an entrepreneur
more regional integration
lower the customs duties
Commodity bonds
the problem of volatility
you link the loans you take up not to a currency but to the oil price
your ability to pay will stay the same
everyone is hedging regarding the pricce
buyers and sellers
airlines etc
the highs and the lows are more extreme than they should be
you have to set rules — Chile etc
you can’t overspend if there only is a temporary boom
structural changes are OK
Democracy in the Muslim world?
The US:
“They hate our values!” “They hate democracy!”
actually
they only hate the dictators you have installed
Putin’s Russia as another case
How only oil kept the Soviet Union working
still the case — you can literally pump money out of the ground
Control of the press — no independent voices
All TV is controlled by the government
Manipulation of the internet and social media
Cyber warfare
Ability to shut down infrastructure
influence foreign elections
Assassinations of political opponents
journalists at home
parliamentarians who speak up
people who have gone into exile — in Salisbury, for example
Capital flight
They are all taking their money out of the country
Money is not safe there
No trust in politicians
Nothing much to invest in — few creative industries, nothing that grows
Brain drain
You have to know Russian if you work in a lab at the MIT
Terrible for Russia, great for everyone else
Telegram coders sitting in a skyscraper in Dubai — on the run from Putin
“In classical economics, economic rent is any payment made (including imputed value) or benefit received for non-produced inputs such as location (land) and for assets formed by creating official privilege over natural opportunities (e.g., patents) and monopolies.”
“rent-seeking” — people who are looking for ways to protect themselves from the market
gaining more from a market transaction than you would if there was a free market
the cost of the market not functioning well — monopolies, oligopolies — you can set your own price
some reason why the market doesn’t work — usually political
but also a nature of the good — if you have a monopoly …
or access to a particular location or resource
not just for landlords, but for the owners of all natural resources
“income derived from the gifts of nature”
a rentier economy is an economy which relies on substantial external rent
an external rent can, if substantial, sustain the economy without a strong productive domestic sector, hence the epithet of a rentier economy
traditional hostility towards people who make money without working
cf. Christian and Muslim prohibition against usury
you are making money without doing anything
Schumpeter — entrepreneur
creative destruction
the very opposite of the rentier
Cf. the concept of “wealth”
mercantilism and gold
wealth as productivity
the young artist and the old woman
Adam Smith on Spain and England
Oil economies
Arab oil states are rentier states
only a few are engaged in the generation of this rent
the majority are involved in distributing and utilizing it
economic power
produces political power
oil represents
90% of government revenue
90% of exports
but no more than 2-3% of the people are involved in this production
long tradition of buying loyalty from tribe members
the states are all about distributing favors to the population
everything is a royal favor
domestic economic activity is a matter of competing for government contracts
govt employment and private business blurs
oil-based welfare-state
defense and national security
education and health
social security, employment
infrastructure
the govt is effectively the only employer
as many people working for the state as in Communist countries
productivity of civil servants is very low
the point is mainly to show up at your office
Political consequences
since they don’t rely on taxes
ordinary people have little bargaining power
there is no political participation
people aren’t paying taxes and that means that they can make no demands for representation — this is historically an important cause of democratic pressure
the elites
means they can ignore the traditional middle-class — also an important source of political pressure
no social groups form — no civil society
repression
enough resources to repress the people — why do all oil regimes have such large military?
Foreigner companies and workers
Foreign companies have to rely on local agents
in any case impossible to deal with the local bureaucracy if you are a foreigner
big families are associated with big brand names — GM, Mercedes
Professions and trades restricted to nationals
locals can sponsor professionals who can work for them — another source of rent
The Souk Al-Manakh stock market crash was the 1982 stock market crash of Kuwait’s unofficial stock market, the Souk Al-Manakh (Arabic: سوق المناخ). The Al-Manakh market was housed in an air-conditioned parking garage in the historic area of Jibla, Kuwait City. The market was specialized in highly speculative and unregulated non-Kuwaiti companies.[1] At its peak, its market capitalization was the third highest in the world, behind only the U.S. and Japan, and ahead of the U.K. and France.
everyone only talked about the stock market
you rely on migrant labor
they are working in an ordinary work-reward economy
not in the rent economy
they are a part of the labor force but not of society
better conditions than their home country, but insecurity and alienation
Non-Oil Arab States — semi-rentiers without oil
they can still claim location rent
nice geopolitical location
they can get rent from the superpowers
Somalia and Egypt playing the US against the Soviet Union
Jordan and Yemen too
transit countries
picking up money for the Suez Canal
the oil states are paying them off
the Waterloo of pan-Arabism — the 1973 war
they are buying peace and stability
Workers remittances
this is also unearned income
tourism and foreign aid of course
Egypt — perhaps 45% of GDP unearned income
Patrimonialism
these states too are playing this patriomonial game
handing out favors
a state controlled economy
although they can’t quite afford it
a lot of inefficient state companies
and incompetent bureaucrats
the importance of a new social class
lawyers, consultants, financial advisors
Conclusion
the rentier pattern
oil has contaminated all of the Arab world
serious blow to the ethics of work
it is not about being productive
but about exploiting various gifts of nature and advantages of location
unearned income
The resource curse
What is this? Why is it a “curse”?
Economic consequences
very rich but low economic development
Countries without natural resources often do much better
Japan, Singapore, Ethiopia
How can the economic consequences be explained?
little economic spill-over — everything is brought in from outside — next to no connection to the local economy
little technological spill-over — local people receive no training — there are no spin-off companies
but debate:
whether the positive results outweigh the negative?
and scholarly discussions about
how resources should be measured?
changes or constant levels?
and don’t forget:
these countries are often bad investment risks
better to invest in democracies
Why oil seems to be uniquely terrible
different qualities of oil and very different costs associated with the extraction
as a result the market does not work very well
Price fluctuations:
Inelasticity of both supply and demand
It is very difficult to react to changes in price — the market cannot clear
difficult to suddenly come up with more oil — if production already is at the limit
difficult to cut the demand for oil in relation to higher prices
makes it difficult to make lasting commitments
periodic crises
overspend in times of boom
and economic problems in time of bust
The history of the petroleum industry:
The “Seven Sisters” — who were they?
Nationalizations in the 1970s
now all countries own their own oil — except the US
OPEC
Very opaque book keeping
keep it outside of the state budget
money that very easily goes into someone’s pockets
the national leaders had access to much more wealth
Civil wars
as the value of resource wealth increases, the risk of conflict first rises — and then falls
when the central government can control it
rebels can either be suppressed or bought off
oil found offshore is much better for that reason
no one can really control it
but oil doesn’t cause civil war
only intensifies conflicts in existing countries
mechanisms
rebels might get their hands on the resource — they want their independent state
they now have money to pay for the war
if the govt controls the wealth, there is more of a reason to capture the state
Conclusions
a lot of evidence to support three broad claims:
higher levels of petroleum income lead to more durable authoritarian rulers and regimes
more petroleum income increases the likelihood of corruption
petroleum and perhaps other natural resources triggers conflicts when found in regions dominated by marginalized ethnic groups, particularly in poor countries
What’s needed?
more transparency
dealing with fluctuating prices
invest more in other sectors
help with basic health and education
make it easier to be an entrepreneur
more regional integration
lower the customs duties
Commodity bonds
the problem of volatility
you link the loans you take up not to a currency but to the oil price
your ability to pay will stay the same
everyone is hedging regarding the pricce
buyers and sellers
airlines etc
the highs and the lows are more extreme than they should be
you have to set rules — Chile etc
you can’t overspend if there only is a temporary boom
structural changes are OK
Democracy in the Muslim world?
The US:
“They hate our values!” “They hate democracy!”
actually
they only hate the dictators you have installed
Putin’s Russia as another case
How only oil kept the Soviet Union working
still the case — you can literally pump money out of the ground
Control of the press — no independent voices
All TV is controlled by the government
Manipulation of the internet and social media
Cyber warfare
Ability to shut down infrastructure
influence foreign elections
Assassinations of political opponents
journalists at home
parliamentarians who speak up
people who have gone into exile — in Salisbury, for example
Capital flight
They are all taking their money out of the country
Money is not safe there
No trust in politicians
Nothing much to invest in — few creative industries, nothing that grows
Brain drain
You have to know Russian if you work in a lab at the MIT
Terrible for Russia, great for everyone else
Telegram coders sitting in a skyscraper in Dubai — on the run from Putin