The political economy of resource discoveries. Prof. Michael L. Ross UCLA Department of Political Science September 21, 2011

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1 The political economy of resource discoveries Prof. Michael L. Ross UCLA Department of Political Science September 21, 2011

2 Overview 1. Oil and mineral production is spreading to more low-income countries; 2. This typically leads to a political resource curse; 3. Much can be done to prevent this.

3 The spread of oil and gas production

4 Rising global demand World 40 Opec Persian Gulf

5 OPEC production lagging World 40 Opec Persian Gulf

6 New oil & gas producers? Includes both recent & likely new producers Latin America: Kenya Guyana Cuba Southeast tasia: Cambodia East Timor Africa: Ghana Guinea Guinea-Bissau Liberia Mali Mauritania Mozambique Sao Tome Senegal Sierra Leone Tanzania Togo Uganda

7 Oil Producers 1975 MOROCCO TUNISIA Mediterranean Sea WESTERN SAHARA ALGERIA LIBYA EGYPT MAURITANIA SENEGAL THE GAMBIA GUINEA GUINEA BISSAU COTE SIERRA DTVOIRE LEONE LIBERIA MALI BURKINA BENIN TOGO GHANA NIGERIA NIGER CAMEROON CHAD CENTRAL AFRICAN REPUBLIC SUDAN Red Sea ERITREA ETHIOPIA DJIBOUTI South EQUATORIAL GUINEA GABON ANGOLA REP. OF THE CONGO DEMOCRATIC REPUBLIC OF THE CONGO (ZAIRE) RWANDA BURUNDI UGANDA TANZANIA KENYA SOMALIA Indian Atlantic ANGOLA MALAWI ZAMBIA NAMIBIA ZIMBABWE MOZAMBIQUE MADAGASCAR SOUTH AFRICA Walvis Bay BOTSWANA LESOTHO SOUTH AFRICA SWAZILAND Indian

8 Oil Producers 1985 MOROCCO TUNISIA Mediterranean Sea WESTERN SAHARA ALGERIA LIBYA EGYPT MAURITANIA SENEGAL THE GAMBIA GUINEA GUINEA BISSAU COTE SIERRA DTVOIRE LEONE LIBERIA MALI BURKINA BENIN TOGO GHANA NIGERIA NIGER CAMEROON CHAD CENTRAL AFRICAN REPUBLIC SUDAN Red Sea ERITREA ETHIOPIA DJIBOUTI South EQUATORIAL GUINEA GABON ANGOLA REP. OF THE CONGO DEMOCRATIC REPUBLIC OF THE CONGO (ZAIRE) RWANDA BURUNDI UGANDA TANZANIA KENYA SOMALIA Indian Atlantic ANGOLA MALAWI ZAMBIA NAMIBIA ZIMBABWE MOZAMBIQUE MADAGASCAR SOUTH AFRICA Walvis Bay BOTSWANA LESOTHO SOUTH AFRICA SWAZILAND Indian

9 Oil Producers 1995 MOROCCO TUNISIA Mediterranean Sea WESTERN SAHARA ALGERIA LIBYA EGYPT MAURITANIA SENEGAL THE GAMBIA GUINEA GUINEA BISSAU COTE SIERRA DTVOIRE LEONE LIBERIA MALI BURKINA BENIN TOGO GHANA NIGERIA NIGER CAMEROON CHAD CENTRAL AFRICAN REPUBLIC SUDAN Red Sea ERITREA ETHIOPIA DJIBOUTI South EQUATORIAL GUINEA GABON ANGOLA REP. OF THE CONGO DEMOCRATIC REPUBLIC OF THE CONGO (ZAIRE) RWANDA BURUNDI UGANDA TANZANIA KENYA SOMALIA Indian Atlantic ANGOLA MALAWI ZAMBIA NAMIBIA ZIMBABWE MOZAMBIQUE MADAGASCAR SOUTH AFRICA Walvis Bay BOTSWANA LESOTHO SOUTH AFRICA SWAZILAND Indian

10 Oil Producers 2005 MOROCCO TUNISIA Mediterranean Sea WESTERN SAHARA ALGERIA LIBYA EGYPT MAURITANIA SENEGAL THE GAMBIA GUINEA GUINEA BISSAU COTE SIERRA DTVOIRE LEONE LIBERIA MALI BURKINA BENIN TOGO GHANA NIGERIA NIGER CAMEROON CHAD CENTRAL AFRICAN REPUBLIC SUDAN Red Sea ERITREA ETHIOPIA DJIBOUTI South EQUATORIAL GUINEA GABON ANGOLA REP. OF THE CONGO DEMOCRATIC REPUBLIC OF THE CONGO (ZAIRE) RWANDA BURUNDI UGANDA TANZANIA KENYA SOMALIA Indian Atlantic ANGOLA MALAWI ZAMBIA NAMIBIA ZIMBABWE MOZAMBIQUE MADAGASCAR SOUTH AFRICA Walvis Bay BOTSWANA LESOTHO SOUTH AFRICA SWAZILAND Indian

11 Oil Producers 2015 MOROCCO TUNISIA Mediterranean Sea WESTERN SAHARA ALGERIA LIBYA EGYPT MAURITANIA SENEGAL THE GAMBIA GUINEA GUINEA BISSAU COTE SIERRA DTVOIRE LEONE LIBERIA MALI BURKINA BENIN TOGO GHANA NIGERIA NIGER CAMEROON CHAD CENTRAL AFRICAN REPUBLIC SUDAN Red Sea ERITREA ETHIOPIA DJIBOUTI South EQUATORIAL GUINEA GABON ANGOLA REP. OF THE CONGO DEMOCRATIC REPUBLIC OF THE CONGO (ZAIRE) RWANDA BURUNDI UGANDA TANZANIA KENYA SOMALIA Indian Atlantic ANGOLA MALAWI ZAMBIA NAMIBIA ZIMBABWE MOZAMBIQUE MADAGASCAR SOUTH AFRICA Walvis Bay BOTSWANA LESOTHO SOUTH AFRICA SWAZILAND Indian

12 Danger of a political resource curse

13 The Political Resource Curse Reduces government accountability

14 The rest of the world has democratized

15 But the oil producers have not

16 Transitions to Democracy annual rate Oil states Non-oil states All Since 1980 Outside LA, since 1980

17 The Political Resource Curse Reduces government accountability Heightened risk of civil war

18 The rest of the world has become more peaceful

19 But the oil producers have not

20 Annual Risk of Violent Conflict (%) Non-oil states Oil states Since 1960 Since 1992 Since 1992, Low Income

21 Oil-producing states with recent conflicts Middle East: Latin America: Iran Iraq Algeria Yemen Libya Bahrain Syria Africa: Chad Sudan Congo Republic Angola Nigeria Colombia Peru Bolivia Ecuador Southeast Asia: East Timor Myanmar Thailand Indonesia Former Soviet Union Russia Azerbaijan

22 The Political Resource Curse Reduces government accountability Heightened risk of civil war Government policies become more important but less effective

23 Government spending dominates the economy Camer eroon Ghana Nig igeria Geo orgia Arm menia Azerba baijan Argen entina Parag aguay Venez ezuela Syria Tur urkey Iran Tun unisia Moro occo Algeria

24 Yet their governments are relatively ineffective

25 What causes this ineffectiveness? Revenue volatility Involuntary component (prices) Voluntary components Volume of production Contract design Fiscal volatility Stabilization/savings funds: design is critical

26 What causes this ineffectiveness? Rent-seeking Hard to control components Easier to control components Institutionalized transparency Institutionalized competition National oil companies push towards competition, openness, accountability Private sector that is productive & creates jobs

27 What causes this ineffectiveness? Reduced accountability Automatic component (diminished need to tax) Voluntary components Transparency revenues, expenditures, contracts Civil society International EITI, Natural Resource Charter

28 Timor-Leste as a model Strong awareness of oil as potential danger Commitment to transparency in revenues, budgets, contracts, and decision-making EITI compliant information is reliable Stabilization/future generations fund: overseen by multi-stakeholder council detailed quarterly reports limits on withdrawals

29 Summary Many new low-income oil (& metal) producers Vulnerable to political resource curse Much can be done to offset this

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