The political economy of resource discoveries Prof. Michael L. Ross UCLA Department of Political Science September 21, 2011
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.
The spread of oil and gas production
Rising global demand 80 70 60 50 World 40 Opec Persian Gulf 30 20 10 0 1973 1978 1983 1988 1993 1998 2003 2008
OPEC production lagging 80 70 60 50 World 40 Opec Persian Gulf 30 20 10 0 1973 1978 1983 1988 1993 1998 2003 2008
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
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
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
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
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
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
Danger of a political resource curse
The Political Resource Curse Reduces government accountability
The rest of the world has democratized
But the oil producers have not
Transitions to Democracy annual rate 3.5 3.17 3 2.72 25 2.5 2.22 2 1.5 1 1.19 1.13 Oil states Non-oil states 0.5 0.43 0 All Since 1980 Outside LA, since 1980
The Political Resource Curse Reduces government accountability Heightened risk of civil war
The rest of the world has become more peaceful
But the oil producers have not
Annual Risk of Violent Conflict (%) 9 8 83 8.3 7 6 5 4.8 Non-oil states 39 3.9 38 3.8 4 Oil states 3.2 2.8 3 2 1 0 Since 1960 Since 1992 Since 1992, Low Income
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
The Political Resource Curse Reduces government accountability Heightened risk of civil war Government policies become more important but less effective
Government spending dominates the economy 45 40 39 35 30 30 25 23 23 21 21 20 15 10 18 15 14 12 12 10 11 11 11 5 0 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
Yet their governments are relatively ineffective
What causes this ineffectiveness? Revenue volatility Involuntary component (prices) Voluntary components Volume of production Contract design Fiscal volatility Stabilization/savings funds: design is critical
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
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
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
Summary Many new low-income oil (& metal) producers Vulnerable to political resource curse Much can be done to offset this