The Perils of the Petro-State: Reflections on the Paradox of Plenty.

• Author: Karl, Terry Lynn

Think back to the years 1973 and 1974 when the rapid and unexpected fourfold increase in the price of crude oil created the first global energy crisis. As the most massive transfer of wealth ever to occur without war began to work its way through the international system, wild predictions were made about the potential skyrocketing wealth of oil exporting countries.(1) While the industrialized countries trembled at the prospect that the Organization of Petroleum Exporting Countries (OPEC) might become the world's most powerful banker, the oil exporters(2) were euphoric.

Prosperity, in their view, would provide a sustainable base for a post-oil economy, full employment, national security and political stability; in short, it would permit oil-exporters to join the countries of the First World. Thus, the Shah of Iran promised his people a Great Civilization," while Venezuela's President Carlos Andres Perez forecast La Gran Venezuela (The Great Venezuela) in the near future. "Someday soon," Perez predicted in a conversation with this author, "Americans will be driving cars built by our workers in our modern factories, with bumpers made from our aluminum, and gasoline made from our oil. And we will look like you."(3)

Such predictions have proved to be the modern version of the Midas myth. Twenty-five years after the 1970s boom, and despite two other major price hikes in the 1990s, most oil-exporting countries are in crisis, especially the capital-deficient ones.(4) Plagued by bottlenecks and breakdowns in production, capital flight, drastic declines in efficiency, double-digit inflation, overvalued currencies and budget deficits, they urgently seek the foreign capital and joint ventures that they so vehemently rejected during the nationalizations of oil in the 1970s. As their economic performance worsens and their oil and debt dependence increases to levels higher than in the pre-bonanza years, most oil exporters' political stability also has suffered. From Nigeria and Venezuela to Indonesia and Algeria, riots, conflict and outright civil war threaten the populations of OPEC countries. Just as gold once tainted King Midas' life despite his expectations to the contrary, oil seemed to "petrolize" the economy and polity of these countries. "It is the devil's excrement," OPEC's founder, Juan Pablo Perez Alfonzo, observed. "We are drowning in the devil's excrement."(5)

What I have elsewhere called "the paradox of plenty" poses a significant puzzle for both scholars and policymakers.(6) That oil-rich countries--countries as dissimilar as Venezuela, Iran, Nigeria, Algeria and Indonesia--should end up in profound economic and political crisis is remarkable. That they also stand at strikingly similar junctures despite all their differences calls for an explanation. These countries are heterogeneous in virtually every respect except oil: they are physically diverse (Algeria is more than 100 times larger than tiny Kuwait) and demographically different (Indonesia's population is 132 times that of Qatar); they vary in their oil reserves (Saudi Arabia has 265 times as much as Gabon), not to mention their other factor endowments. Their standards of living showed enormous discrepancies at the time of the 1974 boom, with per capita income as low as $170 in Indonesia compared with $11,000 in the United Arab Emirates, and their political regimes ranged from democracy (Venezuela and Ecuador) to military rule (Iraq and often Nigeria), from strict Islamic theocracies (Saudi Arabia and post-1979 Iran) to nominally socialist one-party systems (Algeria). There are profound differences between Nigeria, which falls at the worst end of the continuum, and Indonesia, which has fared better.(7) That is not to argue that oil countries are worse off than many of their non-oil counterparts, which may or may not be the case depending on the comparisons involved. But the path by which they have arrived at their current troubles is different from those countries without oil, and despite their riches, they have arrived at similar crisis points.

This puzzle has global implications. If petroleum booms are likely to produce poverty, inequality and political crises inside oil-exporting countries--which seems to be the case judging from the past two decades--these crises subsequently produce new oil shocks that may have profound and unforeseen consequences. Oil prices rose sharply three times in the 1970s, and two of these shocks (the 1971 "Libya jump" and the 1979 "Iran boom") were closely associated with a political crisis inside a major oil-exporting state. In 1990 the market was disrupted and prices rose sharply again as a result of Iraq's attempt to overcome its domestic problems by invading neighboring Kuwait. Imagine the consequences of instability in Saudi Arabia or elsewhere in the Persian Gulf--an area that controls a full 60 percent of the world's known oil reserves! Crises within oil exporters are essential to understand, not only because they shape the lives of people within their borders or regions, but also because they can reverberate powerfully throughout world markets and even threaten global peace.

How does oil affect the political economy of producer countries? What is the record of the OPEC countries in the 25 years since the 1970s boom? Is this record of development a fluke that can be overcome by learning from the past, or are the same patterns likely to repeat themselves where new discoveries may occur? And what might be the consequences of more perverse development outcomes in the future?

THE "PARADOX OF PLENTY": THE SPECIAL DILEMMA OF PETRO-STATES

Petro-states are not like other states.(8) While they share many of the development patterns of other developing countries, especially mineral exporters, the economies and polities of countries dependent on oil are rapidly and relentlessly shaped by the influx of petrodollars in a manner that sets them apart from other states. Oil wealth molds institutions more dramatically than development specialists ever imagined or even seem to understand. This is especially true if petroleum exploitation coincides with modern state-building, as has so often been the case. Where this historical coincidence occurs, petro-states become marked by especially skewed institutional capacities. The initial bargaining between foreign companies anxious to secure new sources of crude and local rulers eager to cement their own bases of support--whatever their mutual benefits--leaves a legacy of overly-centralized political power, strong networks of complicity between public and private sector actors, highly uneven mineral-based development subsidized by oil rents and the replacement of domestic tax revenues and other sources of earned income by petrodollars. In effect, this alters the frameworks for decision-making in a manner that further encourages and reinforces these initial patterns, producing a vicious cycle of negative development outcomes.

That this relatively uniform development occurs in settings that are remarkably heterogeneous at the outset is due to the one commonality shared by these countries--a set of properties arising from the exploitation of petroleum. The petro-state is simply more dependent on a single commodity than any other state, and the exploitation of this commodity is more depletable, more capital-intensive, more enclave-oriented, more centralized in the state and more rent-producing than any other--all of which bodes ominously for successful development. The main patterns of oil exporters flow directly from such properties: the over-reliance on petroleum revenues as a mainstay of virtually all economic activity, which tends to put the needs of the oil industry above all else; the lack of productive linkages and the dominance of fiscal ones; the extreme partiality for highly capital-intensive heavy industry coupled with a structural bias against agriculture and other export activities; the perceived necessity to accelerate development very rapidly "before the oil runs out"; and the primacy of the state in the ownership and disposition of oil revenues.

These patterns have a self-reinforcing internal logic. In the beginning, both the requirements of oil exploitation and the depletability of the resource necessitate a highly-centralized authority if only to give foreign capital a bargaining partner. Whether by law or custom, oil rents accrue to the state, and because oil belongs to the nation as a whole, one of the key tasks of this authority ostensibly becomes the search for viable productive alternatives to petroleum-led development through the use of this fiscal advantage. But this very fiscal advantage tends to foster consumption linkages while overwhelming the productive linkages so necessary for generating sustainable economies.(9) At the same time, it blocks self-correcting mechanisms, thereby fostering continued dependence on petrodollars.

"Petromania" further reinforces this oil logic. When oil monies first come on stream, or when booms occur, rapid petrodollar flows encourage new belief systems about the expansive role of the public sector, new modes of behavior and new vested interests--both inside and outside government. In the 1970s and early 1980s, for example, oil wealth fueled the ambitions of political leaders fortunate enough to possess it. Not only did these rulers believe they could finance their major development projects at home, but they could also invest or buy resources and protection abroad. Thanks to black gold, rapid affluence would be attained without resorting to the forced savings, austerity programs or escalating deficit spending that marked their counterparts in the Third World.

Such "petromania" is by no means confined to rulers. The pernicious access to easy money weakens traditional work ethics and reduces incentives for entrepreneurship, lowering financial discipline within bureaucracies and leading to reckless budgetary practices...