Oil and Development

1
Oil and Development The Resource Curse in
Practice Ben Paarmann (bp283_at_cam.ac.uk)
2
All in all, I wish we had discovered water
- Sheikh Ahmed Yamani, Oil Minister Saudi Arabia
3
Oil and Economic Growth Sachs and Warner
1997 resource-rich countries - on average lower
economic growth rates or 'inverse association
between natural resource intensity and growth
between 1970 and 1990
4
Ross 1999 Literature summary of economic and
political considerations
Economic Decline of terms of trade Instability
of international commodity markets (large swings
in world market prices) Poor linkages between
resource and non-resource sectors (insulation of
growth sectors) Dutch Disease (currency
appreciation and loss of competitiveness of
non-booming sectors)
Political Cognitive Myopia and overambitious
development programs (in scope and time
frame) Societal empowerment of
groups/sectors/classes that are
growth-impeding State-centred Resource booms
weaken state institutions
Over the past two decades, the gap has widened
between our understanding of the economics and
our understanding of the politics of resource
exporters.
5
Economic Pitfalls
1) Terms of trade No downward trend with
global demand growth and finite supply, prices
likely to stay high 2) Instability of
international commodity markets (large swings in
world market prices) Oil prices subject to large
swings but with prices hovering around 50 per
barrel at the moment, oil one of the most
profitable natural resources
6
Economic Pitfalls
3) Poor linkages between resource and
non-resource sectors (insulation of growth
sectors)
Economy
Oil sector
But oil-exporting countries possess resources to
foster linkages, but many failed to do so
7
Political Pitfalls
Recap 1) Overambitious development programs
2) Benefiting growth-impeding individuals or
groups 3) State-centred approach
1) Cognitive approaches to explaining the
Resource Curse difficult to quantify 2)
Resource windfalls should cushion government
from the demands of interest groups 3)
State-centred approach, which is often a hybrid
of various elements a) Rentier state (less
representation due to relative absence of
domestic taxation) overoptimistic, guarding
status quo, no reform incentive b) Weakening
state institutions sector specificity (oil is a
point resource with limited amount of players)
uneven institutional development Petro State -
fiscal reliance on petrodollars weakens state
authority (other sectors wither)
8
(No Transcript)
9
Kazakhstan
At a glance Four times the size of
France Population 15.2 million Capital
Astana GDP growth 2006 8.5 GDP per capita PPP
9,100 Oil/GDP 17-30 Former Soviet
Republic Independence 1991 difficult transition
period

10
Oil and Gas Locations
Oil proved 26 billion bbl Production 1.3 million
bbl/day
Exports gt 1.0 million bbl/day Windfalls 2005
.4.2 bn, 2020 16 bn (IMF estimate)
Oil facts
11
Countering the Economic Pitfalls of the Resource
Boom
Poor linkages (i.e. only the oil sector is
growing) Non-oil growth 6-8, in line with
overall economic growth Over-reliance on
oil Diversification drive high-technology parks,
special economic zones, clusters World Bank
(2005) warns the temptation to use
interventionist measures for quick but
unsustainable results, e.g. creating state
entities and administrative mechanisms to foster
the goal of diversification and competitiveness
should be avoided (p. 19)
12
Countering the Economic Pitfalls of the Resource
Boom
Dutch Disease Why Dutch? - gas discoveries in
1960s had adverse effects on tradeable non-oil
commodities as currency appreciated
Counter strategies 1) Sterilise oil earnings
via National Fund, thus leaving them out of the
Kazakh economy, also buffer against terms of
trade shocks Fund's assets 2001 1.2
billion June 2005 5.2 billion March 2006 8.3
billion
2) Keep inflation in check Fiscal prudence e.g.
withstand political pressure to spend oil
windfalls
13
The Political Resource Curse in Kazakhstan
1) Overzealous societal transformation program
Kazakhstans strategy of joining the worlds 50
most competitive countries all state
structures must pay maximum efforts to implement
the tasks outlined Altogether thirty priorities
in the socio-economic sphere
Problems 1) quality of spending might
deteriorate World Bank institutions in
Kazakhstan are still ill-suited to address the
challenges posed by rapid economic expansion and
oil wealth 2) Strain on budget inflationary
pressures
14
2) Corruption
The lack of transparency in cash flows of some
financial and industrial groups and their illegal
enrichment through hiding profits, transfer of
capital and property abroad, tax evasion and
shadow economy are becoming serious hindrances to
our development. Their representatives are the
ones who are shattering the air with empty calls
to support the fight against corruption. At the
same time, this is exactly where major losses of
the budget are hidden. It is time to move from
words to actions.
- Nursultan Nazarbayev, Annual Message to the
people of Kazakhstan (2006)
Seymour Hersh (2001) Via intermediaries (like
James Giffen, left), American oil corporation
Mobil (now part of ExxonMobil) had paid the
Kazakh government an amount exceeding one billion
U.S. dollars, which President Nazarbayev then
deposited in Swiss bank accounts
15
2) Corruption
Focus on large-scale corruption and transparency
in accounting for windfalls National Fund of
Kazakhstan all channels of accountability lead
to president President only person allowed to
approve changes to the NFK, can allocate
resources for special uses, chairman of the
oversight council
Extractive Industries Transparency
Initiative Announced by Tony Blair (2002) aims
to ensure that revenues from extractive
industries contribute to sustainable development
and poverty reduction Comparing government
revenue with payments foreign and local companies
report (have to add up) But confidentiality
clauses (details of many PSAs not
available) 2006 Only 38 companies have joined
the EITA, while 212 have not agreed to disclose
their accounts
16
2) Corruption
Corruption that much of a problem? What about
greasing the wheels? Corruption compatible with
economic growth (e.g. Korea) Kazakhstan
Corruption practices worse than in some other
countries in the region. Bribes are commonplace,
but it is by no means guaranteed that the desired
result would be achieved by paying officials off
(Akiner, 2004) -gt Market for bribes
uncertain Deterioration of institutions
property rights, contracts, etc. Manifest in
Renegotiation of contracts, problems of SMEs in
getting registered
17
2) Other institutional problems connected to
oil a) Centre-periphery relations long
distances in Kazakhstan and regional state
structure have allowed regional strongmen to
amass influence and become semi-independent
players Oil-rich regions against redistribution,
struggle over tax payments from periphery to
centre Difficult implementation of new
legislation in the regions, little policy
cohesion b) De-privatisation of strategic
oil and gas assets state claiming a more
prominent role through state-owned enterprises
as efficient as private sector?
18
Oil and Development Bulte at al (2002) Because
of the on average poor quality of their
institutions, resource-rich countries tend to do
worse with regards to various development
policies and performance in comparison to other
countries
19
Kazakhstan Inconclusive evidence short period
of independence, windfalls started to flow in
late 1990s Transition from communist rule biggest
impact
Some indicators Human Development Index
(HDI) 1990 0.776 1996 0.726 Since then
improvement, today 80th on worldwide scale, ahead
of all other Central Asian states
Life expectancy 1965 71.4 years 1995 63.5
years 1997 (male) 58.5 years Since then
improvement
20
Kazakhstan - Health Soviet heritage and lack of
engagement after independence
UNDP (2003) From 1999-2002, morbidity rates
rose by 19.9 due to a worsened environmental
situation, poor quality drinking water,
decreased access to and lower quality of medical
care
Infant mortality rates, although officially on
the decline, have been rising according to
parallel demographic and health surveys (UNDP,
2005).
21
Kazakhstan - Poverty Progress...
The proportion of the population living below the
national poverty line, based on a
Kazakhstan- specific subsistence-minimum
definition, fell from 31.8 in 2000 to 16.1 in
2004 (USAID, 2005) Between 2000 and 2004 average
wage more than doubled (IMF, 2005)
...and stagnation But despite increasing
employment and average incomes, the situation in
the labour market is not conducive to poverty
reduction (UNDP, 2005) - large proportion of
the population being self-employed (40 of the
labour force) - seasonal unemployment (mostly in
rural areas) - persistently low living standards
for people dependent on state benefit
transfers - Oil sector up to 30 of GDP, but
only 1 of employment
22
Kazakhstan What to do?
OSI 2003 earnings from the oil windfalls should
be spent on a public investment program to
improve infrastructure, access to health care and
education, and the investment climate for small
and medium-sized enterprises But Fiscal
prudence important unenviable task for Ministry
of Finance
Redistribution regional differences in these
redistribution patterns, i.e. central and
southern oblasts (e.g. South Kazakhstan, Almaty,
Aqmola) benefit the most while northern regions,
which are equally poor, receive less official
transfers But resistance from donor regions,
unofficial redistribution (corruption, informal
sector)
23
Kazakhstan What to do?
Agriculture Employs 22 of the total labour
force, only accounts for 9 of GDP Governments
agricultural budget has increased sevenfold over
the last five years Oil revenue could be used
for public infrastructure, RD assistance, tax
incentives
SMEs 20 of GDP and labour force Capital oil
revenue could be used for SME funds and credit
schemes Labour highly-skilled labour key in
diversifying away from oil But Problems in
higher education
24

• Discussion
• Are there best-practice models of how to deal
  with oil windfalls? What about Norway?
• And, in the end, is oil a blessing or a curse?