The Fuse

Professor Michael Ross on the Consequences of Oil Wealth

by Leslie Hayward | May 30, 2015

Wealth from natural resources—blessing or curse for developing countries? And what does it mean for international cooperation when countries are able to tap these resources?

Professor Michael Ross has examined these questions in the context of oil wealth, and uncovered evidence that—far from being a blessing—oil wealth can prop up dictatorships, slow economic development, and prevent government transparency. Here’s some of what Ross has to say on the topic.

What first signaled to you that oil wealth could have a down side for some areas of the world, and what have you learned about this through your research?

Like many people, I had the perception that oil wealth was an asset, since it would allow governments to make larger investments in public goods, like schools, hospitals, and roads.

My research in the late 1990s began to show that as countries discovered mineral wealth, including petroleum wealth, they actually began to suffer unexpected problems. I sought to understand how those resources affected the accountability of the government, and the likelihood of violent conflict.

You say there are important foreign policy consequences for countries finding oil—tell us about your research findings on this with Eric Voeten at Georgetown.

We observed that many of the most belligerent countries around the world are dependent on oil exports: Russia, Venezuela, Iran, and until recently Libya and Iraq. This is particularly interesting, because all of these countries are heavily dependent on international trade.

Usually, when countries become more economically globalized and engaged in international trade, they also develop an interest in being more cooperative. It seems like common sense: the more your economy is dependent on trade, the more you want to get along with your trade partners.

However, we saw that for countries that are more economically engaged through this one channel—petroleum exports—[and] the money was coming in from [these] exports, the more uncooperative their governments became, and the more likely they were to reject international institutions.

In other words, the problem is not just a few belligerent leaders—like Qadaffi, Putin, or Chavez—but the oil-exporting states more generally.

Regarding your research about oil revenues and unbalanced globalization: What makes your research model statistically robust, and gives you confidence your hypothesis has been confirmed?

We (Professor Ross and Professor Voeten) carried out an exhaustive number of statistical tests. We began by comparing countries with each other—oil exporters vs. non exporters. We then compared countries to themselves over time, looking at their behavior before and after they discovered oil, and when oil prices changed.

We saw the same pattern over and over again: More revenue from oil was followed by less cooperation with other countries.

Naturally, we were concerned that this result might be confounded by lots of other variables—wealth, democracy, and other conditions that scholars have identified as affecting international cooperation. So we controlled statistically for a long list of these and other confounding factors, and still we found this strong effect.

We were also concerned that our findings might depend on how we measured international cooperation. So we tested the effects of oil revenues on about a dozen different measures of how cooperative countries are, including how they vote in the UN, whether they sign human rights treaties, if they contribute to peacekeeping, the number of embassies they have in other countries, how often they sign international agreements, and if they abide by those agreements.

Again and again we found the same thing: That more oil is followed by less cooperation.  After many many tests, we ultimately came away convinced that our finding is really an important and robust one.

The Middle East is infamous for lagging behind the rest of the world in terms of democratic norms, good governance, human rights, and economic stability. A lot of people attribute this to the region’s cultural history. Can you summarize how oil wealth props up these regimes, and enables these countries to remain mired in antiquated traditions or political systems?

On many issues like democracy and women’s rights, the Middle East is seen as the great outlier in the world. I think many Americans assume it has to do with Islam or patriarchal traditions or the Arab culture. My own research—which is summarized in my book, The Oil Curse—shows that a lot of it can be explained by the abundance of oil.

Let’s take the question of democracy, or more broadly, government accountability.  We can’t say that’s only a matter of oil, since almost all of the Arab countries are undemocratic, including ones without oil, like Jordan and Morocco. However, even among these authoritarian states there is still a lot of variation in the freedom of civil society and the protection of civil rights. The countries with greater oil wealth tend to allow fewer civil liberties and are generally the less accountable to their people.

And around the world?

The oil-rich states have been governed by some of the world’s longest-running dictatorships, in places like Angola, Equatorial Guinea, and until recently, Libya. Despite their oppressive tactics, these regimes have become so durable because they were built on a foundation of oil wealth.

The links between oil wealth and authoritarianism are very robust, and is connected to the insight that taxation is closely linked to representation in government.

When people are taxed, they demand accountability. Oil allows these regimes to keep taxes low or nonexistent.

What is the impact on the military and police in these countries?

They tend to have better funded military and police organizations. You see this demonstrated quite clearly in the Arab Spring—in pretty much all countries across the Middle East, the regimes that were most successful at quelling protests were those with access to oil wealth. Those regimes were able to keep the military on their side, and in many cases, to quiet public dissent with higher subsidies.

Arab states with less oil wealth including Bahrain, Tunisia, Egypt, and Syria were the ones that struggled to keep the lid on protestors, and saw the greatest pressures for regime change.

The notable exception is Libya, and it’s an important one. But had it not been for the NATO intervention, the Gadhafi regime would have most likely prevailed—it was well on its way to quashing the rebellion, thanks in part to mercenaries hired with oil money.

What other countries or regions might we expect to demonstrate troubling levels of uncooperativeness?

We’re at a point historically where a lot of low-income countries in sub-Saharan Africa and Latin America have discovered significant oil and gas resources. There’s a real possibility they could become cursed rather than blessed by their new resource wealth.

One potential danger, drawing again on my research with Professor Voeten, is that they will lose interest in cooperating with their neighbors and resolving conflicts peacefully. Many more Venezuelas and Libyas could be emerging in East Africa or South America.

So what about a country like Brazil that has discovered massive offshore oil resources in recent years, but has a fairly well developed and diverse economy? It’s also a BRIC, and we’ve seen poor behavior from its peers Russia and China recently. Based on these findings, can we see it shifting from being a generally cooperative country to one which is more independent?

I think this is a greater danger than people realize: a decade from now, these massive pre-salt resources could have a powerful and harmful effect on Brazilian politics.

I don’t think that Brazil is on a direct pathway to becoming the next Venezuela. But it’s instructive to remember that in the 1980s, Venezuela was seen as a model for managing its petroleum resources wisely, and it had what many people considered the best run, most independent and business-oriented national oil company in the developing world, PDVSA. All of that fell apart.

A huge factor in the shift in Venezuela’s behavior has been the dramatic run up in petroleum prices since 1998. Chavez became President in February 1999.

And Russia?

Just a few months later, Putin became Russia’s Prime Minister. While both countries have been rich in hydrocarbons for a long time, the price boom allowed both leaders to consolidate power, remove checks and balances on their own authority, and take a more aggressive stance toward their neighbors.

If a country that governed its petroleum wealth as prudently as Venezuela did in the late 1980s and early 1990s can turn into Venezuela today, we should also be concerned about the direction of countries like Brazil.

What about countries like Argentina, which is currently working on tapping its massive Vaca Muerta shale basin?

I’m pretty agnostic on shale—it’s a different kind of resource, and I’m not sure we’ll see the same kinds of effects.

We don’t know if shale will generate the same kinds of government revenues as conventional oil and gas, and it tends to involve a more decentralized extraction process. A lot remains to be seen about the political consequences of exploiting shale.

There’s always plenty of attention on the international community’s problem children like Iran and Venezuela, but even friendly Norway has remained independent of the European Union. Do you think this is because of its oil revenues and sovereign wealth fund?

I’ve presented this work in Norway at a number of institutions. Many Norwegians seemed to agree that the reason they didn’t join the E.U. was that—even though they’re generally very cooperative in their foreign policy—oil wealth enabled them to stand apart and remain independent.

Shifting to domestic politics—what can the U.S. do to undermine the negative foreign policy impacts of oil wealth?

There’s a number of ways to try to counteract some of these effects. The first and most important: globally reduce fossil fuel dependence.

There are plenty of other good reasons to do this, but the contribution of my research is to show that oil exploitation has harmful political consequences in a great many places. So if you can reduce the global demand for oil, you should also see fewer dictatorships, and fewer violent insurgencies, in many places around the world.

But we have to figure out how to reduce demand on a global level – not simply in a few rich countries.  Fortunately, there are many ways to do that.

What do you suggest? 

Peel back the secrecy in the petroleum industry.

Often people in resource-rich countries don’t know how much money their governments are accruing and what kind of payments are being made to government officials for the sake of the oil industry. So the more light that we can shed on this issue, the more people will demand the same kinds of accountability in resource-rich countries that they demand elsewhere.

That’s where the Extractive Industries Transparency Initiative (EITI) and other initiatives can really contribute—by opening up this secretive industry.

Finally, I think we need to have more research on how we can help low and middle income countries that are dependent, or on the verge of becoming dependent, on these resources.  It’s critical for their citizens to build more diversified and sustainable economies. We need to find better ways of pulling people out of poverty and helping them achieve more equitable kinds of growth.

I’ve been working on this issue for about 15 years now. There’s been so much more progress than I could have imagined on raising awareness of this issue and creating initiatives like EITI, to help countries better govern these resources.

A great deal more work must be done to help countries break out of the resource curse.

 

Michael Ross is a professor at UCLA, whose work explores the ways that oil revenues and oil wealth often disrupt international development and enable nations to disengage from the international community. His recent publications include The Oil Curse: How Petroleum Wealth Shapes the Development of Nations, and Oil and Unbalanced Globalization—a study conducted with Georgetown University’s Professor Eric Voeten.

Ross has been published in journals including Foreign Affairs, Foreign Policy, The New York Times, and Harper’s. He currently works on various task projects with the World Bank, Central Intelligence Agency, United Nations, and Department of Interior.