Oil and Development The Resource Curse in Practice Ben Paarmann (bp283@cam.ac.uk)

1. Oil and Development The Resource Curse in Practice Ben Paarmann (bp283@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)

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: > 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 entitiesand 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 “Kazakhstan’s strategy of joining the world’s 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) -> “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): ‘[F]rom 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 Government’s agricultural budget has increased sevenfold over the last five years Oil revenue could be used for: public infrastructure, R&D 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?