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“All in all, I wish we had discovered water” - Sheikh Ahmed Yamani, Oil Minister Saudi Arabia
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’
Ross 1999Literature summary of economic and political considerations
Political:
Cognitive: Myopia and overambitious development programs (in scope and time frame)Societal: empowerment of groups/sectors/classes that are growth-impedingState-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.”
Economic:
Decline of terms of tradeInstability 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)
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
Economic Pitfalls
3) Poor linkages between resource and non-resource sectors (insulation of growth sectors)
EconomyOil
sector
But: oil-exporting countries possess resources to foster linkages, but many failed to do so
Economic Pitfalls
Political Pitfalls
Recap:
1) Overambitious development programs 2) Benefiting growth-impeding individuals or groups3) 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 elementsa) “Rentier state” (less representation due to relative absence of domestic taxation); overoptimistic, guarding status quo, no reform incentiveb) 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)
Kazakhstan
At a glance:
Four times the size of FrancePopulation: 15.2 millionCapital: AstanaGDP growth 2006: 8.5% GDP per capita PPP: $9,100Oil/GDP: 17-30%
Former Soviet RepublicIndependence: 1991difficult transition period
Oil and Gas Locations
Oil proved: 26 billion bblProduction 1.3 million bbl/dayOil facts: Exports: > 1.0 million bbl/day
Windfalls: 2005: $.4.2 bn, 2020: $16 bn (IMF estimate)
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)
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
The Political Resource Curse in Kazakhstan
1) Overzealous societal transformation program
““Kazakhstan’s strategy of joining the world’s Kazakhstan’s strategy of joining the world’s 50 most competitive countries”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
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
2) Corruption
Focus on large-scale corruption and transparency in accounting for windfalls
National Fund of Kazakhstan: all channels of accountability lead to presidentPresident: 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
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
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?
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
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
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).
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
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)
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
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?
