Democracy, Governance, and War in Oil Exporting Nations

[00:00:20]I'd like to welcome everyone back uh hope you enjoyed your break and we'll just beginning be beginning with our final panel before the ambassador's speech and I'd like to introduce Mr Christopher Whitney who will be moderating this panel and uh he'll take it from there thank you very much well thank you uh I'm Christopher Whitney I'm the executive director for studies at the Chicago Council on global Affairs and it's a pleasure to be with you today on this very glorious afternoon um to talk about an issue that I personally consider to be one of the the most pressing inter AAL problems we face today and that is the issue of democracy governance and War in uh oil exporting Nations uh we have a very distinguished panel with us to uh talk about that and we I'll quickly turn it over to them but I just wanted to say a few words about this issue uh I find it to be very uh significant for for a variety of reasons I it touches on a wide range of of critical international issues ranging from energy dependence in security to geostrategic stability uh resource competition between great powers and even to uh the emerging need to look at alternative renewable sources of energy to help mitigate against uh climate change and uh it has increasingly become an important issue in the last few years with the very significant rise in oil prices uh at a global level which have produced Revenue windfalls uh for a variety of oild dependent countries in the developing world and quite a few of these countries have not used uh this money very productively uh in many cases they have uh used it as a lever to uh either ignore calls for the development of democratic institutions and governance models or in some instances even to roll back uh the existence or the efficiency of existing institutions within those countries and this democracy deficit has been coupled with a development deficit in quite a few of these countries uh they just simply have not been investing the money uh in productive ways um and in fact many of them suffer uh compared to non-oil dependent countries in the developing World in terms of a variety of economic indicators and this combination of of a lack of democracy and a lack of development is really a very impressing International issue and it's greatly Complicated by the fact that the United States and a variety of multilateral and international actors have diminished ability to exercise influence over these countries because of their added oil revenue and also because of the relationships they have developed with emerging uh economic Powers such as China and India which have diminished our ability to either guide them in as they develop or even to ensure that they act as responsible members of the International Community and and we see that very prominently with what's happening in the Sudan and Iran and with that I'm very pleased to be here today and to be with these three speakers to to talk about this issue in Greater depth and to to look at the convergence or lack of convergence between uh democracy and development uh and uh this particularly these in these countries uh we're going to start off with two PowerPoint presentations uh the first is by Professor Terry Lin Carl who is the gildard professor in Latin American studies and professor of political science at Stanford that will be followed by uh a second presentation by Professor Miriam Loy who is the visiting research scholar at Princeton's Institute for the trans Regional study of contemporary Middle East North Africa and Central Asia it's a very long title and followed and and concluded by Professor Kevin sway who is the assistant professor of Economics at Clemson University and with that I will turn it over to you this really isn't a PowerPoint presentation as much as it is showing you little pieces of my former PowerPoint presentation and I changed a little bit imp part because um we're we're here thanks to the students who invited us and I really want to thank all of you this has been the most impressive uh Jeff and Chris and others Kyle others it's been a really impressive uh conference that you've put together but I think that what I decided to do instead of showing you lots of data was to try to put a bit of a human face on um the debate that I see in oil today and I I need to go back by saying that uh I first got interested in oil because the founder of OPEC Juan Pablo pz Alonso a very noted Venezuelan uh looked at me at one point and said Terry why don't you study what oil is doing to us and I said he was pointing at Venezuela and I said what do you mean Don Juan Pablo and he said oil is the devil's excrement and I have not been able to get that phrase out of my mind for a very long time uh and I wanted to bring it up to you because I'm feeling a little bit of a disconnect at this conference and it may uh and I wanted to say how I see that disconnect on the one hand we are hearing a series of presentations that say there's a lot of energy out there um we can there's a lot of technological advances the market is going to resolve this we have a little bit the US government can't do very much and so it's going to be business as usual and we're okay through 20 30 and then on the other hand we have some people saying what about climate change and now I'm going to say uh what about people living in oil exporting countries and what is happening in in countries in a moment of transition from easy to find relative relatively cheap oil to more difficult to find and more expensive oil and I want to start by just telling you uh a story of something that happened to me in my office hours at Stanford and that is I went and opened the door of my office hours a big long line of students standing outside and in the middle of them there was this indigenous man elderly man completely in what I knew to be Latin American indigenous outfit um lots of um jewelry made out of seeds Etc and I walked right up to him CU he didn't it he didn't fit the profile of my students and I said you know excuse me uh can I help you and he looked at me couldn't understand me and then finally someone else came up and said I need to translate he only speaks OA which I have subsequently learned is only a verbal language there is no written language he'd come from the cloud forest of Columbia and uh in my office hours he walked in and through an interpreter explained to me that he was the chief spiritual leader of the uwa indigenous people and he wanted to talk to me about oil because uh British Petroleum and accidental were drilling under their land the role of the UA spiritual advisers is to mediate between the Earth and the tribe and they had felt in their 5,000 year recorded verbally recorded history uh or I don't know how many thousands of years verbally recorded history that they um that they had to leave the land the way they found it and he said to me this phrase for us oil is the blood of the earth and if you disturb too much the blood of the Earth in our spiritual beliefs terrible things will happen it will get hot it will get cold there will be floods um there will be droughts and he proceeded to explain how the world would change if you disturb the blood of the earth too much he then said to me we wonder if you could help us Professor Carl because I the 200 religious leaders ERS of the indigenous tribe of the UA all male have taken a vow that if we cannot protect our territory and we cannot protect the blood of the earth that we are going to commit Collective suicide well that's uh something to happen in your office hours let me tell you this was an absolutely serious comment by the way um it resulted in a long legal battle that now has um all oil companies on hold not actually exploring in the Indigenous territory of the UA but I tell you that because in places where Oil actually exists um and in places that become dependent on oil the picture is not as pretty as um as a lot of Statistics showing how much energy there is uh says to us and what I believe very strongly is that if we do not have a global solution that is fair between consumers and producers we will not only have the environmental problems that have been heard about so much but we will have consistent and persistent war that I also believe will blow back on us in the United States and let me tell you why I say that I have not a lot of time so I'm going to say this very quickly um the first thing about oil for those of you who have ever studied it is that if you are dependent on oil can I have the first slide please um keep going if you're dependent on oil as these countries are um meaning it is what you primarily live from in your fiscal Health um then the thing that you experience as a country are very disappointing development outcomes over time and I'm not now talking about the United States or producing countries I'm talking about countries that live from the export of oil next slide please um I'm just going to give you a feel of this what is called the resource curse in my view is just an inverse relationship uh between natural resource or oil uh abundance and particularly oil and growth and if you keep going on that uh keep going and next slide please don't have enough time to do all this the way I'd like to but let me just show you this slide this is a spectacular slide if you realize that in the 70s the beginning of the 70s the oil exporting countries as a group received the most massive transfer of wealth ever to occur in history without War towards them the most massive transfer of wealth when I was living in Venezuela Venezuela got more in two years in the 19734 oil boom then it had in all previous recorded budgets in its history now just think of that and yet what are the outcomes from something like that and this is not just Venezuela's outcome these are uh the OPEC countries as a group they just don't do very well and that's what we call the resource curse next slide please um this is another way of showing it uh the red is average World growth average LDC growth and you can see that with the exception of Iran and Norway and Iran is primarily by the way a demographic phenomena um growth rates look very bad can you keep going one of the reasons for that is a terms of classic terms of trade argument which is if you live off of one commodity you have to buy everything else and what you see is that over time most other Commodities end up being more expensive than oil as a group and so that gives you a little bit of a sense of why Rich oil country countes are in fact poor in many ways next slide please um could you hit that again I wanted you to see where most oil comes from the countries that most uh that are the greatest producers of oil in the top ones are the greatest exporters and what's important about those regimes is that we've had a big debate in political science about whether those regimes are Democratic or not Democratic stable or not stable two different questions how durable and stable stable are they how Democratic are they could next slide please now here's what I think in this debate um I think there's a paradox I once called it a paradox of Plenty in which I meant that oil rich countries have such poor development outcomes but there's another Paradox and that is most oil regimes whether they're authoritarian or Democratic last a very long time on the other hand oils countries that are dependent on oil as a group are the most likely countries they have a much greater higher propensity to have Civil War so they're both stable and with greater prospects of descending into war as a group again next slide please oil is associated with authoritarian rule but that's largely because most of the places that were dependent on oil were already authoritarian and as oil rents become a very important part of their budget uh it does not mean that oil countries cannot be Democratic that is not the argument it just is catching a historic relationship that most of the places that you found oil were already authoritarian and that oil rents when they come on stream will keep any government in power over time as long as they're incrementally growing and I want to say something about that because I think this is a really important point about how oil rents by that I mean the excess profits from oil sustain governments and power and there's a big again big debate in political science do they sustain democracies do they sustain authoritarian re regimes are the mechanisms the same are the mechanisms different I don't think it's that complicated let's pretend for a moment that I am the leader of an oil exporting country and you all are my citizens or subjects or whatever how am I going to govern I'm going to try to extract as much as I can from the international oil sector and I am going to distribute that oil in a way to keep me in power that's what I'm going to do now if if I'm a Sunni and you all are sunnis you're going to get more um if your Kurds over there and you happen to be sitting on top of the oil but I want your oil I'm going to repress you more there's a logic of distribution of oil and that logic has to do with the political iCal survival of regimes so when you figure out who you think your support base is whether it's a social class whether it's an indigenous group whether it's a linguistic group whether it's a religious group whatever that's part of the way you distribute your oil rents and that's one of the reasons why the outcomes the economic outcomes aren't very good because one of the things we know is if you distribute oil rents on a political basis in order to keep a particular government in power you're not necessarily thinking about efficiency sustainability or long-term Economic Development you're really thinking about how can I stay here which is a different way of thinking and that means that um in this process that oil states are really different than other states they're what I like to call honeypots the way you get into an oil State the way you collect money the way you get money is you link up to it in some way and that way may be a political party it may be that you're in the baist party of Saddam Hussein it may be under the previous government in Venezuela the two-party system one out of every seven Venezuelans belong to both parties and the reason they belong to both parties is it allowed you to get a job or some access or something um from the government itself that's something you wouldn't see in most other countries now why is it so different the reason it's different is that most States live off of taxes I extract revenues from you I give you back something a school U you know military protection or whatever and you in turn since I'm taking your money say to me I want some say in how I'm you my money is being spent that's what we call taxation with representation that's the the link that is broken in oil exporting countries and with very few exceptions and one of them is the Chavez government today there's very little effort to reforge that link and build a tax system that is independent in some way from petroleum so the minute you live off of rents you break the bond between you the ruler uh me the ruler and you the citizens in a sense and and so you feel like whatever I'm spending doesn't really belong to you it's not yours and you also don't hold me accountable for whatever ways it's being spent um next slide please now what does that mean when nobody's scrutinizing you when there's a lot of money going around when states are uh not institutionally strong it's a formula not only for poor spending and for poor patterns of spending which characterize all kinds of oil exporters um but also for corruption money leaks out all over the place and what you see is that since there's so much money floating around the levels of corruption by and large in oil exporters and not all of them uh is higher next slide please the other thing you see is that a piece of that actually corruption in some senses is actually borrowing because there was a logic in the 70s for borrowing for oil exporters oil exporters became the biggest borrow borrowers in the 70s during the middle of the most massive transfer of wealth towards them well why the logic was interest rates were low oil prices were high leave the oil in the ground let it keep appreciating and borrow cheap money right well what happened interest rates went up oil prices went down and so all of those countries that did that were stuck now the other problem came and again I'm going to use Venezuela as an example as a country I know best but this is actually and a number of other oil exporters in the in many oil exporters including the previous regime in Venezuela the way you could borrow money without any controls is you could use short-term debt if you use long-term debt used to have to go through the Parliament and you know ministers and all kinds of other people but short-term debt every state Enterprise could borrow without even asking anybody so that means they acrw debt that's much more expensive much worse for the country at a much greater rate than anyone else next slide please now what does all this turned out to it turns to Quality of Life indicators that are pretty shocking because here you are a rich oil country only you're not only that's not what people experience and I think um I want to give you some contemporary uh polling data from Venezuela and by the way I can replicate at this in every country I can find polling data in I just happen to have this with me when you have these results after years and years of oil spending you have what we call a social debt and by that I mean people believe they should have more than they do contemporary Venezuelan polling this is actually from 2000 it's not so contemporary it's from 2003 90% of Venezuelans believe their country is one of the richest on Earth 75% say they are poor a huge 50% in 2003 said there was no way to overcome their poverty Venezuelans then say when asked to explain this that this is because their oil money has been stolen by the rich the politicians and the foreigners that's the perception of why they believe they live like they do in 2003 and that's what we call a social debt next slide please and what does this mean this is my link to conflict here if I'm spending all this money to keep myself in power by doing some combination of co-optation and and repression at the same time what is accumulating underneath me and many other regimes are a series of grievances now I'm not going to have time to go through these Grievances and how I've been documenting but what I'd like to do is explain that first of all they start at the point where production of petroleum actually occurs next slide please they start with exploration impacts particularly where indigenous people are and where very fragile environments are which is where oil companies are working more and more now um next slide they continue through tremendous the tremendous impact of production through Environmental and social problems that are linked to transport could I have the next slide please next slide please and this is what you get this is a picture of Aon land in Nigeria now if you go to if you go to aoni land in Nigeria you will see a group called M and this is their platform this is what they stand for and I'm quoting the total Destruction of the capacity of the Nigerian state to export Petroleum in other words they have gone from a sense of let's just capture some of the rents and get some of ours and go to you destroyed us now we're going to destroy you that's the logic that is going on in the Niger Delta today it couldn't be any worse now I say this because next slide please there's a link between these kinds next slide um these kinds of grievances go ahead one more there good um these kinds of Grievances and the development of civil wars in inside oil exporting countries and the thing the reason I was feeling a bit of a disconnect in the discussions that were going on about oil is and I think David made this point and veto made this point and others is that unless you realize that the production of petroleum could very well end up in Civil Wars which then take production off the market um that means that we're actually facing a problem that markets can't solve and that is not just the climate problem but the issue of Global Security the issue of global welfare the issue of how people live in inside oil exporting countries themselves the tremendous incentive for Wars particularly in places where oil is located and for secessionist Wars in places like a in Indonesia or cabinda in Angola or uh the Kurds or Kurdistan in Iraq etc etc but this is a very real problem and the Iraq story that we're seeing we will see repeated I very much believe unless there is a more Cooperative way of Distributing the costs and benefits of how uh we produce energy in this world and how we use it and I want to end um just by saying uh sharing one statistic with you and then I will stop and that is find it um today at least 34 less-developed countries rely on oil and natural gas for at least 30% of their export revenues onethird of these countries have per capita incomes of less than $1,500 a year these people then are oil rich but their populations are dirt poor and almost all of this latter group and some of the former are potential or actual failing States so I would leave you this thought I believe that unless we urgently change the current injustices and way the in way in the ways in which the benefits of oil are distributed if we don't alter our own consumption patterns and search for Less damaging and energy Alternatives these State failures will consistently blow back on us and they will fuel more and more conflict in the future weakening the prospects for democracy and the prospects for development thank [Applause] you I want to begin by thanking Chris Milroy and Jeffrey crane for putting together such a interesting and Rich conference um I have been learning a tremendous amount over the past uh day and a half and I'm I'm very pleased to be here so thank you very much um I want to begin by saying that um I began my academic career um focusing on water and conflict in the Middle East and North Africa and I came to that topic because I was very passionate about the Israeli Palestinian relationship and I knew that um in equitable distribution of water was an important element of that relationship and I spent spent um many years reading and writing and talking about water and conflict in the Middle East and um in the mid90s when I was beginning to feel that I had said just about all that I wanted to say about the topic a former uh professor of mine came over to me and he said you know Miriam you know so much about uh water issues why don't you write a a paper uh investigating whether water would be to the 21st century what oil was to the 20th century and I said well you know I don't know anything about oil so um I started reading about oil exporting States and since um I had been nurtured on the documentary film The Battle of algers I thought I would start uh with Algeria and I did and I became very passionate about Algeria and I thought that this country had had such an very very interesting developmental trajectory that I wanted to explore and um somewhere along the way I was reminded of my graduate school uh readings on the ronier state uh where there was this implicit not even implicit but explicit suggestion that oil determines outcomes and I was very concerned about this because um oil was discovered in Algeria just a few years prior to Independence yet I was convinced that the political trajectory of Algeria was um deeply conditioned by the history of Algerian nationalism that preceded the discovery of oil and so um this was the beginning of what has become um for me a kind of a criticism of what I have perceived in the so-called resource curse literature as a kind of commodity determinism I am convinced that it's not the resource itself that does anything but rather what leaders do with that resource and how leaders manage the challenges that those resources present and so my focus is on leadership and I think that those of us who want to make sense of what happens in these oil exporting States is not to focus on the ills of oil or the you know that oil is the devil's excrement but rather to hone in on the challenges to leadership and um and and and that's really at the core of what I want to say today um uh I think that much of the literature that has been uh written in recent years on the Ron State and the resource curse assigns far too much weight to economic structure and to oil rents in in particular an insufficient weight to such things as historical legacies the choices of leaders and even cultural peculiarities I should point out to you that many of the oil exporting States today are postc colonial states and we must remember what the colonial experience left with our newly independent states the implied suggestion of much of this literature is that oil exporting States evolve as they do because of oil and not because of such things as bad government or inappropriate policies or something altogether unrelated to oil and I would like to suggest that the absence of democ y the Persistence of authoritarianism the uh uh the prevalence of Civil War may not be related to oil it may be related to other uh uh historical factors uh that uh uh that uh have a strong bearing on uh political stability and instability the other thing is and and so there is this tendency to uh suggest that oil revenues spawn a particular set of effects but we need to prove that those effects actually did Issue from oil and neither preceded oil nor issued from something else um a a very recent critique of the literature notes that ronier states tend to be located in regions where States ronier or not typically suffer from generally unsatisfactory political outcomes so I want to uh keep that in mind as we um as we uh focus on oil as um as a uh uh a problem um the other thing is that if you do not Factor agency or cultural po peculiarities or historical legacies more systematically in into your analyses studies of the resource curse cannot account for some of the very interesting variations among oil exporters in terms of both strategies and performance nor can they uh provide compelling explanations for uh political outcomes now it is true that in um more recent years we're getting uh uh uh I would say uh richer uh analyses where there's an effort to look at for example the impact of pre-existing institutions on political outcomes and um this is a a trend that I I think uh should be um should be encouraged um the more recent statistical analyses um of um oil and oil exporting states that look at the relationship between natural resource wealth and Civil War or the absence of democracy or the Persistence of authority arianism or uh regime durability um do in many cases indicate statistically robust uh relationships however um I fear that depending on the data set that you use you may get different kinds of uh results and um and that is a concern of mine the other concern of mine is that the causal mechanisms linking um uh uh these variables have to be more clearly um um uh uh um um uh worked through and I haven't seen enough convincing analysis of these causal relationships and I could tell you some um analyses that I have seen that actually defy historical evidence um uh in the middle East uh and North Africa which is one area of the world that I uh do have some familiarity with the implicit suggestion of much of the literature that oil promotes instability is beginning to be uh contested um in 2003 for the first time there was a quantitative study that did demonstrate that oil exporting states are not particularly prone to instability and failure and this was despite the suggestions of both the ronier state literature and more recent scholarship on Civil War in a study that I conducted on uh violence in Algeria for the World Bank a couple of years ago I found only an indirect link between oil wealth and the Civil War in Algeria um and there are as I said a few of us who are part part of a new trend in the resource curse literature that are trying to locate explanations for outcomes uh in all exporting States uh more squarely within the framework of the modern nation state and institutional foundations that inhere in the modern State um and so for example there is one study uh that has just come out where uh political outcomes depend on the timing of access to oil rents relative to uh Industrial Development um what I want to do in my remaining time is uh look at um oil and instability and um you look at three cases and um three cases and three different outcomes uh to give you a sense of how regimes when faced with an exogenous economic shock when uh prices fall dramatically oil prices dramatically fall how oil exporting how different oil exporting states have responded differently to that challenge with different outcomes and um those three countries are Iran Algeria and Saudi Arabia the three different out comes are regime breakdown and change in Iran regime stability and persistence in Saudi Arabia regime crisis and restabilization in Algeria and I'm going to look at two oil price downturns the first the late 1970s as it affected Iran and Algeria and the second the late 1980s as it affected Algeria and Saudi Arabia um in in um 1973 uh when there was the first oil boom uh the Sha of Iran uh completely ignored his policy community and decided on his own to multiply investment targets with no attention to the country's absorptive capacity and the huge distortions that ensued caused the economy to spin out of control at the same time the new found wealth fed the Shaw's autocratic political Ambitions and he disbanded the two political parties that existed at the time and replaced them with his own creation the rakas party that became his own personal mouthpiece and he transformed Iran into a weakly institutionalized totalitarian style single-party state with by the mid 1970s little other than repressive capacity and so far this sounds just like like the Roni what the Roni State literature um would tell us but then when very high inflation accompanied by recession followed soon after the oil boom the shaw re refused to find ways to address the economic hardship that much of his population faced he did instruct Ministries to cut back on spending but corruption remained widespread and mounting and private Iranian investors were sending huge sums of money abroad on a daily basis the Shaw's principal effort at this time was to lash out at those social forces he detested and that posed in his view a challenge to his domination of the domestic political economy he targeted the bazari merchants and ignored he imposed de debilitating regulations on them and ignored the the activities of the big industrialists and the large importers and in that way he kind of tantalized and radicalized an opposition rather than pacifying it in Algeria the recession years of the uh of the late 1970s were also difficult times but in contrast to the Sha Harari buen the president of Algeria uh was able to manage the growing descent fairly effectively and he did so by investing in institutions in ways that alter distribution he understood that his development strategy was causing uh tremendous hardship and so what he did was he opened up some political space uh for um uh the population to express themselves he called for a national debate and he figured that the impression of some degree of political participation at a time of economic hardship would um would reinvigorate support for the regime and ease domestic suffering and in fact he was fairly successful in this regard he did Implement some structural reforms at this time he gave some sense of people having some um uh voice in the system and the results in terms of domestic peace at this particular juncture were uh positive the Shaw's methods were uh uh woefully in adequate and uh his uh preferred strategy was through repression after having targeted the bizares he went after the clergy and um he uh when they went out into the streets uh he had his military uh fire on the the crowds and they did so repeatedly um when he eventually tried to engage with um the opposition he chose those members of the opposition who were not even allied with h who was the leader of the opposition so it shows you how alienated he was from social preferences and uh eventually uh with only a willingness to use Force the monarchy uh crumbled um the the 1986 oil shock was even more challenging uh for the political stability of oil exporting States as you know oil prices plummeted to $10 a barrel from $40 a barrel uh just a few years before within a few years of uh that oil shock Algeria was highly destabilized in the early 1990s it was in the throws of a civil war that would last roughly 10 years and the regime appeared for some time to be on the verge of collapse in contrast Saudi Arabia mastered that uh weathered the 1980s 86 shock masterfully it seemed um what happened in 1986 for Algeria well first of all the in response to the growing descent as a as a result of the oil shock uh the uh new president shadley B Ben jadid decided to uh Embark upon a democratic transition but then a few years later in 1991 when it became clear that an islamist party was going to win power and the fln the single party state that had the single party that had dominated since Independence in ' 62 was going to lose the military which was the strongest institution in the country intervened and put a stop to the electoral process and the democratic transition with force and the military back regime pursued the islamist opposition with utmost brutality for several years with the result that Insurgency grew and developed and factionalized and radicalized um but Algeria the Algerian regime leared after a while that severe repression on its own was an ineffective in fact a counterproductive strategy and what the Algerian regime began to do as of the mid 1990s was it began to appropriate the political agendas of the opposition for its own it um coopted uh the islamists by encouraging an official islamist opposition and it co-opted oh my God the um the uh barberist by um by uh organizing by by quarantining the uh uh Berber opposition and um uh this work very well for the regime for some time fortunately by the end of the 1990s when oil prices increased the government had uh more money where it could use um um it could use money to to consolidate its co-optation strategies it also fortunately very fortunately for itself had the uh war on terror that it Allied itself to claiming to the US government that it had tremendous experience in um combating Islamic Terror and so uh won a lot of uh uh stature in the International Community so through a combination of targeted violence co-optation and manipulation of key forces the Algerian regime was able to restabilize after a period of tremendous instability if you would just allow me to say a few words about the Saudi monarchy because the Saudis have been uh uh uh brilliant I think in ensuring their own uh uh um durability and that is that during bust periods they did not remove subsidies for their population they understood that they needed to keep their population happy so in 1986 they slashed all their development projects and by the way uh you know their economy uh uh per capita income just plummeted unbelievably at that time people think that Saudi Arabia has enormous sums of money so it couldn't have been hurt that badly it was hurt enormously but the regime would not remove subsidies uh uh on the population and it in fact it increased welfare services at the time during the Gulf War when the Saudi population was Furious that there were foreign uh uh um uh military on its soil from which they were uh from which there were attacks on Iraq uh what the Saudi government did was encouraged the population to speak up it accepted petitions from the population to express their concerns and their Grievances and slowly but surely that regime has been prepared to give in to give peace meal uh uh political reforms that don't impact it too much but keep the mo more moderate forces happy I'm racing through this um but I think what I'm trying to say show here is that there is a variation in responses to uh oil shocks and the Very the W the different ways in which regimes respond to oil shocks determine the kinds of outcomes that one finds in those countries in terms of stability or instability and thank you it's my great pleasure to come back to Chicago and uh I remember like seven years ago when I first came to Chicago I took the price Theory class from uh from uh Professor kin Murphy and he told me that uh numbers are important so since I'm the only Economist in this panel I'm going to uh show you more numbers okay so this is what I'm planning to do um uh next slide please so this is a ska plot okay so on the x-axis we have oil Reserve is in 2004 and on the Y of vertical actess we have a measure of democracy okay and zero means is very non-democratic and one is the most democratic so we can see that United States is on the top it's one of the most democratic countries in the world and you look at Saudi Arabia they have a lot of oil and uh they're one of the least Democratic country in the world so the question here is that I mean there a clear there's a clear negative relationship between democracy and uh oil reserve the question here is uh how we want to measure oil oil okay so um our previous speaker they they used to me measure that um oil dependency okay and and and the lure that create a lot of debate on whether that's the right measure of uh of oil wealth because if the story is about oil wealth then why it matters you sell oil to to the people in your country or people in other countries if if the pro is the if this is the oil profit that helps the leaders to stay in power then the relevant uh variable that we should be looking at the oil profit right so here I'm I'm using the oil reserve and uh and uh I'm going to argue that this is the relevant thing we should be looking at and um next slide please so as an economist we don't we're not really good at uh knowing studying a lot of political institutional details but we are uh good at some fundamental concepts okay like cost okay if we think about oil profit as the as the evil then uh profit is a difference between revenue and cost so uh we better have some some measure of get get a handle of the cost of production so this is what what I'm going to talk about today and then the next thing is uh Is wealth okay that's what I learned Chicago as well um it's not just the income that you have today but also the money that you expect to earn in the future okay so and that's why if we think about um export which is a flow variable uh uh that's going to tell you how much oil money you're going to make this year but it's not going to tell you anything about how much oil money you're going to make in the future right so the relevant concept is going to be a discount value of the oil income that a leader is expected to get okay so this is going to be important in in my presentation as well and then in terms of the underlying story that I want to tell at the very end of this presentation I want to tell you a story and want why uh it matters why we expect to find a a negative relationship between oil wealth and democracy and I'm going to tell you I'm going to tell you a very simple story about how that's going to fact the leaders incentive to stay in power and then there's going to be a supply and demand of Freedom or democracy if you will and uh and how competition uh for leadership is going to be important okay uh next slid please so um this is the data I get from those uh peak oil people okay and those uh there a organization called uh Association study of peak oil uh as an it's a nonprofit organization uh uh members in that organization or a group of oil export okay so they collect data they have industrial data to understand the uh problem of peak oil okay and they claim that um they have the reliable data okay and and and the reason why they argue the public data that we have seen in some other presentation and and and in this uh conference uh which are Bas basically based on the data from BP okay and those oil expert they argue that the data from BP they are very bad okay and the reason is because nowadays A lot of those uh oil producing country they they have their it's basically self-report data they can report whatever they want okay and in particular since uh the OPAC quota system if you look at the uh BP data in a few years they just double the reserve okay and the reason is because basically um their quota how much each OPAC country can produce it's based on their reporter Reserve so there's a lot of noise in terms of uh in terms of the reporting data so I got the data from them and then those people that told me that each country um they have a one Peak discover year for example for the US okay uh we have a lot of oil in this country a lot of people didn't know that I mean in terms of endowment a total amount of discover as comparable to Saudi Arabia it's just somehow that uh we discover oil the peak Discovery year is is on the 1930s okay and Saudi Arabia they started later okay the peak Discovery year is in the uh 50s okay so by looking at these data uh uh it tells you that the distribution of the size one thing is the size the other is the timing of Discovery okay so in the following analysis I'm going to use this kind of data to make a comparison that okay if a particular country they discover oil in particular year that I want to see whether before and after whether the country is becoming more or less Democratic okay because a lot of debate um in this resource Cur literature is that well when you look at the oil dependence well then when we measure that oil dependence then it's basically two problem two problems create by by by looking at the oil dependence the first thing is export okay export is what it's production and interet of the domestic to consumption then people can argue that some economists argue that well if there's some underlying reason um maybe cultural or or or some other reason that we don't observe okay uh that's going to uh hinder the economic development of a country okay that's going to lead to low consumption domestically and that's why they going export more okay that's one reason and then another reason is that when people look at that oil depend uh oil dependence measure export and then normalize that divided by the uh income of the country then that create another problem that another problem is again if there's some other reason that um researcher cannot observe that why uh the country is not doing well then that's going to reflect in the income right and that's going to inflate the oil dependency and and if we want to understand the relationship between oil oil wealth and economic growth then that's something it's going to be create out oficial uh that there's a negative correlation between um oil dependence and and and economic growth and that's why uh uh today I'm going to talk about uh we should measure oil in terms of the oil endowment okay and see whether that that really create a problem okay um next slide please another measurement issue I want to talk about is the heterogenity heterogenity in terms of oil production cost okay there's a huge heterogeneity okay and we think about profit as a difference between in uh revenue and cost then this is something we cannot ignore when we think about production or export as just a gross revenue okay but if it cost a lot to produce then it doesn't mean that the leader is going to get a lot of oil money so we look at this this uh um diagram from the data source from IA and then there's a lot of me I mean hogen in terms of the cost of production and in terms of oil so those uh cheap oil which has has already produced they relatively cheap to produce in terms of the cost is between a few bucks to 20 20 bucks per barrel and then if you look at those uh Middle East OPAC countries I mean these are the countries in which they have relatively cheap oil okay and then there other conventional oil uh the cost can can be range from 10 bucks to to 40 5050 bucks okay so there's a lot of heterogen in terms of the cost of production and if o profit provide incentive for the leader to stay in power then we have to somehow capture that next slide please oh this is uh this is one beautiful picture that I got from a geologist he told me that this is how a particular oil field uh the lifetime profile production Prof Prof over any particular oil field so and that's going to be important let me first tell you roughly what this graph is about so this is the y axis we have the time and then the uh the xaxis we have the time the y axis we have the oil production rate okay so initially uh oil is discovered and then it takes usually about 5 to 10 years to develop okay and then they can start producing okay and then initially let's build up the the the the capacity and then after a little while depends on the size of the oil field and it's got flat and then after that decline okay and the important message from this picture a few things first um we can have depends on when o is discover okay two oil country can produce the same amount of oil and hence they may export the same amount of oil but in terms of the oil wealth because oil we is how much you can make in the future we have to somehow capitalize the future income so because of this u-shaped I mean an N word u-shaped thing two oil producing country if they discover oil in different period of time then they can produce the same amount of oil at a particular point in time but in terms of their wealth implication can different right if you just discover oil then that's going to be a lot of wealth down a row but if it's declining then that's going to be very different okay uh another thing that I want to talk about is this profile not only tell you the oil production profile but also in terms of the cost okay and naturally the cost of production is relatively cheap because all just PR off from the ground from natural uh pressure but then over time then you have to inject water initially and then you have to inject gas and so on and they're very expensive so and that's going to exacerbate the uh change in the oil okay so there a bunch of democratic countries okay they are they had been Democratic before they discover oil okay and those country and then the one with the black dot are the oil country so they they they're Democratic country and they had oil they discover oil so those countries are like the United States and Norway UK okay so they have been Democratic before discover oil and they remain Democratic okay and there are other there and then we can compare that with the uh another the uh bubble white dot on the top of so they are oil Democratic country as well but they don't have no they don't have a lot of oil and and we can see that it doesn't matter for countries in which they have been Democratic before they they found any oil they remain Democratic okay and uh but then when we look at the bottom of this diagram then we have a similar uh uh two time series one is I me down there they non-democratic countries so these count they have been non-democratic before they discover oil and some they're lucky to discover oil and some they didn't and we observe there's a Divergence between the degree of democracy so those country who were lucky enough to have oil they remain non-democratic and over time uh those who didn't discover oil they're getting more and more democratic so there is a Divergence between the degree of democracy okay when we try when we measure uh oil in terms of the oil endowment okay and roughly speaking if we look at this diagram after three decades of the oil Discovery then the Gap okay the the or people some people use the term Freedom deficit uh the difference between uh an oil country and non non non- oil countries is about 0.15 percentage point in terms of the degree of democracy next slide please and then uh we can do some fancy regression analysis and then it tells you that there's no effect or Discovery has no effect for Democratic countries it's not going to make Norway us less Democratic but for non-democratic countries a discovery of uh when we convert that into the dollar terms uh$ 280 billion dollars worth of oil Revenue it's going to push down or reduce the Democracy by about 30 percentage point and what ises that 30 percentage Point means uh roughly speaking 30 percentage percentage point of democracy and something like the difference between Jordan and Saudi Arabia so Jordan they don't have a lot of oil and then Saud Arab oil and the difference in terms of the degree of democracy is about 30 percentage Point okay and then um the next finding is that uh in term what about in terms of the cost so uh in terms of the cost of production a reduction in about a 100 billions of exploration cost is going to reduce democracy by about 15 percentage point so they are in a way in terms of the order M they they're in the same bpar so the revenue and the and the cost it's going to fact uh uh the uh change in democracy in in pretty much the same way okay and finally uh when we look at uh the uh heterogenity in terms of the quality and the cost of production then uh I found that uh the the anti Democratic effect of oil increases in oil quality so some countries like Algeria their quality of oil is pretty is very good so they very have very low s content is also very light so these countri they uh the anti- Democratic effect is bigger and also on the other hand it's decreases in the cost of production so uh which is consistent with the story about about the uh profitability of of of uh of oil wealth okay next slide please and then uh and then we can look at several case studies so this is like the first story is about like the oil Discovery it's like the rise of the oil wealth and then what about if we look at the decline of oil wealth so here I look at some uh um Gulf States okay there are three Gulf States in which uh in particular I mean basically the case I want to look at is bin okay so rank these three countries they have similar um cultural and geographical background uh also in terms of population brain and cutor they're very similar and they this just next to each other okay and I rank this country according to the oil endowment so we can see the brain um they discover 1.21 gig barrels of oil and then if we look at Omar and and and and cutter they have weigh almost like 10 times more oil okay but uh the difference between Omen and cutter is that somehow cutter they they have more uh in terms of cost of production they their cost of production is lower than Omar because we look at they have more giant oil fields so the oil fields are in general bigger and uh and also um the quality of oil we can look at that uh from cutter is also big is also better and then if we rank according to their oil wealth and then we look at their their Quality Index which is the the me of democracy so we can see that brain is more democratic than Omen and Omen is more democratic than cutter and this is the level if we look at the transition since 1991 we find the same pattern so they start off with uh all equally non-democratic but over time brain is getting more and more democratic I mean still not very Democratic uh according to the our standard but still am those SCF country they're one of the most democratic ones next and last please and here another similar case study in which I look at the those po most communist producers okay uh I exclude Russia in this in this uh in this uh table because uh there's a lot of debate in terms of how Democratic Russia is and so I look at others uh postcommunist opis country and again I rank them according to the O endowment from the Albania to Kazakhstan and again it's consistent with the story that um uh oil I mean those country who are uh have production declining they tend be more getting more and more democratic over time and and kistan in fact is getting less and less Democratic so which is consistent with my oil story next SL please and we can look at another scale plot just look at B region oil reserve and democracy this is Middle East negatively related next SL please but what about in terms of so we try to understand what's going on so what I did here is I look at the all Reserve but instead of looking at their at degree of democracy I look at their military expenditure as a fraction of GDP so I want understand whether an oil country they spend more on on on on defense or military spending and turns out to be true and I'm going to tell you a story why that's the case next slide please that's true for those Euro Asia country negative relationship between democracy and all Reserve next SL please and the positive relationship between all reserve and military spending next slide please so this is a conclusion and basically the story is that just think about an oil producer and an oil leader there's a lot of money that uh provide them an incentive to stay in power and to stay in power they have to spend more resource to make sure that they they are remaining in power so they spend more uh in in military spending it's like a form of barriers to entry to ensure that they can stay in power so they kill the enemy and so on and uh so we can think about supply and demand of democracy and oil wealth is going to in to lower to reduce the supply of Freedom or to increase the supply of repression so uh and and uh yeah that's the end of the talk time thank you well I want to thank all three of our panelists for very uh interesting and stimulating presentations and uh I I on a personal level learned a lot I think it's often difficult to attempt to reduce decisions that occur in any one country down to a single variable but clearly at a at a larger more macro level there are patterns going on and uh there did seem to be some difference uh of opinion regarding the degree to which there is a causal link between uh energy resource uh and uh varying degrees of of of uh Democratic institutions and I thought it might be good to start off by just having each of our panelists or see if and if the three of you have any comments you want to make on the presentations and then we'll turn it over to the to the group or if you don't have any comments on each other's presentations we can start off I think we can start I don't have do you have any comments no that's very straightforward okay um good line let me then Begin by asking the first question um in many ways the the portrait that's painted is a very sobering one uh there's clearly something going on which uh should be of concern to all and the question is what do we do about it obviously uh decreasing our dependence on oil is an option but barring that what are the options available to this nation and to the International Community to help facilitate the development of democratic Institution U and reduce conflicts in these countries how do we engage other nations in that process uh is is it possible to develop a framework that brings in China and other emerging countries that clearly have a a geostrategic stake in this uh do any of the three of you have opinions on that uh yeah I I I'm not going to be able to elaborate on this but there's a actually new book that came out this week um that is edited by uh Jeffrey Saxon and um Joe stets and mccarten Humphrey's called escaping the resource curse and I'm going to try to summarize really fast my chapter there the first thing I would say that you do is you don't start a war in an oil exporting country number one you just don't do that there are a lot of reasons why you don't do that but the second thing the the main reason is that what is really important in my view inside oil exporters and I'm going to get outside in a minute but inside oil exporters is whatever their regime type whatever they're like um is to foster a wider and wider debate and Consciousness about oil being their resource and their future in this end and reconnecting back uh the sense of oil wealth in the way that other people feel relation uh with their tax dollars if I can put it that way the reason that that debate is so important um is that that is the central resource in oil exporting countries and so if you take something like the Iraq oil law right now which is um has had no debate at all which is completely secret and which contrary I think to some of the things that were said yesterday was largely written by foreigners that has some of the worst terms I've ever seen um in terms of equity about what belongs in Iraq and what belongs to foreigners and what the relationship should be for foreign oil companies that's just not a formula for more more stability or more democracy so the first thing is you know real debate inside about what is the central resource of a of of countries and any way to encourage that it seems to me is important um for the just distribution of what that means and outside I think it is an increasing understanding that if we do not you know we can either fight with China over scarce resources or we can cooperate um we can either militarize um and build military bases in West Africa along the pipelines which is exactly what is happening right now and make um and militarize in Nigeria and other places or you can find more just more peaceful and more fair ways as I said to distribute the costs of um energy and without going into the ways I I I actually have written about that seems to me to be the the real Choice facing us um i' I'd also like to say just a a brief word about what we could do and um I I'm I don't like intervening in um the politics of other countries unless we're asked to intervene so um I would say stay out unless you're asked to go in and second of all I think that if we do not like the politics of a particular country and we find that they're anti-democratic or are are oppressive of their population or whatever then we don't do business is with them even if they have oil so I we have to be we have to you know decide what's more important to us do we care so much about how politics is organized in other countries do we care so much about democracy or do we Mo mostly comp care about uh uh profits and so that's um uh that's my take on what we should do or not do yeah I think I probably agree with you especially because I'm being trained in Chicago I mean in general I don't like even government intervention in general not not not even to say uh uh at the international level and but if for any reason we believe that uh uh there's some externality in terms of having a lot of non-democratic government around then I think the right thing to do is just to think about other attorney source of energy so that because if if I think we we agree that oil wealth is impose a challenge for a democratic transition and if oil wealth is a problem then if we somehow have some other source of energy then oil weth is is going to be less valuable and then they're going to I mean they're going to solve their own problem instead of if you have some other government intervene even I mean there are some people suggesting that we we should make sure that they they do things uh transparency account uh accountable and stuff like that it's very costly and difficult from a third party to to to to to help out and do that kind of that kinds of things I think yeah thank you let's turn it over to the audience um hello again uh thanks of course for coming and talking about these uh important issues um and I would also like to apologize you know for having to be The Annoying butthole who held up the time cards um this uh this question is directed to Dr Carl um black gold is a problem but what exactly can country uh around the world do to accommodate these Humane concerns if the world needs oil to operate well there are a lot of short-term things and there are some longer term things and I would say the the short-term thing is it really matters how you I mean let me preface this by saying Black Gold isn't anything it's just a viscus liquid um it doesn't have any meaning good or bad um the best Mo most spectacular uh development outcomes in the world in the top of the undp index every year is Norway which is an oil exporter um and the worst is down down at the bottom are you know Chad Sudan and some other oil exporters so it in itself to me doesn't have so much meaning let me just make that really clear I think there are ways however if you looked at the the grievance structure that I raced through really fast in every one of those places there are really important things to do right now that would change um how difficult I mean that would change the enormous footprint I wouldn't even say footprint what do you you what would you call dinosaur print or something that that companies leave let me let me give you an example um if you applied the same environmental regulations that we have in the United States to Ecuador to Chad to the Sudan to any places where us oil companies operated you would not have the huge spills in the Ecuador Amazon that have just absolutely destroyed uh miles and miles and miles of rainforest which matters to us actually um you would not have that picture I showed you in the Niger Delta it wouldn't look like that so um one of the things that's really important is um regulating the industries whether they're oil companies or uh foreign oil companies to behave with really strong standards in I would say both environmental and other forms of of Human Rights um there are a range of other things that go along with that that have to do um with and and there are a lot of things that go along with that there are there are disease patterns that I can track to oil absolutely there's an aid epidemic that follows the Chad Cameroon pipeline for example um um there many other things like that that are really important and that actually much more responsible corporate management could do something about so there are things that are very and I can give you many many more examples I don't want to talk too long about this but that that's one set of things that could happen now my own belief is that whether we like it or not and no matter how much oil is out there the tremendous um social environmental and um more costs associated with the way we organize our economies today is going to force us to change and so I would only it it's going to force us to change regardless of whether you believe in peak oil or you don't or how much oil is in the ground there are things that cannot that are not being Quantified in these talks uh in these economic analysis about the costs of not having democracy the costs of environment the costs of human rights violations all over the costs of 4 million debt in the Congo over o over oil and other mineral wealth along with other factors Etc these are just huge costs and so I think that we are going to be forced to make a transition and as I said before the real issue is is that going to be an orderly cooperative and fair transition where all actors involved the producers the consumers the companies um the population ations involved try to share that cost in some way so that none of us get hit too hard from it as we push for something cleaner or is it going to look worse I've got a kind of a follow-up question on that about what the appropriate policy response should be because so far the the the answer for governments and for companies has been about standards you know the equator principles don't don't lend unless the project meets certain standards uh extractive Industries transparency initiative will all agree to a certain level of disclosure voluntary principles on security you know we won't associate with government's militaries in a particular way um and so my question is is for Professor Carl and Professor Lo different ones for Professor Loy I guess the question is if leadership is really the core issue and the host governments don't choose to set these standards for everyone who operates there are these initiatives worthwhile or do you think that they're a superficial policy response and then for Professor Carl because you in a sense you've said you've already said that standard setting is a good way to go but then how do you deal with the problem of Nigeria maybe setting different standards for us companies and they might set for Chinese companies how do you how do you broaden those standards or deepen them in a way that they're effective that's a that's a very good question thank you for that um are these initiatives worthwhile um if they are are if they are imposed seamlessly they are for example you know a country like Algeria does want foreign companies in their developing their oil reserves if it knows that you're not going to get involved unless sonat Trak uh opens up its books to the public to look at they're out of they're out of business so I think if you're I mean they can go elsewhere yes but there if there could be an international imposition of these kinds of regulations I think that would be I I think that's the direction that we should be trying to move towards and I think um I think that that you know I'm thinking out loud now I haven't thought about this very hard um but I think that that might be a win-win situation okay um in the in the medium term um I think that for a while perhaps you would get sonat track going elsewhere to countries that are don't give a damn about such initiatives and um but I think if somehow the United States or whoever uh if there were an an international effort to impose such things that would be a great way to go and I guess what I would add to that is you know I I'm very mixed on these initiatives and um the main reason is I just don't believe in voluntary standards I think they have to be mandatory and if they're not mandatory someone's going to break them um and there have to be consequences if you break them and so I again I would underline what Miriam says this needs to be International but mandatory standards and I think you shouldn't be able to be listed on a US Stock Exchange for example unless you have you you you conduct business in a certain way so that you can create actual economic incentives um the example everybody says is the Chinese won't play well I I'm not so sure about that the Chinese are getting more and more integrated they're finding they don't want their people kidnapped either I can guarantee you um on in in the kinds of places that I've been working in and so I would favor very strongly um mandatory transparency in both what uh companies pay governments and how governments spend them number that that that that issue but I have to say that transparency isn't nearly enough because you can have things be transparent but if you work in Angola and nobody can understand the accounts um because of the or or in Chad because there's there's three economists in the country um you have to have more than that this has to be coupled with I think a really um with very serious campaigns inside countries about what this wealth means what its prospects can be um and and and I'll give you some examples I've seen situations in which uh in in in where a particular Village is given a stipend and they say by in this case by an oil company and they say you know we we were going to give it to you to build a school but we don't really know because some people want a clinic and some other people want this and some people want that and so what happens is they get stip in and they sit down and they debate what they want in the village and it has to become a public good instead of a private good and you get a whole village talking about what is its first order of priorities in the list of incredibly I mean they need everything so who knows how you make this priority they tend to go in the cases I've seen for something that involves their children but you know it's the beginning of a step of turning um a rent into what is a much more long-term human resource thank you all for doing really great presentations uh really enjoyable out of question kind of based on some of Dr Carl's concerns uh that she brought up I mean the kind of the consensus that I've been uh seeing here is one that kind of revolves around leadership in these countries and that you know whether it's Putin and Russia that you know we really need to apply these standards uh to these countries a lot of tears have been spilled about Russia in particular I won't get into why I cynically not so sure about that uh but I mean the Takeo message has been that it's effectively the fault of the people in these countries and so I was wondering uh Dr l b in the beginning about historical legacies and kind of left it at that after colonialism you know I I was wondering how things much have really changed with resource development and I was looking at the Canada and Norway kind of this Democratic bar the top you know kind of stay the same well they're also never colonized either I mean there's other factors that work here too I was just you know wondering we have what 900 odd military bases around the world you know I was wondering much these things have really changed and how much it's just of these people in these countries whether there's something really that wrong with them or whether there's something that's also a little wrong with us thanks um you know I just want to remind you that the incentive of the Imperial powers to go into col to to have colonies in the first place was on the one hand to have these resource extracting Hinterlands and they create it turned them into resource extracting Hinterlands so remember that that you know that's what their role was uh originally as colonies and um and and this is something that you know this this has affected uh much of the developing world having had this colonial experience and so there's a whole um set of um uh ways in which uh uh uh colonies that have been developed as resource extracting Hinterlands have been affected over time um and uh and then the discovery of oil more recently has has has just reinforced that um and and and and this is something that much of the developing world that had been colonized has to deal with has to deal with the long-term effects of having been developed in this way and there was a polit political development that went along with this sort of Economic Development right the infrastructure was was built up in such a way that it would promote getting the resources out of the The Colony Etc so I mean there's this there there you know much of the efforts of the postc colonial states has been to kind of resolve these issues of of dependency and underdevelopment related to the Colonial experience