The Perils of the Petro-State: Reflections on the Paradox of Plenty

Abstract

Think back to years 1973 and 1974 when rapid and unexpected fourfold increase in price of crude oil created first global energy crisis. As most massive transfer of wealth ever to occur without war began to work its way through international system, wild predictions were made about potential skyrocketing wealth of oil exporting countries.(1) While industrialized countries trembled at prospect that Organization of Petroleum Exporting Countries (OPEC) might become world's most powerful banker, oil exporters(2) were euphoric. Prosperity, in their view, would provide a sustainable base for a post-oil economy, full employment, national security and political stability; in short, it would permit oil-exporters to join countries of First World. Thus, Shah of Iran promised his people a Great Civilization, while Venezuela's President Carlos Andres Perez forecast La Gran Venezuela (The Great Venezuela) in near future. Someday soon, Perez predicted in a conversation with this author, Americans will be driving cars built by our workers in our modern factories, with bumpers made from our aluminum, and gasoline made from our oil. And we will look like you.(3) Such predictions have proved to be modern version of Midas myth. Twenty-five years after 1970s boom, and despite two other major price hikes in 1990s, most oil-exporting countries are in crisis, especially capital-deficient ones.(4) Plagued by bottlenecks and breakdowns in production, capital flight, drastic declines in efficiency, double-digit inflation, overvalued currencies and budget deficits, they urgently seek foreign capital and joint ventures that they so vehemently rejected during nationalizations of oil in 1970s. As their economic performance worsens and their oil and debt dependence increases to levels higher than in pre-bonanza years, most oil exporters' political stability also has suffered. From Nigeria and Venezuela to Indonesia and Algeria, riots, conflict and outright civil war threaten populations of OPEC countries. Just as gold once tainted King Midas' life despite his expectations to contrary, oil seemed to petrolize economy and polity of these countries. It is devil's excrement, OPEC's founder, Juan Pablo Perez Alfonzo, observed. We are drowning in devil's excrement.(5) What I have elsewhere called the paradox of plenty poses a significant puzzle for both scholars and policymakers.(6) That oil-rich countries--countries as dissimilar as Venezuela, Iran, Nigeria, Algeria and Indonesia--should end up in profound economic and political crisis is remarkable. That they also stand at strikingly similar junctures despite all their differences calls for an explanation. These countries are heterogeneous in virtually every respect except oil: they are physically diverse (Algeria is more than 100 times larger than tiny Kuwait) and demographically different (Indonesia's population is 132 times that of Qatar); they vary in their oil reserves (Saudi Arabia has 265 times as much as Gabon), not to mention their other factor endowments. Their standards of living showed enormous discrepancies at time of 1974 boom, with per capita income as low as $170 in Indonesia compared with $11,000 in United Arab Emirates, and their political regimes ranged from democracy (Venezuela and Ecuador) to military rule (Iraq and often Nigeria), from strict Islamic theocracies (Saudi Arabia and post-1979 Iran) to nominally socialist one-party systems (Algeria). There are profound differences between Nigeria, which falls at worst end of continuum, and Indonesia, which has fared better.(7) That is not to argue that oil countries are worse off than many of their non-oil counterparts, which may or may not be case depending on comparisons involved. But path by which they have arrived at their current troubles is different from those countries without oil, and despite their riches, they have arrived at similar crisis points. …

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