The Paradox of Plenty: Oil Booms and Petro-States
By Terry Lynn Karl.
“All in all I wish we had discovered water”
Sheik Yamani, Oil Minister of Saudi Arabia.
Terry Lynn Karl opens her book by recalling the fairy tale King Midas who turned everything he touched to gold. She traces the similar, dismal performances of a group of developing states to their common trait, an abundance of petroleum, and likens their “paradox of plenty” to King Midas’ affliction. Karl presents a convincing case, which may be particularly salient for new oil states today.
The Myth of “Black Gold”
The Paradox of Plenty includes a case study of Venezuela, as well as a comparative study of a group of developing, petroleum-exporting countries (Nigeria, Iran, Algeria, Indonesia, and Venezuela) that have experienced remarkably similar economic and political problems. Her hypothesis, simply put, is that these countries have faced common difficulties not by coincidence, but as a result of their common resource.
The book maps the road to ruin followed by these hapless Midases. Key to the similarity of their development trajectories is the fact that their leaders centralize the control of oil resources within the state for personal benefit. Foreign, private interests that prefer to work with as few negotiating partners as possible also push states to nationalize oil rights. The study focuses on weak states with embryonic political institutions that are particularly vulnerable to the challenges of managing such enormously increased oil incomes.
The windfall profits received by the state can be staggering. These oil revenues permit states to avoid the political costs of voter opposition to taxation, leaving their institutional capacities for tax collection underdeveloped. This also creates a population accustomed to low taxes and hostile to politicians who attempt tax hikes. At the same time, rent seeking often develops as individuals and groups find begging the government for financial support easier than engaging in productive activity. Interest groups fostered by state patronage align themselves with foreign investors to pressure the government to maintain the existing system of oil production and distribution of oil profits. By succumbing to the temptation to buy off such coalitions, the state creates a system of mutual dependence. With high economic stakes for all parties, the state then dares not reduce or end transfers to what might be called “oil lobbies” for fear of losing major public support.
The stunted capacity of the state to raise revenues and its growing reliance on powerful interest groups conspire to limit the range of policy choices open to the government, paralyzing the process of institutional development. Thus, quite different states develop similar institutional frameworks that encourage political leaders to pursue politically painless policy solutions. Remarkably parallel developments and difficulties follow. According to Karl, the end result is an institutionally weak state reliant on oil rents and beholden to rent seekers.
Meanwhile, the economy suffers symptoms of “Dutch disease,” including a shrinking export sector, increasing domestic consumption, rising rates of inflation, and burgeoning debts as consumption overtakes oil revenues. Powerful client groups of the state and a population allergic to taxes deprive the state of fiscal capacity, leaving it unable to balance its external payments.
In terms of the debate over what determines state decisions — the rational, independent choices of politicians or state institutions that severely limit this independence — Karl places herself somewhere between the rational-choice theorists and the structuralists. Her argument tends towards a structural explanation of oil states’ development: without coming down at the deterministic end of the spectrum, Karl contends that the discovery of oil presents decision-makers with a relatively narrow set of policy options.
From a theoretical perspective, it is also interesting to note Karl’s focus on economic outcomes as the results of policy decisions. She acknowledges the effects of Dutch disease — whereby the success of oil exports leads to currency appreciation and wage inflation that damage the competitiveness of other sectors and threaten deindustrialization — but claims that such economic problems result from state decisions.