The Paradox of Plenty : Oil Booms and Petro-states
Terry Lynn Karl
University of California Press, 1997.
Book Review by Baris Sanli
Why did the oil-rich countries end up being worse than the resource poor countries? This is a question frequently discussed. Recently, BBC has broadcasted a discussion titled : "Oil: Blessing or Curse". The program was recorded in a Middle Eastern country and there was no clear cut agreement between the advocates of two sides. Terry Lynn Karl's Paradox of Plenty presents a very compelling answer to this question, through case studies of countries, statistical data and across different parameters.
The oil revenues of producer countries have been skyrocketed once again with the recent price hike. Oil has hit as high as $140 and most of the analysts expects its value to surpass $200 in near future. The export revenues of oil exporting countries has reached an all time high. There are record GDP growth rates reported from these countries, but will this last forever? Will Angola, Russia, Azerbaijan, Kazakhstan suffer from "paradox of plenty"?
Paradox of Plenty is highly cited book trying to find out the reasons behind the dilemma of petro-states. Her main case country is Venezuela, one of the founding members of OPEC. By doing that she starts from a Latin American country and compares and contrast her initial findings with other countries including Algeria, Nigeria and Norway. When you finish her book, a substantial belief in the importance of solid institutions in a country captures you.
Her book is "rooted in the political economy approaches of Karl Marx, Adam Smith and the new institutional economists.". In it, she argues "that dependence on a particular export commodity shapes not only social classes and regime types, as others have demonstrated so well, but also the very institutions of the state, the framework of decision-making, and the decision calculus of policymakers".
The general argument discussed in the book is how commodity-led growth induces changes in property rights, relative power of interests groups and organizations and the role and character of the state vis-a-vis market. From this question, she comes to the revenue basis of the state and the tax structure. The collection and distribution of thestaterevenues influence "how the organization of political and economic life and changes government preferences with respect to public policies"
A General View
The book is organized in three parts. The first part starts from theoretical explanations and elaborates the general views on commodities, booms and states. The second part is the Venezuelan case study of the arguments. The third part compares the results obtained so far with other oil exporting countries.
1. The modern myth of King Midas: Structure , Choice, and the Development Trajectory of States
The chapter discusses the theoretical basis for the arguments and defines petro-states as units of analysis. She also defines terms like oil exporter, capital deficient oil exporters. Also in this part, she elaborates her general argument by asking John Stuart Mill's classic question : "how can the repeated occurrence of similar patterns across different countries be explained?". This part also gives a hint about why she has chosen Venezuela as a case study. Apart from the other Middle Eastern and North African (MENA) countries, "Venezuela was a noted 'outlier' prior to the 1990s; its generally strong growth and more than thirty five year old democracy were the most striking signs of a path distinct from the uneven performances and bureaucratic authoritarian cycles of its Southern Cone neighbours". (p. 21)
2. Spanish gold to black gold: commodity booms then and now
The chapter deepens the theoretical basis of the argument with another case study from a different time period : 16th century Spain and her gold from the America. "A sudden influx of great wealth is not always a development 'good'". (p.24) she claims. From a Dutch Disease point, in which this influx leads to currency appreciation and harms other sectors in a country, the oil wealth is curse rather than a blessing. The argument is elaborated with contemporary examples and than the focus turns to 16th century Spain. "In these golden years modern capitalism was born" from John Maynard Keynes is a relevant sentenceregarding our course. The "easy road" that gold of America provided for policy makers and the way spending is attributed to character of a state are given as the important arguments of Spanish case. In this chapter she also argues that "booms themselves are cannot be held responsible for the failure of the leaders to change discourse". By referring to Schumpeter's book titled Business Cycles "with regard to Spain 'increase in the supply of monetary metals does not, any more than autonomous increases in the quantity of any other kind of money, produce any economically determined effects. It is obvious that these will be entirely contingent upon the use to which the new quantities are applied".
3. The special dilemma of the Petro-State
How mineral revenues alter the framework for decision making is a question which is at the core of this chapter. It is not only "policy environments" but also "autonomy of goal formation, the types of public institutions adopted, prospects for building other extractive capabilities and the locus of authority" are affected by these revenues. (p.44). As she calls the relevant agents as "Extractive States", she gives the characteristics that make a state extractive. The organized interests and political vicious cycles of the petro-states are discussed. Then she comes to the fiscal and tax related arguments, from there she elaborates how oil money depletes state capabilities.
4. Making of a Petro-State
From chapter four to the end of chapter eight, a historical view of Venezuelan oil booms and bustsandtheir aftermaths aregiven. There are certain examples are relative to Schumpeter's arguments in this part. If the bureacracy or other institutions are not well established in a country, the sudden flow of export revenues may alter most of the state structure. "Caudillismo, a set of political rules based entirely on force, was the expression of fragility of the governing apparatus and it left an enduring mark on state formation" she claims as she refers to Gilmore. "A heritage of personalism and presidentialism" that she calls "ultrapresidentialism" determines how Venezuelan history will change after the oil booms. This "path dependence" in Venezuela's history determines the very essentials of state structures, affects the reactions of the state to financial flows and the rest of the story.
5. Oil and Regime Change: The Institutions of Pacted Democracy
Karl describes a pacted democracy, in Venezuelean case “democracia pactada”,as “symbiotic interaction between the overwhelming incentives created by the petro-state and the particular type of democracy”. This type of structures are established “through elite bargains and compromises during the transition from authoritarian rule” (p.93). In this part, she also argues petroleum was “the single most important factor in shaping the structural conditions for the breakdown of military rule, the subsequent creation of a reformist political space and the maintenance of a democracia pactada ...”(p.94). Through the developments after the late 1935s, but particularly focusing on the late 1950s (end of military rule), she tries to argue how the transition happened and how oil revenues have structured the institutions in Venezuela.
6. Instant Impact of a Bonanza
In the subsequent events, revenues are seen as a key to transition to democracy, like campaign slogan of Carlos Andres Perez’s “Democracia con Energia” (Democracy with Energy). One of the important pieces from this chapter is the following excerpt : “By 1976, the per capita fiscal income of Venezuela equaled that of West Germany and was double that of Italy”(p.122). Perez’s desire for power and weakening of check and balances of the democratic system to refrain him from obligations has at first sight seem like working. “La Gran Venezuela”, “a modern industrialized economy”, has been turned to a bitter game as Perez requested “Special Powers Act” by claiming “The government cannot develop its plans efficiently through normal channels”. His intentions was “a plan to pull Venezuela into the twentieth century”. (p. 128). This act altered the “norms of pactismo”(p. 130). In the time slice that this chapter discusses, is the foundation of Fondo de Inversiones de Venezuela (FIV) to sterilize the petrodollars, before entering and harming domestic economy. (p. 131). But because of special presidential powers, this fund became a toy for president.
7. The politics of rent seeking
This chapter starts with a fundamental sentence for the story “ Had Venezuela possessed a relatively coherent bureaucracy, a functioning civil service, routine tasks and standard operating procedures, its public institutions should have been able to place some barriers to halt the contradictory demands and gigantic programs put forward in the first year of the Perez administration” (p.138). The Venezuelan system is now trying to balance the acts of the previous system and trying to build a “efficacious state” by “National Council of Sectoral Corporations” which would be a centralized agency for “all the sectoral corporations”. By 1976 the nationalization was accomplished. (p. 152). The chain of events created an economic clique called “Twelve Apostles” that is close to president. To create a developed nation, the spending soared, massive projects were started. But as the 1973 oil boom cooled down, the country itself found itself with budget deficits in the hands of “presupuestiveros” (budget eaters). (p.158)
8. From boom to bust: The crisis of Venezuelan Democracy
The OPEC’s strategy to increase price by limiting volumes has ended up in 1985. The sharp price reductions by Saudi Arabia has unveiled the financial problems of the state. “Thus even when oil prices and government income plunged, government behaviour didn’t change: public expenditures and investment outlays did not go down”. (p. 162). The second oil boom (1979-1981) ended. In the late 1980s and the early 1990s, mega-projects like “expansion of Guri Dam” and “Caracas metro” were costing to the administration dearly. Country's oil fields were suffering a serious decline in output. (p.170). With the rentier situation and deficiency of tax structure can be summed up in President Lusinchi’s statement : “In Venezuela only the stupid pay taxes” (p.172).But the taxes were needed by the state by late 1980s. The state turned to foreign debt to sustain her spending. “By the end of the 1980s, for every dollar earned on a barrel of oil, Venezuela was paying $0.40 back to foreign banks”. (p. 173). By late 1988s, governing party “had no more room to maneuver” (p. 178). IMF precipitated packages hit the streets. On February 4, 1992, young military officers attempted to overthrow Latin America’s second oldest democracy. (p.182). Increasing the taxes have been seen by “way out” by President Perez, but because of his demise of pactismo, he failed to gather support. On May 20, 1993, “... the Supreme Court moved to indict Perez on charges of embezzling $17 million in government funds”. This paved the way for his removal.
9. Petro-States in Comparative Perspective
From this point on, Venezuela story is compared with other petrostates. Firstly, similarities and “variations in outcomes in Venezuela, Nigeria, Algeria, Iran and Indonesia” are investigated. The main properties of these countries are the high public expenditures to “make speedy use of their oil rents to perpetuate their resource-based development model”. (p. 191). The development priorities changed from country to country. Then, the reasons for Indonesian “exceptionalism” are highlighted. The claimed reasons behind the Indonesian “exceptionalism” are “ better control over its expenditures, pursued a development strategy more balanced among physical infrastructure, education, agricultural development and capital-intensive industry; directed a higher proportion of spending toward rural areas; and accrued less for foreign debt”. (p.191) Afterwards a contrasting example of Norway is discussed. By 1975, Norway was a typical patient of Dutch Disease, inflation has risen to high levels, “... current-account deficit became the highest of any OECD country except United States”. These events were followed by a government change from Labor Party to Conservative Party. Norway was “a typical civil servants’ state” resembling what Weber labeled as an ideal bureaucracy operating under rational legal authority. “This ‘civil-service’ state was the complete antithesis of Venezuela and the other politicized states examined previously”. (p. 217) . Norway “did not depend on ‘borrowed’ state capacity from international advisers...”
10. Commodities, Booms and States Revisited
“The revenue of the state is the state” by Edmund Burke that Karl refers to at the opening sentences of the chapter. “Oil exports is the similar political behavior exhibited across historical time, geographical regions, regime types, religions and cultures regardless of the diverse intentions expressed by policy makers”. This political behaviour either creates weak institutions or weakens the current institutions. Booms make policy makers believe in ‘politics without limits’ (p.225). She then argues whether private investors may mitigate the problem of Venezuelan path. She continues with the advantages of democracy. Through out the chapter she emphasizes “state” and “stateness”. In this typeofstates, policy makers “operate in the incentive structure shaped by this commodity [petroleum]”. Also, institutional frameworks are “the critical key to the relative success of economies”. (p.239). The key sentence in this chapter is “developmental outcomes depend on the character of the state institutions”. “Lessons from the past suggest a perverse relationship between some forms of natural resource endowment and successful state building” she says. (p. 242). As she puts forwardAdam Smith’s argument on Tartars, claiming “Tartars, Asian NICs may be rich precisely because they are resource poor... The need to overcome this poverty may have been one of the chief catalysts for building effective states”. And she calls this as the “paradox of plenty”.
A Remark before Personal Discussion
Writer of this review is well aware the lecturer is an expert on Institutional Economics. Therefore, it is for sure that, the lecturer knows the best of the underlying reasons for “Paradox of Plenty”.
From Polanyi’s Perspective
In his book, Great Transformation, Polanyi’s arguments are generally centered aroundmarkets. Paradox of plenty in this sense does not fit to his main theme, but Polanyi’s arguments provide a dimension to our understanding.
Especially “double movement” which defines as “the market expanded continuously but this movement was met by a countermovement checking the expansion in definite directions”, incorporates a similar theme like “paradox of plenty”. This is also argued by Schumpeter relating to capitalism.
So can we call Polanyi’s argument as “paradox of markets”? It is maybe a natural phenomena regarding every expansion ends up with a contraction. From human heart to universe this provides the oscillations for diversity. But Polanyi’s arguments are relevant to our case, in the sense that massive influx of revenue which has been gained through a concentrated sector (from a land and manpower utilisation perspective, oil industry depends on geographically fixedfields and fields are operated by limited number of rigs) creates a huge spending in turn increases budget deficit in the long run and breaks the sustainability of the spending.
On the other hand, taxation is another term that can be regarded in this sense. The massive oil revenues eliminates the need for taxing thecitizens. Although Karl’s main argument is around the understanding of institutions of a state, taxation is essential for the establishment for well-formed institutions in the framework of accountability. As in the Venezuelan case, a misleading thinking like “only the stupid pays the tax”,results withdemising the strength of state institutions. The elimination of taxation can be regarded as a relief for citizens, but then the only source for state revenues becomes petrodollars. The elite formation hunts around this interest. Since citizens are not taxed, it becomes harder to tax them as the recent oil price hikes demonstrates. This breaks the link between the rulers and citizen. “No taxation without representation” is a key sentence in this sense.
Polanyi’s one other argument that can be applied to our paradox is from this part: “While under the regime of feudalism and of the village community, noblesse oblige, clan solidarity, and regulation of the corn market checked famines, under the rule of the market the people could not be prevented from starving according to the rules of the game” (Polanyi, p. 167). In the book, we have seen a transition from a state ruled by military generals trying to be democratic. The aims and goals of the initial democratization game has changed with the arrival of petrodollars. A poor nation trying to survive and built institutions for her own sake, has became a state that is borrowing “institutional framework” from foreign advisors. This may be due to the short sightedness of her leaders as discussed by Schumpeter.