By Akhil Andasu and Shubhra Agrawal
Nigeria has a term limit for its presidents – two four-year terms. Obasanjo, who took over as the President in 1999, investigated human rights abuses by the military, releasing political prisoners and even making a real attempt at rooting out corruption. All this happened when the price of oil was $25 per barrel. When oil reached a price of $60 per barrel though, rumours of him trying to amend the constitution to serve a third term began to swirl, amid others involving him in nefarious $1million bribes. Is this mere happenstance or is political freedom tied to the global price of oil?
One might expect an abundance of marketable, commercially viable resources to be a blessing for any nation’s future growth. However, this is not always the case. A bountiful supply of natural resources, especially oil, can sometimes prove to be detrimental to a country’s economic and political freedom, especially if its political circumstances are far from propitious to organic growth. The effects of oil prices stretch across a vast number of fronts, with volatility in prices possibly affecting the socio-political realm. The price and abundance of oil might have a strong correlation with the sustainability of political and economic freedoms in countries, especially in the oil-rich dictatorships.
How oil wealth impedes democracy
According to Michael L. Ross, Professor of Political Science at UCLA, oil wealth can impede democracy by four different mechanisms. The taxation effect occurs when, after the nationalisation of oil companies, the oil-rich states no longer have to tax private oil companies and are free to earn more by producing more oil whenever they please. As the revenue rises, governments can reduce taxes on the citizens, making governance easier and the ruling government more politically popular. What this leads to though, is the government neglecting other streams of income. The spending effect is when the rise of revenues tend to indulge the government in greater patronage spending, by increasing its subsidies. Nationalism, being easier on a full stomach, helps the country buy opposition loyalties. However, these grants can be economically wasteful, not to mention environmentally disastrous. In 2006, Iranian President Ahmadinejad promised to build 300,000 housing units and maintained energy subsidies amounting to 10% of the country’s
All this increase in revenues and power lead to the repression effect where the overabundance of oil revenues allows the government to spend excessively on internal security and intelligence forces, which can then be used to strike down upon democratic movements. The newfound wealth can also be used to prevent independent social groups from forming, thus curbing free thought. And finally, a massive influx of oil wealth can diminish the immediate social pressures for occupational specialization, urbanization and the securing of higher levels of education, which are trends that one would normally associate with the broad development of the economy. This is known as the modernization effect.
The inverse relationship
The relationship between the price of oil and freedom in non-democratic regimes was well characterized by three-time Pulitzer Prize winner Thomas L. Friedman as the First Law of Petropolitics. “The price of oil and the pace of freedom always move in opposite directions in oil-rich non-democratic states.”
The higher the price of crude oil, the more free speech, free press, free and fair elections are eroded. Conversely, the lower the price of oil, the more are these countries forced to start indulging in dialogue about gravitating toward a political system and a society that is more transparent. There is more focus on uplifting legal and educational structures that will provide a suitable environment conducive to maximizing their citizens’ abilities.
A marked difference: $20 vs $60
A shining example of how the entire dynamic in an authoritarian state change with fluctuating oil prices can be seen by comparing the situation in the Soviet Union under its leader Mikhail Gorbachev and Russia under Putin, when the prices of oil were $20 and $60 respectively.
A surge in the budget deficit caused by a sharp fall of 58% in oil prices in 1985 was a clear indication that the economy that was once at par with the United States, was in dire need of restructuring. Consequently, in 1987, Gorbachev introduced two reforms: glasnost and perestroika. Glasnost gave the citizens a greater freedom of speech and opened the government to criticism. Perestroika referred to the restructuring of the economy by introducing policies which allowed the ownership of private property and permitted foreign investments in the form of joint ventures with Soviet ministries. Contrast this with Putin’s Russia when oil was at $60 a barrel, where he used his oil windfall gain to nationalize Gazprom, a massive oil company. Media outlets and several other previously independent institutions were also brought in under the government’s jurisdiction.
A worrisome feature of oil wealth is that it skews how development is perceived within the country. When the citizens are poor and the wealth is concentrated in a few hands, they begin to question why the oil wealth isn’t trickling down to them, rather than questioning the appalling existing developmental structures such as education, innovation, rule of law and entrepreneurship.
Bahrain : Dust turned into gold
When a country doesn’t have to just dig up another oil well for money, it begins to think about diversifying the economy and encouraging private enterprises. Such is the case with Bahrain. Upon realizing that the country had a limited source of oil wealth, Bahrain embraced economic liberalization, diversifying its economy into banking, retail and tourism. The country used its windfall gain from its oil wealth to invest in infrastructure development and other projects, along with education, health, water and roads. It has an impressive track record of being the most open economy in the Middle East, while enjoying a robust pace of growth. International events such as hosting the Grand Prix have caused major airlines such as Lufthansa to continue services in the country, bringing it into the limelight as a country that has truly embraced economic liberalization.
We can, therefore, come to a logical conclusion that commodity-rich countries would be far better off using their fortunes to diversify the economy, or better yet, investing in foundational pillars of any country’s growth, such as better education and health. This would ensure that not everything revolves around those who control the commodity. An environment conducive to growth would be created, with competition and innovation, leading to a production of real goods, for real markets.