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Energy Economics – IIIEnergy Economics – III

Jeffrey FrankelJeffrey FrankelHarpel Professor, Harvard Harpel Professor, Harvard

UniversityUniversity

ADA Summer School, Baku, ADA Summer School, Baku, AzerbaijanAzerbaijan

7-9 July , 20107-9 July , 2010

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Oil and DemocracyOil and Democracy

Middle Eastern governments’ access Middle Eastern governments’ access to oil revenue rents may have freed to oil revenue rents may have freed them from the need for taxation of them from the need for taxation of their peoples, which in turn freed their peoples, which in turn freed them from the need for democracy. them from the need for democracy.

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Oil and DemocracyOil and Democracy, continued, continued

Tax revenue requires democracy Tax revenue requires democracy under the theory “no taxation without under the theory “no taxation without representation.”representation.” Mahdavy (1970) was apparently the first —Mahdavy (1970) was apparently the first — followed by Luciani (1987), Vandewalle (1998) & many followed by Luciani (1987), Vandewalle (1998) & many

others.others.

Huntington (1991) generalized the principle Huntington (1991) generalized the principle beyond Middle Eastern oil producers beyond Middle Eastern oil producers to states with natural resources in other parts to states with natural resources in other parts of the developing world.of the developing world.

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Econometric findingsEconometric findings

Statistical studies across large cross-Statistical studies across large cross-sections of countries find that economic sections of countries find that economic dependence on oil and mineral is correlated dependence on oil and mineral is correlated with authoritarian government:with authoritarian government: Ross (2001), Barro (2000), Wantchekon (2002), Ross (2001), Barro (2000), Wantchekon (2002),

Jenson & Wantchekon (2004), and Ross (2006).Jenson & Wantchekon (2004), and Ross (2006).

Some find that authoritarian regimes have Some find that authoritarian regimes have lasted longer in countries with oil wealth.lasted longer in countries with oil wealth. Smith (2004, 2007), Ulfelder (2007).Smith (2004, 2007), Ulfelder (2007).

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Counter-argumentsCounter-arguments

Karl (1997): Venezuela was already authoritarian when Karl (1997): Venezuela was already authoritarian when oil was developed, and in fact transitioned to democracy oil was developed, and in fact transitioned to democracy at the height of its oil wealth. at the height of its oil wealth.

None of the Central Asian states are democracies, None of the Central Asian states are democracies, even though Kazakhstan is the only one with major oil even though Kazakhstan is the only one with major oil production. production.

Haber & Menaldo (2009) do not find in historical time Haber & Menaldo (2009) do not find in historical time series data the statistically significant link from oil to series data the statistically significant link from oil to democracy democracy that is typical of cross-section and panel studies.that is typical of cross-section and panel studies.[1][1]

Noland Noland (2008)(2008) claims that oil rents are not a robust factor claims that oil rents are not a robust factor behind lack of democracy in Middle Eastern countries.behind lack of democracy in Middle Eastern countries.

Similarly, Dunning Similarly, Dunning (2008)(2008) for Latin America (with fixed effects). for Latin America (with fixed effects).

[[1]1] Loss of statistical power in pure cointegration time series tests may explain Loss of statistical power in pure cointegration time series tests may explain this.this.

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Democracy, growth, & Democracy, growth, & causalitycausality

The question whether oil dependence tends to The question whether oil dependence tends to retard democracy should probably not be retard democracy should probably not be regarded as a component of the causal regarded as a component of the causal relation between oil and economic relation between oil and economic performance. performance.

Some correlates of democracy – rule of law, Some correlates of democracy – rule of law, political stability, openness to international political stability, openness to international trade, initial equality of economic endowments trade, initial equality of economic endowments and opportunities – do tend to be good for and opportunities – do tend to be good for economic growth. But each of these other economic growth. But each of these other variables can also exist without democracy. variables can also exist without democracy.

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The evidence is much clearer that The evidence is much clearer that economic growth leads to economic growth leads to

democracydemocracythan the other way aroundthan the other way around

Econometrics:Econometrics: Helliwell (1994), Helliwell (1994), Huber, Rueschemeyer & Stephens Huber, Rueschemeyer & Stephens

(1993),(1993), Lipset (1994) and Lipset (1994) and Minier (1998).Minier (1998).

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Economic growth leads to Economic growth leads to democracydemocracy

Examples include Examples include Asian economiesAsian economies such as Korea or Taiwan. such as Korea or Taiwan.

Some believe that Lee Kwan Yew in Singapore Some believe that Lee Kwan Yew in Singapore and Augusto Pinochet in Chile could not have and Augusto Pinochet in Chile could not have achieved their economic reforms without achieved their economic reforms without authoritarian powers authoritarian powers the one certainly more moderate & benevolent than the the one certainly more moderate & benevolent than the

other. other.

Why has China has grown so much faster Why has China has grown so much faster than Russia since 1985?than Russia since 1985? Some answer: because Deng Xiao Peng chose Some answer: because Deng Xiao Peng chose

to pursue economic reform before political reform to pursue economic reform before political reform while Mikhail Gorbachev did it the other way around.while Mikhail Gorbachev did it the other way around.

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Does democracy lead to Does democracy lead to growth?growth?

The statistical evidence is at best mixed The statistical evidence is at best mixed as to whether democracy as to whether democracy per seper se is good for is good for economic performance. economic performance.

Barro Barro (1996)(1996) finds that it is the rule of law, finds that it is the rule of law, free markets, education, & small government free markets, education, & small government consumption that are good for growth, consumption that are good for growth, not democracy per se. not democracy per se.

Tavares & Wacziarg Tavares & Wacziarg (2001)(2001) find that it is find that it is education, not democracy per se. education, not democracy per se.

Alesina, et al, Alesina, et al, (1996)(1996) find that it is political find that it is political stability.stability.

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The The combinationcombination of ofdevelopment + weak institutions development + weak institutions

+ oil+ oil Bhattacharyya & Hodler Bhattacharyya & Hodler (2009)(2009) find that find that

natural resource rents lead to corruption, but natural resource rents lead to corruption, but only in the absence of high-quality democratic only in the absence of high-quality democratic institutions.institutions.

Collier & Hoeffler Collier & Hoeffler (2009)(2009) find that when find that when developing countries have democracies, as developing countries have democracies, as opposed to advanced countries, they tend to opposed to advanced countries, they tend to feature weak checks and balances; feature weak checks and balances; thus, when developing countries also have high thus, when developing countries also have high

natural resource rents the result is bad for natural resource rents the result is bad for economic growth.economic growth.

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Democracy is an end in itself,Democracy is an end in itself, aside from whether it promotes economic aside from whether it promotes economic

growth.growth. Even here, one must note that the benefits of Even here, one must note that the benefits of

the formalities of elections can be over-the formalities of elections can be over-emphasized.emphasized.

For one thing, elections can be a sham. For one thing, elections can be a sham. Robert Mugabe, Hamid Karzai, & George W. Bush Robert Mugabe, Hamid Karzai, & George W. Bush

each claimed to have been elected, without having each claimed to have been elected, without having in fact earned more votes than their opponents.in fact earned more votes than their opponents.

Western style or one-man one-vote elections Western style or one-man one-vote elections should probably receive less priority in should probably receive less priority in developing countries than the fundamental developing countries than the fundamental principles of rule of law, human rights, freedom principles of rule of law, human rights, freedom of expression, economic freedom, minority of expression, economic freedom, minority rights, and some form of popular representation.rights, and some form of popular representation.

Zakaria Zakaria (1997, 2004).(1997, 2004).

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