This conceptual sheet will address the question of States with private incomes, also known as “rentier States”. Specifically, it will address the relationship between private incomes and democracy. This issue is all the more so relevant with current affairs as the arab revolutions are currently stiring up.
“The problem is that the good Lord didn’t see fit to put oil and gas
reserves where there are democratic governments”
-Dick Cheney (then CEO of Halliburton), 1996, New Orleans
As a general rule, as incomes rise, States tend to become more democratic. An empirical exception to this rule is States where rising income can be traced to oil wealth. This conceptual sheet will attempt to explain why, paradoxically, many of the poorest and most troubled states have high levels of natural resource wealth.
Hussein Mahdavy’s definition: a State that receives substantial rents from “foreign individuals, concerns or governments”.
Many States in North Africa and the Middle East are described as rentier States because a large proportion of their revenue comes from:
- Sale of oil (eg Bahrain, Saudi Arabia, United Arab Emirates)
- Locational Rents for use use of pipelines, transit fees and passage through the Suez Canal (eg Jordan, Syria, Egypt)
- Foreign Aid (eg Jordan, Egypt, Israel)
Why Does Oil Impede Democracy
The following 3 models explain why oil impedes democracy. Please note that these models may complement eachother. They are not competing models.
- “Rentier Effect”: Governments use their oil revenues to relieve social pressures that might otherwise lead to claims for greater accountability. This happens in 3 ways:
1. Taxation Effect — oil revenue enables governments to impose lower taxes which in turn makes the public less likely to demand accountability and representation (compared with England, the USA and France where revolutionary political movements were historically driven by the bourgeois idea of “no taxation without representation”).
2. Spending Effect — governments use the oil wealth on spending programs which reduce latent pressures for democratization.
3. “Group formation” effect — oil-rich states block (not necessarily intentionally) the formation of independent social groups (such as an independent bourgeoisie) which is a necessary precondition for democracy.
4. “Repression Effect”: Resource wealth enables a government to spend more money on internal security and therefore block the populations democratic aspirations, eg Iran pre-1979 where much of its oil wealth was spent on the military, creating a “rentier absolutist state”. There are 2 explanations for the increased militarisation caused by oil wealth:
a) Self-interest — authoritarian governments are inclined to use resource wealth to reinforce their position.
b) Resource wealth may cause or exacerbate ethnic or regional conflicts — this is especially the case if the resources are geographically concentrated in an area populated by an ethnic or religious minority. In such cases, the government mey need to increase its military capacity to maintain order and stability.
- “Modernization Effect”: Democratization is caused by a collection of cultural and social changes (such as rising education levels, occupational specialization, health services, media participation and urbanization) which are in turn caused by economic development. Therefore, wealthy States which have not undergone these social and cultural changes (such as Kuwait or Libya) do not satisfy the preconditions for democratization.
- Top 10 Oil-Reliant States (expressed in terms of fuel-based exports as a percentage of GDP): Brunei (47.58%), Kuwait (46.14%), Bahrain (45.60%), Nigeria (45.38%), the Democratic Republic of Congo (45.14%), Angola (45.00%), Yemen (38.58%), Oman (38.43%), Saudi Arabia (33.85%), Qatar (33.85%).
Empirically, studies have found that states with a heavy reliance on revenues from the export of non-fuel minerals tend to suffer from the same obstacles to democracy as oil-reliant states. This is because they share 3 key characteristics in common:
1. They generate rents;
2. These rents are largely captured by the state via taxes or state-owned enterprises; and
3. These activities employ relatively little labour.
On the other hand, States with large agricultural sectors do not suffer from the same obstacles to democracy, as the agricultural sector does not produce rents, it is largely driven by private enterprises and it is high in labour-intensity.
- Top 6 Mineral-Reliant States (expressed in terms of mineral-based exports as a percentage of GDP): Botswana (35.11%), Zambia (24.97%), Bahrain (16.39%), Chile (12.63%), Angola (11.50%), Papua New Guinea (10.13%).
Due to the fact that a large proportion of the world’s oil is situated in the Middle East, the question has often been asked whether the lack of democracy could be attributed to other variables specific to this region, such as Islam or their common history. According to Ross, oil has probably had a negative effect on the democratization of states out of this region, such as Indonesia, Malaysia, Mexico and Nigeria. Further, by expanding his analysis to include other non-fuel minerals, he increases the geographical diversity of his study to other States where natural resource wealth has hampered democracy, such as Angola, Chile, the Democratic Republic of Congo, Cambodia and Peru.
This conceptual sheet has discussed the effects of natural resource wealth on the democratization of States. There are other studies which show that resource wealth tends to:
- reduce economic growth; and
- increase the likelihood of civil wars.
These 3 negative effects of natural resource wealth tend to reinforce eachother leading to a “resource trap”. However, there are examples of States which have managed to avoid this trap. Malaysia, Chile and Botswana are examples of societies which have managed to avoid the majority of these negative effects despite their oil and mineral wealth.
According to some theorists, the oil-impedes-democracy phenomenon does not necessarily occur naturally, but is in fact reinforced by developed States (Heradstveit and Hveem). According to this theory, developed States (and most noticeably, the USA), support dictatorships by providing military aid and training to leaders who guarantee an unlimited flow of oil. These leaders can thus protect themselves against all threats, including those coming from their citizens. Therefore, the United States is drawing closer to Algeria (reserves of more than 9.2 billion barrels), despite repeated human rights abuses. The situation is similar in Nigeria (where military aid increased from $90,000 in 1999 to more than $4 million in 2003) and the Caspian Sea States.
According to a statistical analysis undertaken by Michael Ross in 2001, we can draw the following empirical conclusions about the effects of natural resource wealth on the democratization of States:
- A state’s reliance on oil tends to make it less democratic;
- This effect is also produced by reliance on other non-fuel minerals (but not by food and other agricultural products);
- This effect is not geographically limited to the Arabian Peninsula, the Middle East or Sub-Saharan Africa;
- This effect is not limited to small States;
- The poorer a State is, the more likely natural resource wealth will have an anti-democratic effect. Therefore, advanced industrial States, such as Norway, the USA and Britain have no discernible anti-democratic effects from their natural-resource wealth.