Abstract
While economic explanations for the “resource curse” are well established, the political factors explaining why governments fail to take corrective action remain poorly understood. Research demonstrates that if governments save oil profits abroad and slowly re-introduce the oil-generated revenue into the domestic economy once the rate of return on investment is greater at home than abroad and the quality of project implementation developed, many of the economic problems that plague oil-rich countries can be avoided. Political time horizons shape the incentives of governments to pursue this strategy. Unstable leaders rely on oil revenue to maintain positions of power. They also have less incentive to save oil windfalls abroad as they fear they will not be in office long enough to benefit from such decisions. This paper uses both quantitative data and case study analysis of Azerbaijan and Kazakhstan to demonstrate that leaders with longer time horizons save a greater proportion of oil windfalls abroad than their less stable counterparts, helping avoid the economic pitfalls of oil abundance.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
A leader’s propensity to stash oil revenue abroad for their own personal enrichment may also be mitigated by booming oil-driven economic conditions that provide individuals with a higher rate of return domestically than in foreign markets. In cases where investors can make a greater return on domestic rather than foreign investments, it is less likely that the measure of foreign savings used in this analysis will include such flows of money.
Dutch Disease is even problematic for countries that posses underdeveloped agricultural and manufactured sectors prior to the production of oil. The development of Dutch Disease makes it more difficult to grow these sectors, unless the government implements subsidies or trade barriers.
In the oil slump of 1982–1984, both Nigeria and Indonesia experienced a decline in foreign exchange revenue due to declining oil export revenues. However, the decline in revenue was more pronounced in Nigeria because Indonesia was able to “use the cushion of its previously accumulated reserves, whereas Nigeria had already exhausted both these and its credit opportunities” (Bevan et al. 1999, p. 401). Likewise, the existence of large foreign assets in the member countries of the Gulf Cooperation Council facilitated a relatively low level of adjustment spending in the period of 1980–1986, when crude oil prices significantly declined (Fasano and Wang 2002).
However, exactly how much resource revenue should be saved abroad is a complex question that has been the subject of substantial research and debate and is beyond the scope of this chapter. See, for example, Tersman (1991) and Engel and Valdes (2000).
This method was adapted from Hausmann et al.’s (2005) study of growth accelerations. It differs from the measure of oil booms employed by Smith (2004). Smith calculates an oil boom by multiplying oil/GDP by a dummy variable, which counts upwards from 1 from 1974 to 1985 in every country that depended on oil exports for 10% or more of GDP for at least 5 years between 1974 and 1999.
Variables impacting regime failure included in the Wright (2008) model are: GDP, economic growth, dummy variables for: Islamic countries, foreign maintenance of a country, civil war, authoritarian regime types (military, single-party, monarchy, personalist, and hybrid), and geographic location.
It is important to recognize potential sample selection issues and their effects on results. (Przeworski and Vreeland 2000) Because unstable dictators invest less in the domestic economy (Wright 2008), potentially including lower investment in the oil industry itself, the sample may exclude some dictators with short time horizons. Given lower capacity for oil production, these countries may not experience oil booms of sufficient magnitude to be included in the sample. The results presented in this paper, therefore, provide conservative estimates of the effects of time horizon on windfall foreign savings.
The period 6 years after the boom is included because the average and median duration of the oil booms experienced in the sample is 6.9 and 6 years, respectively. The base period for each country is the average oil revenue and foreign savings over the 3 years prior to the start of the oil boom.
The model with AR(1) correlation was also tested. The addition of AR(1) does not substantively change the results.
Values greater than 1 indicate that governments spent more than the increase in oil revenue. This statistic, however, should be interpreted with caution as governments also have other sources of revenue (i.e., taxes) available to fund expenditure. The point of the analysis is to provide further evidence that unstable leaders tend to over-expend resource revenue rather than save this income abroad.
According to this approach, interviews were not conducted in a direct question/answer format. Rather the key to this methodology is giving respondents the freedom to follow topics in the directions they deem relevant and not in the direction the interviewer believes most germane. Therefore, each interview was based on a set of themes, leaving the order and time spent on any given topic largely to the respondent.
One potential method for testing the impact of time horizons in democratic countries was utilized by Dionne (2011), who operationalized democratic time horizons as the margin of victory won by the executive against his leading opposition candidate. Dionne argued that leaders with a smaller margin of victory have greater reason to be preoccupied with ensuring their political survival because they have a smaller support base in the electorate than leaders with a bigger margin of victory. Leaders with smaller victory margins were assumed to have a shorter time horizon.
References
Barnett S and Ossowski R. Operational Aspects of Fiscal Policy in Oil-Producing Countries. In: Jeffrey MD, Ossowski R and Fedelino A, editors. Fiscal Policy Formulation in Oil-Producing Countries. International Monetary Fund; 2003, pp. 45–81.
Beblawi H, Luciani G. The Rentier State. London: Croon Helm; 1987.
Bevan D, Collier P, Gunning J. Nigeria and Indonesia, World Bank Comparative Study. Political economy of poverty, equity, and growth. New York: Oxford University Press; 1999. Published for the World Bank.
Blute E, Damania R, Deacon R. Resource Intensity, Institutions and Development. World Development. 2005;33(7):1029–44.
Collier P, Gunning J. Trade shocks in developing countries. Oxford: Oxford University Press; 1999.
Corden WM. Booming sector and Dutch Disease economics—survey and consolidation. Oxford Economic Papers-New Series. 1984;36(3):359–80.
Corden WM, Neary JP. Exchange rate policy and the resource boom. Econ Rec. 1982;58:18–31.
Dionne K. The Role of executive time horizons in state response to AIDS in Africa. Comparative Political Studies. 2011;44(1):55–77.
Eifert B, Gelb A, Tallroth N. The political economy of fiscal policy and economic management in oil exporting countries. In: Davis, J. M., Ossowski, R., and Fedelino, A. editors. Fiscal policy formation and implementation in oil-producing countries. Washington, DC; 2003.
Fasano U, Wang Q. Testing the relationship between government spending and revenue: Evidence from GCC countries. IMF Working Paper WP02/201; 2002.
Gavin M. The Mexican Oil Boom, 1977–85. In: Collier P, Gunning J, editors. Trade shocks in developing countries. Oxford: Oxford University Press; 1999. p. 164–200.
Geddes B. Authoritarian breakdown: empirical test of a game theoretic argument. Atlanta, GA: American Political Science Association Meeting; 1999.
Geddes B. Why parties and elections in authoritarian regimes? Presented at the American Political Science Association Conference, Washington DC, 2005.
Gelb AH, Oil windfalls: Blessing or curse? New York: Oxford University Press; 1988.
Glaser B, Strauss A. The discovery of grounded theory: strategies for qualitative research. Chicago: Aldine Pub. Co.; 1967.
Gleditsch K, Choung J. Autocratic transitions and democratization. San Diego: University of California; 2004.
Harberger A. Dutch Disease—how much sickness, how much boon? Resources and Energy. 1983;5:1–20.
Hausmann R, Prichett L, Rodrik D. Growth accelerations. Journal of Economic Growth. 2005;10(4):303–329.
Humphreys M, Sanbu M. The political economy of natural resource funds. In: Humphreys M, Sachs J, Stiglitz J, editors. Escaping the resource curse. New York: Colombia University Press; 2007.
IMF. Oil Prices and Global Imbalances. In: World Economic Outlook. Washington, 2006.
IMF. Republic of Azerbaijan. Article IV Consultation, 2007.
IMF. Republic of Kazakhstan. Article IV Consultation, 2010.
Levy R, Hollan D. Person-centered interviewing and observation in anthropology. In: Bernard H, editor. Handbook of methods in cultural anthropology. Walnut Creek: Altamira Press; 1998.
Mehlum H, Moene K, Torvik R. Institutions and the resource curse. Econ J. 2006;116:1–20.
Olson M. Dictatorship, democracy, and development. The American Political Science Review. 1993;87(3):567–576.
Ross ML. Does oil hinder democracy? World Politics. 2001;53(3):325–61.
Ryan G, Bernard R. Data management and analysis methods. In: Denzin N, Lincoln Y, editors. Handbook of qualitative research. Thousand Oaks: Sage; 2000.
Satpaev D. An analysis of the internal structure of Kazakhstan's political elite and an assessment of political risk levels. Empire, Islam and politics in Central Eurasia. Sapporo: Slavic Research Centre, Hokkaido University. 2007;283–300.
Smith B. Oil wealth and regime survival in the developing world, 1960–1999. American Journal of Political Science. 2004;48(2):232–46.
Strauss A. Qualitative analysis for social scientists. New York: Cambridge University Press; 1987.
Usui, Norio. How effective are oil funds: Managing resource windfalls in Azerbaijan and Kazakhstan. Asian Development Bank Policy Brief Series No. 50, 2007.
Wakeman-Linn, John, Paul Mathieu, and Bert van Selm. Oil Funds and Revenue Management in Transition Economies: the Case of Azerbaijan and Kazakhstan. In: Fiscal Policy Formulation and Implementation in Oil-Producing Countries, 2002.
Wantchekon L. Why do resource abundant countries have authoritarian governments? New Have: Yale University; 2002.
Wintrobe R. The political economy of dictatorship. Cambridge: Cambridge University Press; 1998.
Wright J. Insurance or investment? How authoritarian time horizons impact foreign aid effectiveness. Comparative Political Studies. 2008;41(7):971–1000.
Zolberg A. Creating political order: the party-states of West Africa. Chicago: Rand McNally; 1966.
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
Rights and permissions
About this article
Cite this article
Kendall-Taylor, A. Instability and Oil: How Political Time Horizons Affect Oil Revenue Management. St Comp Int Dev 46, 321–348 (2011). https://doi.org/10.1007/s12116-011-9089-9
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12116-011-9089-9