Energy Politics

Chapter 1. Energy and Regime Type

Chapter 1 Energy and Regime Type Major energy exporters possess distinctive patterns of economic and political development. Revenues from oil and gas exports affect the economies of exporting states in a different way than revenue derived from exports of manufactured and other produced goods and services. Almost counterintuitively, oil exporters tend to fare more poorly economically than energy-poor states. Furthermore, because of the volatile nature of oil prices, the economies of major oil producers are generally unstable. Moreover, nondemocratic states that derive the majority of their income from energy exports are considerably less likely to make a transition to democracy. A major foreign policy implication of this development is that U.S.-led democratization policies are most likely inapplicable to major oil producers. In analyzing the impact of energy production on economic and regime development, a number of variables must be differentiated. First, a distinction should be made between energy producers and energy exporters. Income derived from energy sales abroad has a distinctive effect on states. Second, it is necessary to distinguish between energy reserves owned mainly by private sources versus those owned by the state. Third, one should differentiate between energy exporters and major energy exporters: the International Monetary Fund (IMF) draws a distinction between major energy exporters, in which (among other criteria) over 40 percent of the gross domestic product (GDP) is derived from energy export revenues and other energy exporters.1 The economic and political trends discussed for energy producers are most applicable to major energy exporters. Economies of Resource Exporters Energy-poor states often look at their energy-rich counterparts with envy, and strive to find local energy sources. Economists Jeffrey Sachs and Andrew Warner, however, conducted an extensive empirical analysis of 20 Chapter One 97 countries over 1971–1989 that shows that economies with abundant natural resources have tended to grow less rapidly than economies with scarce natural resources.2 This has often been dubbed the ‘‘resource curse.’’ Stanford University’s Terry Lynn Karl has labeled it ‘‘the paradox of plenty.’’3 She claims that oil exporting is the most important factor influencing development in states of this type. Despite vast cultural, geographical , and geostrategic conditions, major oil-exporting states display similar paths of economic and political development.4 Energy export revenues also impair the growth of nonenergy sectors and thus the sustainability of the economies of energy exporters. The economies of major energy exporters tend to display a shift in labor and capital away from the agricultural sectors, and in many cases, from the manufacturing sectors as well. For example, higher wages in the energy export sector, often provided by foreign companies, attract labor from other sectors. The economic boom associated with oil and gas exports also often raises the value of the local currency, rendering locally produced products expensive, increasing imports, and decreasing exports of goods produced by the nonoil sectors. This phenomenon is referred to as ‘‘Dutch Disease.’’5 Few states that have been heavily dependent on the oil sector have succeeded in simultaneous development of the nonoil sector, and this affects their long-term stability.6 Norway and Indonesia are notable exceptions. The cyclical nature of energy, and especially oil profits, places the energy export state in a cycle of boom and bust that has important implications for state stability. During times of high energy prices and thus large state revenues, energy exporters tend to undertake large-scale state spending, often aimed at satisfying popular demands. When prices inevitably fall, oil-producing states are left with large public expectations without the ability to meet public demands, which in turns leads to fiscal crises. In contrast to most predictions following the oil boom of the 1970s, OPEC oil exporters found themselves on the eve of the twenty- first century not only with the real price of crude oil lower than the 1973 level, but also with extensive debt and significant economic challenges.7 The revenue produced by energy exports has a different effect on the producer’s economy than that created by manufactured and services exports. Energy-export-derived revenue produces scant employment and does not generate significant linkages with other economic sectors. Except for service sectors, it does not generally spur significant additional economic activity. In addition, oil export states have poor capacity for economic reform. Energy exporters do not tend to undertake reform of underdeveloped economic sectors during the boom periods, and they rarely have the capacity to do so during the dry periods...