Saturday, May 28, 2016

Speculating (politically) on the woes of petrostates

Oil economics is tricky. But this article definitely flags some important issues: Petr Aven et al, Twilight of the Petrostate The National Interest 05/17/2016. They write:

Oil-producing countries have been living a dream. In recent decades, most oil-producing countries saw their per-capita GDP not only expand but show a rate of growth above the global average. In other words, they were getting rich faster than the rest of the world. In terms of dollar-denominated GDP per capita, as crude prices peaked in 2011 Russia and Kazakhstan outstripped Malaysia and Turkey; Saudi Arabia and Equatorial Guinea nearly overtook South Korea; Kuwait shot ahead of Great Britain, while Qatar rose to rank as one of the three richest nations. The new generation of the petrostates' political elite has come to look on oil rent as a means to achieve all its goals. And yet, many experts will call the oil windfall a curse, not a blessing. A prosperity that is due to the sheer accident of owning large mineral resources rather than to technological prowess, investment and hard work has its downsides, including the degradation of political systems, the throttling of competition and the proliferation of populist fiscal policies.
They describe in terms of economic rent how the global oil business is changing:

Over the course of human history many rent-generating commodities capable of enriching their owners have turned into ordinary products. Pricing becomes determined by production costs rather than scarcity value. The readiest example is land, which has seen the rent component of its price steadily decline over millennia and has thus gradually ceased to be the main cause of armed conflicts. Other cases include furs, which generated rent for Russia into the eighteenth century, and natural rubber, which fed the Amazon boom in the early 1900s.

Inevitably, technological progress reduced the scarcity value for many commodities. A rent-generating commodity could also suffer a fall in demand when a less expensive substitute of similar quality comes to the market. The story of natural and synthetic rubber is a prime example. ...

Oil is now subject to just such pressures from both demand and supply.
But neoliberal economic thinking is ubiquitous these days. So Aven et al argue that the problems currently facing the poorer petrostates have to been addressed by budget cuts and more budget cuts. The same prescription that neoliberal orthodoxy demands for all economic situations, good, bad and in between. "An oversized, unbalanced budget, especially in a relatively poor country, is a clear sign of irresponsible populism."

"Irresponsible populism," like "corruption," is a favorite epithet to be thrown at governments who don't conform to the neoliberal/Herbert Hoover/Angela Merkel "Washington Consensus."

Then in discussing Russia, the authors do a quick re-fighting of the Cold War, in which the Soviet Union in the mid-1960s had the chance to develop in the virtuously capitalistic direction that China has. "The last hope of change vanished with the Prague Spring of 1968, which taught the Soviet leadership one thing: even a small concession to liberalism could have tremendous, unpredictable consequences."

It's a good sign that someone is running of conventional wisdom they have no expectation of being challenged by their audience when huge leaps of faith are made without a blink. Russia in 1917 had a small but important industrial base. After the Second World War, it (as the Soviet Union) had become highly industrialized and was a developed country by any imaginable definition. China is still a developing country. And part of the reason for the tendency to slower growth in China is that as a country reaches a more developed state, the possibilities for rapid growth are reduced. Aven et al make it sound like the same phenomenon in the Soviet Union was purely a policy choice by the bad Commies.

A policy choice which they say was due to the Soviets recognizing that "even a small concession to liberalism could have tremendous, unpredictable consequences." Maybe they mean that purely in terms of liberal economic policies. But it's not widely assumed that China has undergone a lot of political liberalization. They are still ruled by a Communist government and continue to practice policies like capital controls that are heresy to the neoliberal consensus.

After all the convolutions of the argument, it's hard to tell how much weight one should put on their argument that dependency on oil revenue didn't cause but did hasten the downfall of the USSR:

To be sure, the Soviet Union's main economic problem was not oil dependence. Oil or no oil, the Soviet planning system was doomed to collapse one day. But it was oil price swings that determined the timing of its demise. Expensive crude stalled economic reform and then a sharp drop in oil prices exacerbated the pain of the country's transition to democracy and a free market. But for this drop, the Soviet Union could have survived for another couple of decades.
By the end, we get what seems suspiciously like a pitch for regime change effort here, there, and most everywhere based on a global opportunity supposedly presented by the current slump in oil prices:

First, the populist regimes in Venezuela, Ecuador and Algeria, which are the most financially vulnerable today, are going to be hit hard. Indeed, Latin America as a whole is certain to veer to the right. The rulers in Ecuador and Venezuela, as well as in Venezuela-sponsored Cuba, have already been scared by the triumph of right-wing forces in Argentina. While liberal reforms will hardly bring about an immediate improvement in people's lives, left-wing populism is certain to start losing its grip on the continent.

Second, the post-Soviet space is in for a major shift in the balance of power. Until now, economic integration within it has been underpinned by Russia's oil and gas revenues, the trade breaks that Russia offered and its vast labor market where millions of Central Asian migrants could earn enough money to support their families back home. This cooperation model is on the way out. A new one must be established if Russia doesn’t want to lose its regional leadership once again. Unless much-needed domestic reform occurs in Russia, Azerbaijan and Kazakhstan (which is the only one of the three to have made half-hearted reform noises), the countries that depend on their own or Russian oil revenues will face social and economic upheaval. The repercussions may transcend borders, as hundreds of thousands, if not millions, of people flee their homes.

Third, the Middle East will see its balance of power recast. Iran, Turkey and Israel are well placed to increase their influence as Saudi Arabia's dominance wanes due to its declining oil wealth. There is a chance of political liberalization in Iran. Falling oil prices may also serve as a trigger for a major redrawing of borders and the emergence of monoethnic or monoreligious states. In this context, a break-up of Syria and Iraq appears probable. Violent conflicts are most likely in the near term, as regional governments seek to divert popular attention from domestic problems and to solve them by getting their hands on their neighbors' resources. It is hardly a coincidence that the last time Iraq's oil revenue shrank the country invaded Kuwait. In the longer term, however, violence will subside if prices stay low. The belligerents will run out of the funds necessary to finance war efforts. [my emphasis]
And there's a standard warning about the bogeyman of isolationism in US foreign policy, which would inevitably, in their view, lead to scary, scary Chinese dominance of the world.

But they see Francis Fukuyama's End of History on the horizon once again: "The full enjoyment of Western comforts and technologies will no longer be compatible with a negation of its values and institutes [sic]."

The lesson they offer for the petrostates targeted for regime change is between the Washington Consensus and the accompanying US dominance, on the one hand, and development of their own countries' eocnomies. Or, in the jargon they use: "Now is the time for petrostates to awaken from their long oil dream and choose between the first and the third worlds."

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