The First Law of Petropolitics by Friedman

There are a lot "papers" on "Dutch Disease" by Academics, but I found a great article by Thomas Friedman from NYT (I usually don't agree with many of his views) but I agree with this one very much. It certainly helps explain the situation in Venezuela in layman's terms.
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The First Law of Petropolitics

By: THOMAS L. FRIEDMAN - For The North County Times

When I heard the president of Iran, Mahmoud Ahmadinejad, declare that the Holocaust was a "myth," I couldn't help asking myself: "I wonder if the president of Iran would be talking this way if the price of oil were $20 a barrel today rather than $60 a barrel."

When I heard Venezuela's President Hugo Chavez telling British Prime Minister Tony Blair to "go right to hell" and telling his supporters that the U.S.-sponsored Free Trade Area of the Americas "can go to hell," too, I couldn't help saying to myself, "I wonder if the president of Venezuela would be saying all these things if the price of oil today were $20 a barrel rather than $60 a barrel, and his country had to make a living by empowering its own entrepreneurs, not just drilling wells."

As I followed events in the Persian Gulf during the past few years, I noticed that the first Arab Gulf state to hold a free and fair election, in which women could run and vote, and the first Arab Gulf state to undertake a total overhaul of its labor laws to make its own people more employable and less dependent on imported labor, was Bahrain. Bahrain happened to be the first Arab Gulf state expected to run out of oil. I couldn't help asking myself: "Could that all just be a coincidence?


The more I pondered these questions, the more it seemed obvious to me that there must be a correlation ---- a literal correlation that could be measured and graphed ---- between the price of oil and the pace, scope and sustainability of political freedoms and economic reforms in certain countries.

I would be the first to acknowledge that this is not a scientific lab experiment, because the rise and fall of economic and political freedom in a society can never be perfectly quantifiable or interchangeable. But I think there is value in trying to demonstrate this very real correlation between the price of oil and the pace of freedom, even with its imperfections.

The First Law of Petropolitics posits the following: The price of oil and the pace of freedom always move in opposite directions in oil-rich petrolist states. According to the First Law of Petropolitics, the higher the average global crude oil price rises, the more free speech, free press, free and fair elections, an independent judiciary, the rule of law and independent political parties are eroded. And these negative trends are reinforced by the fact that the higher the price goes, the less petrolist leaders are sensitive to what the world thinks or says about them.

I would define petrolist states as states that are both dependent on oil production for the bulk of their exports or gross domestic product and have weak state institutions or outright authoritarian governments. High on my list of petrolist states would be Azerbaijan, Angola, Chad, Egypt, Equatorial Guinea, Iran, Kazakhstan, Nigeria, Russia, Saudi Arabia, Sudan, Uzbekistan and Venezuela.

To be sure, professional economists have, for a long time, pointed out in general the negative economic and political impacts that an abundance of natural resources can have on a country. This phenomenon has been variously diagnosed as "Dutch Disease" or the "resource curse." Dutch Disease refers to the process of deindustrialization that can result from a sudden natural resource windfall. The term was coined in the Netherlands in the 1960s, after it discovered huge deposits of natural gas.

What happens in countries with Dutch Disease is that the value of their currency rises, thanks to the sudden influx of cash from oil, gold, gas, diamonds or some other natural resource discovery. That then makes the country's manufactured exports uncompetitive and its imports very cheap. The citizens, flush with cash, start importing like crazy, the domestic industrial sector gets wiped out and, presto, you have deindustrialization.

Beyond these general theories, some political scientists have explored how an abundance of oil wealth, in particular, can reverse or erode democratizing trends. One of the most trenchant analyses that I have come across is the work of UCLA political scientist Michael L. Ross.

Using a statistical analysis from 113 states between 1971 and 1997, Ross concluded that a state's "reliance on either oil or mineral exports tends to make it less democratic; that this effect is not caused by other types of primary exports; that it is not limited to the Arabian Peninsula, to the Middle East, or sub-Saharan Africa; and that it is not limited to small states."

First, Ross argues, there is the "taxation effect." Oil-rich governments tend to use their revenues to "relieve social pressures that might otherwise lead to demands for greater accountability" from, or representation in, the governing authority. Oil-backed regimes that do not have to tax their people in order to survive also do not have to listen to their people or represent their wishes.

The second mechanism, argues Ross, is the "spending effect." Oil wealth leads to greater patronage spending, which in turn dampens pressures for democratization. The third mechanism he cites is the "group formation effect." When oil revenues provide an authoritarian state with a cash windfall, the government can use its newfound wealth to prevent independent social groups ---- precisely those most inclined to demand political rights ---- from forming. In addition, he argues, an overabundance of oil revenues can create a "repression effect," because it allows governments to spend excessively on police, internal security and intelligence forces that can be used to choke democratic movements.

Finally, Ross sees a "modernization effect" at work. A massive influx of oil wealth can diminish social pressures for occupational specialization, urbanization and the securing of higher levels of education ---- trends that normally accompany broad economic development and that also produce a public that is more articulate, better able to organize, bargain and communicate, and endowed with economic power centers of its own.

What I am arguing in positing the First Law of Petropolitics is not only that an overdependence on crude oil can be a curse in general but also that one can actually correlate rises and falls in the price of oil with rises and falls in the pace of freedom in petrolist countries.

An Axis of Oil?

Since 9/11, oil prices have structurally shifted from the $20-$40 range to the $40-$60 range. Part of this move has to do with a general sense of insecurity in global oil markets due to violence in Iraq, Nigeria, Indonesia and Sudan, but even more appears to be the result of what I call the "flattening" of the world and the rapid influx into the global marketplace of 3 billion new consumers, from China, Brazil, India and the former Soviet Empire, all dreaming of a house, a car, a microwave and a refrigerator. Without a dramatic move toward conservation in the West, or the discovery of an alternative to fossil fuels, we are going to be in this $40-to-$60 range, or higher, for the foreseeable future.

Politically, that will mean that a whole group of petrolist states ---- with weak institutions or outright authoritarian governments ---- will likely experience an erosion of freedoms and an increase in corruption and autocratic, antidemocratic behaviors.

Consider the drama now unfolding in Nigeria. Nigeria has a term limit for its presidents ---- two four-year terms. President Olusegun Obasanjo came to office in 1999, after a period of military rule, and was then reelected by a popular vote in 2003. When he took over from the generals in 1999, Obasanjo made headlines by investigating human rights abuses by the Nigerian military, releasing political prisoners and even making a real attempt to root out corruption. That was when oil was around $25 a barrel.

Today, with oil at $60 a barrel, Obasanjo is trying to persuade the Nigerian legislature to amend the constitution to allow him to serve a third term. A Nigerian opposition leader in the House of Representatives, Wunmi Bewaji, has alleged that bribes of $1 million were being offered to lawmakers who would vote to extend Obasanjo's tenure.

Very often in petrolist states, not only do all politics revolve around who controls the oil tap, but the public develops a distorted notion of what development is all about. If they are poor and the leaders are rich, it is not because their country has failed to promote education, innovation, rule of law and entrepreneurship. It is because someone is getting the oil money and they are not. People start to think that, to get rich, all they have to do is stop those who are stealing the country's oil.

Geology trumps ideology

With all due respect to Ronald Reagan, I do not believe he brought down the Soviet Union. There were obviously many factors, but the collapse in global oil prices around the late 1980s and early 1990s surely played a key role. And lower oil prices also surely helped tilt the post-Communist Boris Yeltsin government toward more openness to the outside world and more sensitivity to the legal structures demanded by global investors.

Think about the difference between Russian President Vladimir Putin when oil was in the $20-$40 range and now, when it is $40-$60. President Bush said after their first meeting in 2001 that he had looked into Putin's "soul" and saw in there a man he could trust.

If Bush looked into Putin's soul today, it would look very black down there, black as oil. He would see that Putin has used his oil windfall to swallow (nationalize) the huge Russian oil company, Gazprom, various newspapers and television stations, and all sorts of other Russian businesses and once independent institutions.

Although we cannot affect the supply of oil in any country, we can affect the global price of oil by altering the amounts and types of energy we consume. When I say "we," I mean the United States in particular, which consumes about 25 percent of the world's energy, and the oil-importing countries in general.

Thinking about how to alter our energy consumption patterns to bring down the price of oil is no longer simply a hobby for high-minded environmentalists. It is now a national security imperative.

Therefore, any American democracy-promotion strategy that does not also include a credible and sustainable strategy for finding alternatives to oil and bringing down the price of crude is utterly meaningless and doomed to fail. Today, no matter where you are on the foreign-policy spectrum, you have to think like a Geo-Green. You cannot be either an effective foreign-policy realist or an effective democracy-promoting idealist without also being an effective energy environmentalist.

Thomas L. Friedman is a columnist for The New York Times and author of, most recently, "The World Is Flat: A Brief History of the Twenty-First Century" (Farrar, Straus & Giroux, 2005). For more articles from Foreign Policy magazine, visit the Web site at www.foreignpolicy.com.