Over at The Interpreter Sam Roggeveen muses on a recent interview by Russian President Dmitry Medvedev

“Medvedev: Trading in natural resources is easy, it leads to the illusion of economic stability. Money flows in — considerable sums of money. Acute problems can be effectively resolved with it. You don’t need any economic reforms; you don’t need to deal with diversifying production. We could rid ourselves of this lethargy if we would only learn the right lessons from the crisis.

You hear this in relation to Australia as well. It’s the idea that you can disguise a lack of economic reform if you just have enough natural resources to pull out of the ground. But how true is this, really?

Australia and Russia are both blessed with a great many valuable natural resources, but these resources don’t extract themselves. There’s an array of technological, regulatory, economic and infrastructure factors involved in extracting, processing and transporting these resources at a competitive price.

None of that is ‘easy’, as Medvedev would have it, and Russia’s under-performance as a resource supplier seems to prove that point. Russia would be doing a lot better out of its natural resource sector if it improved its infrastructure and reduced corruption.

Roggeveen’s perhaps right that an efficient industry needs development and hard work, but that simply re-enforces the unique ease of oil, as you can have a very inefficient industry and still be wealthy and powerful. The initial scouting, expertise and establishment can all be hired or outsourced from private companies (Or European colonizers may have already helpfully set it up for you). Once the process is established, countries can either start to take-over some of the industry (as Argentina and Venezuela have to varying degrees) or simply regulate & tax a fair slice and leave the rest in industry hands. There are very few nations today that have large reserves that they arn’t using, and that is usually more due to modern environmental concerns (such as drilling in Alaska in the USA) than practical difficulty. Indeed some of the most unstable and undeveloped nations in the world have been able to produce a sizable oil industry.

Which leads neatly to Medvedev’s second and more important point, the flow of money from natural resources like oil allows governments to paper over difficult challenges in many areas. As Larry Diamond has noted, of the 23 nations which derive a majority of their income from oil and gas, not a single one is a democracy. Why bother giving the people what they want (a say) when you can simply buy them off. Why bother educating them, or raising the role of women when welfare keeps all content.
Likewise Michael Ross had an interesting paper in 2001. (1)

… uses pooled time-series cross-national data from 113 states between 1971 and 1997 to show that oil exports are strongly associated with authoritarian rule; that this effect is not limited to the Middle East; and that other types of mineral exports have a similar antidemocratic effect, while other types of commodity exports do not.
The author also tests three explanations for this pattern: a “rentier effect,” which suggests that resource-rich governments use low tax rates and patronage to dampen democratic pressures; a “repression effect,” which holds that resource wealth enables governments to strengthen their internal security forces and hence repress popular movements; and a “modernization effect,” which implies that growth that is based on the export of oil and minerals will fail to bring about the social and cultural changes that tend to produce democratic government. He finds at least limited support for all three effects.

Ross’s conclusion is clear: “A states reliance on either oil or mineral exports tends to make it less democratic”.

Indeed this is a very good week to be talking about the effect of oil on dictators, for while the Berlin Wall came down in 1989, the real final blow to the USSR’s scope came not from Reagan’s labeling of it as evil, but the fourfold rise and then sudden collapse of oil prices. Beginning in 1985, changing oil prices wiped over $20b a year from their economy. Oil went up to $70, then crashed to $10 in the late 1980′s. See the Graph. No economy could survive such a rapid change for an industry worth 40% of their total exports (2). Naturally foreign aid to satellite states like East Germany had to be dramatically reduced, undercutting those countries economies, and the rest as they say, is history. While Russia was always going to re-insert itself into the world’s affairs, the amazing speed with which it has done so in the 21st century is again a reflection of growing oil prices. In a similar vein the internal resilience and regional influence of the Iranian regime is a function more of oil than the US’s removal of their former competitor Saddam Hussein in Iraq. You can even predict the chance Hugo Chavez will appear on your TV screens by watching the oil price. High prices let him thumb his nose at the ‘great donkey’ of the USA and shower the poor in funds. Dropping prices means he has to turn his attention back to actually governing the country, and put on hold his dreams of regional organisation and change.

Talking about Australia in such context does seem relatively absurd, but John Howard certainly was able to take advantage of the extra wealth from our resource boom to seek to buy back popularity and smooth over issues rather than having to confront it. After all why talk about race relations or have to think up an future agenda when you can just hand out a tax cut every single year. Just as Keating turned to cultural issues in part to avoid mentioning a bad economy, Howard focused on economic issues to avoid harder cultural questions. Smart politics, but the issues are still there and unresolved.

Finding oil is perhaps the worst thing that ever happened to most countries. & certainly to their populations Its great wealth could be used well, but likely it will just be used to pay off various interest groups in order to maintain the status quo. So modernization, development, education, reform, and forward planning are all abandoned as unnecessary struggles. Just lie back and sip another oil martini and keep signing the checks. Wealth and stability is only a phone call to Shell away.

(1)Ross’s paper can be obtained on the Project Muse database if your university institution has subscription. Or if you can’t get it that way email me if you want a copy & I can send it through.
(2) Friedman, T (2008) Hot, Flat & Crowded p.105 Victoria:Allen Lane