Is oil bad for democracy? (A footnote on Thad Dunning’s “Crude Democracy”)

The view that oil is bad for democracy and freedom has become conventional wisdom. (Any view espoused by Thomas Friedman is by definition conventional wisdom). On this view, the rents produced by oil (and, to a lesser extent, other minerals) tend to provide authoritarian rulers both with incentives to entrench themselves and to give them the capacity to do so; as a result, as Friedman puts it, “the price of oil and the pace of freedom tend to move in opposite directions.”

There is indeed some apparent association between high levels of resource wealth and authoritarianism, as documented in many studies (see, e.g., Michael Ross’ “Does Oil Hinder Democracy?” which has been cited more than 900 times). Qualitative studies of Middle Eastern politics (e.g., Kiren Aziz Chaudhry’s fantastic book “The Price of Wealth”) examine in detail the ways in which oil has served to buttress authoritarianism in some countries. And there are theoretical reasons to believe that democracy is unlikely to emerge or be stable when elites control highly immobile assets (like oil wells) from which they derive large rents (see, e.g., Carles Boix’s “Democracy and Redistribution”).

Yet there have always been apparent outliers: Venezuela, for example, seems to have sustained a relatively democratic regime even during the oil boom of the seventies, and Norwegian democracy did not seem to have been adversely affected by a huge influx of oil. Oil and natural resources seem to be bad for democracy in some countries (mostly in the Middle East and Africa) but good in other regions (Latin America). And some recent studies claim that the statistical evidence actually does not favour the view that oil and natural resources are bad for democracy (see, for example, Stephen Haber and Victor Menaldo’s work, who go so far as to argue that there is a “resource blessing” rather than a curse).

Thad Dunning’s book, “Crude Democracy,” develops a neat argument that makes sense of the conflicting evidence. Resource rents, he concedes, tend to produce incentives for autocrats to hang on to power or for elites to struggle to control these rents. (Sudden oil booms, on this view, might increase the attractiveness of capturing the state). But these incentives are sometimes overridden or at least mitigated by the fact that resource rents also decrease incentives to redistribute wealth in the non-resource sectors of the economy. If the non-resource sectors of the economy are highly unequal (and relatively large), then resource rents are likely to decrease the redistributive costs of democracy for elites and the attractiveness of coups; this has been the case, according to Dunning, in much of Latin America. By contrast, if the non-resource sectors of the economy are very equal (and small relative to the resource sectors), then resource rents are likely to have an “authoritarian effect;” this has been the case in African countries like Equatorial Guinea or Middle Eastern countries like the UAE or Saudi Arabia. In other words, when oil (or other natural resources, like tin in Bolivia) is the only game in town for elites, then oil is bad for democracy; but if elites mostly derive their income from other sources, and the country is overall poor and unequal, then oil can actually mitigate redistributive pressures and make democracy more palatable to elites. 

Dunning uses game-theoretical models, statistical analysis, and case studies to support this thesis. He has a detailed case study of Venezuela that is of particular interest to me. In Dunning’s view, the non-oil sectors of the Venezuelan economy have always been very unequal, which would suggest high levels of class conflict. And indeed we do observe lots of class conflict, but especially so during those periods where oil revenues (or more precisely, the oil “take” of the Venezuelan state; not exactly the same thing) declined. Venezuelan democracy appeared most consolidated, and class conflict was lowest, when the price of oil was highest (i.e., during the oil boom of the 1970s). By contrast, the rise of Chavez (and more class conflict) coincided with a period where the oil take of the Venezuelan state had declined.

Dunning was writing in 2007, so he cannot address every development of Venezuelan politics since then, but he does argue that Chavez’ redistributive rhetoric has tended to “bite” more – there have been more expropriations, for example – when the price of oil declined, and it has tended to remain mere rhetoric when the price of oil was high. (There are some complications here, since the price of oil is not an exact measure of the oil-related resources available to the Venezuelan state, but you should read the book if you are interested in the complications). The upshot is that if the Venezuelan state’s take from oil is declining, perhaps because petroleum production is declining (as it seems most analysts agree: see also chart below) and oil prices decline or fail to rise sufficiently to compensate for the decline in production, we should expect to see more class conflict, and potentially more authoritarianism from the Chavez regime. So high oil prices (so long as there is enough oil production) moderate actual redistribution and authoritarian temptations (though not necessarily redistributive rhetoric), whereas low oil prices increase actual redistribution and authoritarian temptations (on both government and opposition sides: the coup attempt of 2002 is explained by Dunning in part as a result of higher redistributive pressures on the elite due to a fall in oil revenues).

Qualitatively speaking, this seems more or less right to me, though I am no more than an amateur Venezuela-watcher (I play one in my class, though). But I would complicate the analysis a bit. For one thing, the price of oil has been on an upward trend recently (this is the price of West Texas Intermediate, which tends to be a bit more expensive than the heavy Venezuelan crude, but it will do as a proxy), yet it seems that actual redistribution and the authoritarianism of the Venezuelan government have both increased recently, at least in some respects. This could be because the expectations of redistribution have increased (perhaps because of Chavez’ rhetoric) so that actual oil revenues no longer suffice to mitigate redistributive pressures, even if they are on an upward trend, or because the actual amount of resources that the government perceives from oil have actually decreased due to declines in production and unfavourable deals with other countries, I don’t know. Or it could be that there is some other thing going on, not accounted for in Dunning’s model. (A more industrious blogger would actually try to look up the time series of oil revenue that accrues to the government, to see whether this time series is in accord but this seems to be a non-trivial task; Dunning’s own sources for reconstructing the oil take of the Venezuelan state seem quite inaccessible from New Zealand).

It is also worth emphasizing, as Dunning himself does briefly at the end of his book, that though some form of democracy may be supported by high natural resource prices when the rest of the economy is highly unequal, the quality of that democracy is not necessarily great. A rentier democracy may be democratic in the Schumpeterian minimalist sense, but it is a form of politics that often appears inimical to responsibility, and may be accompanied by a great deal of corruption. (I could speak from personal experience, but it’s been a long time since I’ve lived in Venezuela). In this sense, it could be that Friedman is at least partly right: rentierism may be bad for freedom (to some extent), regardless of whether or not it is always bad for democracy. 

Finally, I would have wanted Dunning to say more about how dependence on oil may have long-term “authoritarian” (or “democratic”) effects. Institutions may be hollowed out by state dependence on rents (this is Aziz Chaudhry’s argument in The Price of Wealth, if I remember correctly – it’s been a while since I read it, but basically the idea is that extreme oil dependence means you do not need to collect taxes and can basically give lots of people unproductive jobs in the government bureaucracy, which has all kinds of deleterious effects on other institutions); and the “Dutch disease” may decrease the size of the non-oil sector over time, increasing the “authoritarian effects” of natural resource rents. Dunning does speak a bit about both of these things, discussing some potential countervailing mechanisms, but some additional qualitative evidence would have been nice.

The quality of the analysis in this book – the game-theoretical models, quantitative tests, and qualitative case studies – is consistently high, though like many books that come out of dissertations there is too much cross-referencing and repetition. (Also, I wonder why the game-theoretical formalization of Dunning’s model leads to such ugly math. There’s nothing wrong with it, but isn’t there a way of handling the math of these optimization problems in a more elegant manner?). I wonder what recent detractors of the "resource curse" (like Victor Menaldo) think of it?