I now test whether the mere transfer of operational and management control of oil to private companies, and not ownership, brings about improvements in the quality of
80
institutions. To do so I introduce a dummy for private control in the model. Private control is where states assume ownership of oil but operational and management control vests with private companies, particularly foreign companies. Private control is referred to as
‘state ownership without control’ in previous chapters. The results are presented in column (1) of Table 4.4. Here state ownership with control is the base category. The results show that private control does not have a significantly different effect vis-à-vis state ownership with control. Private ownership, on the other hand, leads to a better quality of institutions than state ownership with control.
I also test whether there are significant differences in the effects of private ownership and private control. To do so, I conduct Wald test for equality of the two coefficients. The test rejects the hypothesis that the coefficients are equal at 1% level of significance. I also estimate the model using private control as the base category. The results are presented in column (2) of Table 4.4. The results support the conclusion from the simple Wald test.
Private ownership leads to significantly higher quality of institutions than private control.
The overall results are consistent with the expectation. It is the transfer of ownership to private companies, and not merely control, which brings about improvements in the quality of institutions.
4.7. Concluding remarks
Several scholars emphasize on the need for mineral-rich countries to initiate institutional reforms and strengthen state capacity. It is widely believed that with the right set of institutions mineral rich countries can move on to the path of sustainable development.
However, this policy advice becomes more of a source of pessimism than optimism once it is recognized that institutional form and quality are shaped by historical and geographical factors and are highly persistent. Political elites, benefitting from dysfunctional institutions, are unlikely to put their interests at stake and facilitate
81 control is the base outcome. Robust (country-clustered) standard errors are given in parentheses. *, **, *** indicate that the estimates are statistically significant at 10, 5, and 1 percent levels respectively.
transition to a more favorable institutional environment (Engerman and Sokoloff, 1997;
Acemoglu et al., 2001, 2002; Easterly and Levine, 2003).
Nevertheless, many scholars believe that increasing transparency and accountability in the management of oil revenues can go a long way in reducing the negative effects of oil wealth (Economist, 2003; Sala-i-Martin and Subramanian, 2013; Isham et al., 2005).
In this context, the role of international actors such as foreign governments, financial institutions, and non-governmental organizations have received a lot of attention. Many
82
international initiatives have come up to help oil-rich countries strengthen their institutions and promote better management of oil revenues. These include initiatives such as Extractive Industries Transparency Initiative (EITI), Publish What You Pay, Global Witness, and Revenue Watch Institute. However, none of these initiatives have been successful in bringing about change (Ross, 2012, p.246). This chapter shows that oil-rich countries can actually improve the quality of their institutions if they adopt private ownership instead of state ownership in the oil sector. These results are useful as the presence of strong institutions is considered important for achieving success on many fronts.
83
Chapter 5 Conclusion
The linkages between oil wealth and poor economic outcomes in oil-rich developing countries came under scrutiny around four decades back. Over the years, this ‘paradox of plenty’ or ‘oil curse’ has led to a vast literature which explores the economic and political causes and consequences of this phenomenon. The literature soon took a different turn by highlighting that the problems in resource-rich countries are not due to the presence of resource wealth, but rather due to the presence of weak institutions (Mehlum et al., 2006;
Robinson et al., 2006). As a result, the term ‘oil curse’ began to be interpreted as ‘weak oil governance’ (Gary and Karl, 2003).
This dissertation, in contrast to the existing literature, argues that the problems in oil-rich countries can neither be attributed to oil wealth nor to the institutions alone. While the quality of institutions is important, it alone is not decisive for the curse. The type of ownership that exists in the oil sector plays an important role in determining whether oil-rich countries witness greater prosperity or suffer from the curse. The results in this dissertation suggest that oil-rich countries, even the ones with weak institutions, can achieve higher economic growth, greater decline in poverty, and greater institutional development by adopting an appropriate ownership structure. Chapter 2 shows that oil-rich countries with weak institutions can escape the curse and witness higher economic growth by adopting private ownership instead of state ownership in the oil sector.
However, those with strong institutions do better by adopting state ownership and control.
84
Chapter 3 shows that countries with weak institutions can not only increase growth but also welfare by adopting private ownership, while those with strong institutions witness higher welfare by adopting state ownership. Chapter 4 shows that oil-rich countries, irrespective of the initial institutional conditions, can improve the quality of their institutions by adopting private ownership instead of state ownership in the oil sector.
Overall, the results provide strong evidence that the type of ownership matters. And the term ‘oil curse’ should more appropriately be interpreted as ‘inappropriate ownership’.
In the remainder of this chapter, I discuss the implications of this dissertation for the theory as well as for the policy. I also outline some avenues for future research.