This dissertation contributes to two sets of literature within the broad area of the political economy of the resource curse. The one focusses on the economic dimension of the resource curse, and the other on the institutional dimension. I discuss the implications of this dissertation for these two sets of the literature below.
Resource abundance and economic development
The existing theories on the resource-growth nexus postulate that the accrual of rents to the state promotes a rent seeking culture and a patron-client system of governance. It also entice individuals with entrepreneurial talent away from productive activities and towards rent seeking. These arguments have been formalized in the voracity model (Lane and Tornell, 1996; Tornell and Lane, 1999) and the models of rent seeking and misallocation of entrepreneurial talent (Torvik, 2002; Mehlum et al., 2006). These models also predict that the adverse growth effects of resources would be prevalent only in societies where the institutional constraints are not present to put barriers on the appropriation of rents by the state. When the institutional constraints are strong, the state finds it difficult to
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appropriate and misallocate rents. Herein the presence of resources does not lead to lower growth.
In this dissertation I contribute to the literature by arguing that the institutional constraints alone do not determine the extent of barriers on the state’s behavior. Much also depends on ownership. The above theories, by neglecting ownership, do not adequately explain the phenomenon of the resource curse. I focus on oil resources and argue that the type of ownership that exists in the oil sector determines the level of control that state leaders can exert over oil rents. This in turn affects their behavior and decision making framework. When there is state ownership, states have direct and unrestricted access to oil rents through NOCs. This enables them to appropriate and misallocate rents for political purposes. However, when there is private ownership, states only have an indirect and limited control over oil rents which they derive through taxation of private oil companies. This limited control in turn places barriers on the state’s ability to appropriate rents and direct them towards unproductive purposes.
I further argue that while ownership is important, the institutional environment prevailing in a country cannot be completely neglected. When the quality of institutions is poor, direct control of the state over oil rents can lead to adverse effects. In this case, transferring ownership to private companies and thereby limiting the state’s control over oil rents can lead to better economic outcomes. However, when state leaders adopt good policies and the quality of institutions is good, the state’s direct control over oil rents would not be detrimental. In this case, state ownership would not have the worse effect.
In fact, state ownership here would be better than private ownership, as it will ensure productive use of resources that would otherwise be spent on regulating private oil companies and detecting malpractices such as tax evasions. The empirical results in this dissertation provide support for this argument. Chapter 2 shows that private ownership leads to higher growth than state ownership when the quality of institutions is weak. But
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when the quality of institutions is good, state ownership and control leads to higher growth than private ownership. Chapter 3 provides further support for this argument. It shows that private ownership leads to higher welfare than state ownership when the institutional quality is poor; but when the institutional quality is good, state ownership leads to higher welfare than private ownership.
These results contrast the existing theories which emphasize on the importance of ownership but neglect the role of institutional quality; they predict that state ownership would always lead to worse effects than private ownership (Luong and Weinthal, 2010).
These results also contrast the theories which consider the importance of institutional quality, but neglect the role of ownership; they predict that the countries with weak institutions would inevitably suffer from the curse. This dissertation brings together both the dimensions of ownership and institutional quality in one framework. It thus provides a more comprehensive understanding of the oil curse phenomenon. It shows that state ownership does not always lead to poorer outcomes. Rather, its effect depends on the quality of institutions existing in a country. It also shows that the countries with weak institutions need not always suffer from the curse. Much depends on the type of ownership structure prevailing in the oil sector. Oil-rich countries can witness higher growth and welfare if they adopt the right ownership structure given their institutional circumstances.
That is, countries with weak institutions can witness higher growth and welfare by adopting private ownership, while those with strong institutions benefit by adopting state ownership.
Resource abundance and institutions
The previous studies predict that resource abundance, particularly oil abundance, leads to poor quality of institutions. The explanation for this is provided by the rentier state theory.
According to this theory, the flow of oil rents to the state reduces the incentives of state
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leaders to reform institutions and also enables them to curb demand-side pressures for institutional reforms. In this dissertation, I argue that the underlying assumption of the rentier state theory that oil rents flow directly to the state is applicable only when there is state ownership in the oil sector. The rentier state theory, thus, is more appropriate in explaining how state ownership of oil affects institutions. I further argue that private ownership undermines the state’s direct control over oil rents. Under private ownership, states receive rents only via taxation of private oil companies. This should give incentives to the state leaders for strengthening institutions, as that is the only way they can maximize the rents that accrue to them through taxation. Private ownership should also lead to the demand for better institutions from private oil companies, as the presence of weak institutions can undermine their profitability and lower the return on their investments. Owing to both the demand-side and supply-side incentives for institutional reforms, I predict that private ownership would lead to better institutions than state ownership.
The empirical results in chapter 4 are consistent with the prediction. The results suggest that private ownership leads to a better quality of legal system, property rights institutions and bureaucracy as compared to state ownership. They contradict the existing expectation that oil-rich countries would always witness worse institutions due to their oil wealth. The results also stress on the need to revisit the oil-democracy literature, as the rentier state theory is not only popular for explaining why oil leads to lower quality of institutions, but also why oil causes authoritarianism (see e.g. Ross, 2001, Wantchekon, 2002; Aslaksen, 2010).