Oil: It's Not Just About the Money
- 26 February 2014
What happened in those countries outside of the Middle East in which oil was found? The countries in Africa, which collectively form the world largest oil producers after that region, for example. The top oil producing country in Africa is Nigeria, which produces 2.2-million barrels a day, making it the fourth largest exporter of oil in the world.
This question arose late after supper among some journalists who were in Abu Dhabi as part of the Emirates Strategic Studies and Research (ECSSR), which was celebrating its 20 anniversary. The initial question that prompted it was, 'How did the United Arab Emirates (UAE) become such a successful nation?'
The casual response was, of course, oil money. But as Acemoglu and Robinson point out in How Nations Fail: The origins of Power, Prosperity and Poverty 'the windfall of wealth has done little to create diversified modern economies in Saudi Arabia or Kuwait'. One of the reasons the authors give for nations failing is the lack of a diversified economy. So why did it work for the UAE? Another response was that the UAE wasn't a nation but actually a very large – and very successful – corporation, but that dodges the question.
Abu Dhabi had changed since I was last here more than 20 years ago. It looked the same: lots of new buildings, just more of them. The driver, with the zoned-in attention of a fighter pilot, swept from the airport along the broad highways and through the empty streets to drop me at the hotel as the sun rose harsh and fast. Dawn lasts an instant here on the far edge of the Empty Quarter.
The Centre, which has the backing of the Crown Prince of Abu Dhabi, Sheikh Mohammed bib Zayed al Nahyan and who is the Centre's president operates as a sort of microcosm of the United Arab Emirates: an efficient, fully resourced and effective corporate entity. Its mission, said Dr Jamal Sand Al-Suwaidi, director-general of the centre, is 'to support national decision making and serve both the UAE and GCC societies'.
Al-Suwaidi emphasised that the UAE is where it is because of its 'clear strategy and methodology' that was amply supported by the 'quality of the management and the thoroughness of the research of ECSSR. The think-tank has produced more than 1,000 publications, hosted more than 800 events and published more than 20,000 of research papers in the fields of politics, economy, military, security and social studies. In short, it forms part of the inclusive political institutions required to make a nation successful.
How do the oil producing nations in Africa then measure up?
Historically, the UAE grew out of what were referred to in the 1850s as the "Trucial Sheikhdoms", the majority of which now comprise the seven entities that make up the UAE. Earlier in the 1800s, the tribal leaders of the region reached an agreement with Britain to counter the piracy that interfered with their lucrative trading routes to India and the rest of the world. In return, Britain would provide protection against land or sea invasions — and pirates. Once oil was discovered in the 1960s, first in Abu Dhabi, the leaders realised they needed to present a more united front, and formed the Trucial States Council. At the time it included Bahrain and Qatar.
In 1968, however, Britain decided it could no longer afford to provide the protection it had agreed to and in 1971 they withdrew. Sheikh Zayed bin Sultan Al Nahyan, the ruler of Abu Dhabi gathered the Trucial States Council and attempted to form a federation. It failed; Qatar and Bahrain became independent and the regions most powerful leader (and the father of the man behind the ECSSR), the Sheikh of Abu Dhabi then persuaded his counterpart in Dubai to form a union. But first, he stipulated, they must draw up a constitution. The plan was then to invite the five other states to join them, which they did in 1971 (with Ras al-Khaimah coming to the party a few months later).
This matter of drawing up a constitution is an important point. Acemoglu and Robinson point out that in order for nations to succeed its citizens must "trust the institutions and the rule of law that these generated". Such institutions – economic or political – they term inclusive as opposed to extractive: to be inclusive, "economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses".
And here innovation is integral to success, and innovation is "made possible by economic institutions that encourage private property, uphold contracts, create a level laying field, and encourage and allow the entry of new businesses that can bring new technologies to life".
Extractive institutions are exactly what they say they are: as Robinson put it in a debate with Paul Collier, they are, "those which are designed to extract resources and income from some people and transfer them to other people".
Nigeria gained independence in 1960 and oil production started in the 1950s. Despite the enormous wealth that oil brought to the country, not much of it benefited the citizens as corruption and venery saw the money channelled into personal bank accounts. In other words, it was an extractive system. This is, however, beginning to change and it's because the political institutions are becoming inclusive. Military dictatorship finally came to an end in 1999 — as Simon Allison says, there had been a "few other attempts [at democracy] in Nigeria’s post-colonial history" — when a core group of military officers and civilian allies, oversaw the transition from military to civilian rule. It was the culmination of a four-year process and saw Nigerians break with their British colonial heritage and adopt an American-style constitution. The country has since had held three national elections.
In the previous extractive system, for example, there would be no investigation as there currently is into the alleged $49.8-million that went "missing" from the sales of crude oil between January 2012 and July 2013, which was supposed to be remitted to the federation account by the Nigerian National Petroleum Corporation (NNPC). (This trend towards inclusive institutions maybe reversed, however, given the recent suspension of the Governor of the Central Bank of Nigeria.)
Ottoman colonialism, which by 1566 covered North Africa from Tunisia to Egypt, the entire Arabian Peninsula and Iraq, imposed highly extractive institutions. The Ottomans were succeeded by the British, and while it was still an extractive system it allowed a greater deal of independence. But most of the Middle East and North African countries after independence simply continued the extractive system; the only difference this time was that it benefited an indigenous select few. The effect of these extractive economies eventually led to the series of anti-government protests – the so-called Arab Spring – that began in Tunisia in 2011 and spread across the Middle East.
Why Nations Fail claims that the high levels prosperity in successful modern societies rests upon those nation's political institutions. It points out that investment and innovation work to generate prosperity only if they believe their successes will not be appropriated by the powerful. This assurance, they maintain, can only come from a centralized democracy.
Inclusive institutions are those that allow sustained economic growth, technological innovation and capital accumulation. Acemoglu and Robinson state that, 'economic institutions… are those that allow and encourage participation by the great mass of the people in economic activities that make the best use of their talents and skills and that enable individuals to make choices they wish. Innovation is crucial because talent and skill is spread throughout society and there is no way these talented skilful can flourish in an oligarchy operating a system of extractive institutions.
UAE does not qualify, strictly, as a democracy. The last elections held in 2011 involved 129,000 "selected" voters (male and female) who could vote for 20 members of the 40-member Federal National Council (FNC), an advisory assembly with very limited parliamentary powers. So, while the concentration of political power is characteristic of extractive economic institutions, the difference in the UAE is that political power is not only spread among seven members but, more importantly, it is also centralised.
And it does have a strong justice system. The Norway-based Global Network for Rights and Development (GNRD) 2013 annual International Human Rights Indicator (IHRRI) ranked the United Arab Emirates "first among Arab countries and 14th globally for respecting human rights — six points ahead of the United States (20th overall).
Abu Dhabi controls the majority of the UAE's hydrocarbon wealth: 95% of the oil and 6% of the gas. Yet, due to a vigorous (and well-funded) economic diversification strategy non-oil and gas GDP — manufacturing industry, real estate, tourism and retail — now comprises 64% of the UAE’s total GDP. Its founder had a development vision, much of which is reflected in the establishment of the ECSSR that focused Al-Suwaidi said was on "establishing innovation and creativity" that supports the overall development of society. It is in other words, an inclusive system.
The same cannot be said for the other four top producers in Africa. Algeria is second, producing about 2.1-million barrels a day and number five in terms of world exports. It gained independence in 1962 after a bitter 12-year war against the French colonialists.
Algeria felt the rise of the Arab Spring and in 2011 President Abdelaziz Bouteflika’s government lifted the 19-year state of emergency and promised the 2012 parliamentary elections would mean a real step towards democracy. The elections, however, showed markedly low turnout but it did see the establishment of 23 new political parties and new rules that preserved 30% of the places on the candidacy lists for women (this has led to 145 women gaining seats in parliament). But overall Algeria has largely preserved the political status quo in polls and remains an extractive system.
Third is Angola — one of Africa’s richest countries — with 1.9-million barrels per day pegging them at seventh in the world, yet a third of Angolans exist on less than $2 a day. Angola gained independence in 1975 and since 1979 has been ruled by José Eduardo dos Santos.
An example of how an extractive system works, say Acemoglu and Robinson, would be to look at the daughter of Angola's president, Isabel dos Santos, who according to Forbes, is "the wealthiest woman in Africa". Forbes also claims, "every major Angolan investment held by dos Santos stems either from taking a chunk of a company that wants to do business in the country or from a stroke of the president’s pen that cut her into the action". That stifles innovation.
Libya, which gained independence in 1951, produces 1.7-million barrels per day and exports about 1.2m of that. It comes in at fourth. It is currently engaged in a destructive civil war, which started in 2011 – part of the Arab Spring – after the overthrow of Muammar Gaddafi, who had ruled the country for 42 years. It remains mired in conflict. And, finally, in fifth position is Egypt, producing 680,000 barrels per day. It gained independence in 1922.
South Africa is 10th on the list of African oil-producing countries (roughly 191,000 barrels of oil every day). We inherited an extractive system (20% [whites] took resources and income from 80% [blacks]) and its slow to come around. The constitution has been challenged and the rule of law flaunted in numerous cases. On top of that we have cut back on important research and development that is required to increase our international competitiveness in science and innovation, The goal of raising R&D spending to 1% of gross domestic product (GDP) by 2010 was not been achieved and according to the National Survey of Research and Experimental Development 2009-2010, we invested only R21-billion (US$2.3 billion) in R&D over that period. This equals 0.87% of GDP in 2009-10. Not only that, but this was the third consecutive year that research funding as a percentage of GDP had dropped: 0.93% in 2007-08 and 09.2% in 2008-09. It is doubtful that we will meet our target of 2% GDP spending on research by 2018.
Think tanks are not a luxury. They are a prerequisite if a nation is to "adopt a strategic approach to forward planning" and be able to provide support to government decision-making processes.
As Robinson points out, nations locked into extractive institutions are not there for reasons of stupidity or ignorance. It is, they say, about the "conflict of interest of people who control power as politicians or as leaders or business leaders or whatever of the country, are having their preferred policies imposed on society, even if it's not good for society".
Organisations, such as the ECSSR — and locally the sadly now defunct Institute of Democracy in Africa (Idasa) — provide input into the political and economic institutions of governance, from training government cadres, to organizing seminars and creating the avenues for dialogue among decision making bodies. In addition it provides extensive and intensive analysis of local, regional and international events that potentially may affect the UAE. And where political institutions are inclusive, this sort of research is incorporated into the vision for the nation, rather than simply providing lip service — another extractive forum — for entrenched rulers.
Robinson goes on to say that leaders who rely on extractive systems are best termed "political losers" – leaders that are only interested in their own bottom line. "Many of the fundamental transformative technologies and many of the institutional changes that unleash economic growth throughout history have come together with changes that weaken the political power of rulers. And that's why they've been resisted by rulers." And that's why we have to guard against political losers holding power.