2.2 O&G Activities and Their Impact on Host Environments …
19
Adding to the complexity of ‘enclave economies’, Ackah-Baidoo (2012) and Cash
(2012) argue that resource-rich countries that have low rates of economic barriers
might experience an economic paradox called the ‘resource curse’ or the ‘paradox
of plenty’. The ‘resource curse’ occurs in parallel with the ‘enclave economy’ and
the same cause—heavy flows of foreign capital—triggers both economic paradoxes
(Ackah-Baidoo, 2012; Cash, 2012).
In the O&G scenario, the ‘resource curse’ is when the host country goes through
an Oil/Gas production boom and becomes a major exporter and producer of this
commodity. The O&G export expansion strengthens the domestic currency, making
other domestic exports, like agricultural products, less attractive and less competitive in the international market. The lack of state protective regulation to prevent
the deterioration of these other export niches causes their decline. The decline of
these exports (1) hinders the advance of other domestic exports within the local and
international market, (2) results in the country importing the products that it once
exported and (3) makes the country’s economy solely dependent on one sector, in this
case, O&G, increasing its market vulnerability (Ackah-Baidoo, 2012; Cash, 2012).
Oil booms tend to weaken state institutions by making them completely subordinate
to the extractive sector. Because of all this, Sachs and Warner (2001, p. 385) state
that “resource abundance tends to render the [other] export sectors uncompetitive”.
The O&G sector is extremely reliant on international markets, which are unpredictable and subject to occasional sharp fluctuation. When confronted by this market
instability, governments that have no protective economic barriers, tend to allocate
funds from other sectors of the economy into the petroleum sector, pursuing a form
of economic protection. Such action intensifies the ‘enclave economy’ and economic
disparity nationally (Ackah-Baidoo, 2012; Cash, 2012).
Additionally, the resource curse may be caused by policymakers’ ‘shortsightedness’ (Sachs & Warner, 2001). Resource abundance can create a false sense of
security and wealth among a society and its policymakers, which leads them to lose
sight of principles of democracy and social development (Sachs & Warner, 2001).
One example of a country that invested its oil revenues in mechanisms of repression
was the Republic of Congo which built up the country’s armed forces to “maintain
order” (Ross, 2001, p. 335). Nigeria is another example of a country that has heavily
invested in its military after the country’s oil boom, illustrating the ‘resource curse’
and enclave paradoxes (Ross, 1999).
Another economic paradox that might arise in oil-rich countries is called the
‘rentier economy’ (Chari & Kehoe, 2006). In the O&G scenario, the ‘rentier
economy’ generally develops in states that have large portions of their national
revenue stimulated by foreign ‘renting revenues’ of O&G prospecting and production
licensed blocks, pipeline crossings and transit fees. Middle Eastern countries, such
as Saudi Arabia, Bahrain, United Arab Emirates, Libya and Kuwait are examples of
‘rentier states’.
Oil renting revenues may be disconnected to a country’s oil export and import
economy. This means that the oil rent can be utilised in public expenditure projects
without “resorting to taxation and without running into drastic balance of payments
or inflation problems” (Mahdavy, 1970, p. 432). At face value, one would consider
19
Adding to the complexity of ‘enclave economies’, Ackah-Baidoo (2012) and Cash
(2012) argue that resource-rich countries that have low rates of economic barriers
might experience an economic paradox called the ‘resource curse’ or the ‘paradox
of plenty’. The ‘resource curse’ occurs in parallel with the ‘enclave economy’ and
the same cause—heavy flows of foreign capital—triggers both economic paradoxes
(Ackah-Baidoo, 2012; Cash, 2012).
In the O&G scenario, the ‘resource curse’ is when the host country goes through
an Oil/Gas production boom and becomes a major exporter and producer of this
commodity. The O&G export expansion strengthens the domestic currency, making
other domestic exports, like agricultural products, less attractive and less competitive in the international market. The lack of state protective regulation to prevent
the deterioration of these other export niches causes their decline. The decline of
these exports (1) hinders the advance of other domestic exports within the local and
international market, (2) results in the country importing the products that it once
exported and (3) makes the country’s economy solely dependent on one sector, in this
case, O&G, increasing its market vulnerability (Ackah-Baidoo, 2012; Cash, 2012).
Oil booms tend to weaken state institutions by making them completely subordinate
to the extractive sector. Because of all this, Sachs and Warner (2001, p. 385) state
that “resource abundance tends to render the [other] export sectors uncompetitive”.
The O&G sector is extremely reliant on international markets, which are unpredictable and subject to occasional sharp fluctuation. When confronted by this market
instability, governments that have no protective economic barriers, tend to allocate
funds from other sectors of the economy into the petroleum sector, pursuing a form
of economic protection. Such action intensifies the ‘enclave economy’ and economic
disparity nationally (Ackah-Baidoo, 2012; Cash, 2012).
Additionally, the resource curse may be caused by policymakers’ ‘shortsightedness’ (Sachs & Warner, 2001). Resource abundance can create a false sense of
security and wealth among a society and its policymakers, which leads them to lose
sight of principles of democracy and social development (Sachs & Warner, 2001).
One example of a country that invested its oil revenues in mechanisms of repression
was the Republic of Congo which built up the country’s armed forces to “maintain
order” (Ross, 2001, p. 335). Nigeria is another example of a country that has heavily
invested in its military after the country’s oil boom, illustrating the ‘resource curse’
and enclave paradoxes (Ross, 1999).
Another economic paradox that might arise in oil-rich countries is called the
‘rentier economy’ (Chari & Kehoe, 2006). In the O&G scenario, the ‘rentier
economy’ generally develops in states that have large portions of their national
revenue stimulated by foreign ‘renting revenues’ of O&G prospecting and production
licensed blocks, pipeline crossings and transit fees. Middle Eastern countries, such
as Saudi Arabia, Bahrain, United Arab Emirates, Libya and Kuwait are examples of
‘rentier states’.
Oil renting revenues may be disconnected to a country’s oil export and import
economy. This means that the oil rent can be utilised in public expenditure projects
without “resorting to taxation and without running into drastic balance of payments
or inflation problems” (Mahdavy, 1970, p. 432). At face value, one would consider