20
2 The Study Context
the free flow of taxation generated by oil rental revenues to be the key mechanism for
promoting development. Surprisingly, steady social development is not commonly
found among ‘rentier states’ (Mahdavy, 1970).
The oil revenues offer unusual prospects for development precisely because they can make
certain shortcuts in socio-economic transformation and long-range economic development
possible. The effort and the sacrifice required to break through the educational, technological and organizational barriers are far less when relatively ample resources are available.
However, the very existence and the expectation of ever-increasing revenues in the future
– for that is how most of the Rentier States think of their prospect – seem to affect the time
preference in such countries: if in the future external rents are going to be more lucrative
than in the past, then immediate increases in consumption and welfare assume an inordinately greater weight than increases in future consumption and welfare. This deprives the
development effort of any urgency and worthwhileness. (Mahdavy, 1970, p. 443)
In the ‘rentier state’ economy, the ‘rent’ represents the country’s main revenue.
However, this does not mean that the country’s revenue is solely the oil rent (Beblawi,
1987). The income accrued from the ‘rent’ is not a result of a productive class, but a
consequence of a foreign population, or a small fraction of the domestic population,
generating the oil revenue. One example of a country whose productive population
represented a small portion of the country’s populace is Iran during the 1970s. By that
time, only 30% of Iran’s population was economically active or generating income
(Mahdavy, 1970).
Finally, in the ‘rentier state’ economy, only a few authorities control the revenue
generated by the rent. In other words, there is limited level of participation in running
the country and in deciding on the destination and distribution of the oil rent. This
system supports authoritarian, corrupt and non-transparent governments (Mahdavy,
1970).
The economic paradoxes generated by intensive oil production and exportation in
oil-rich countries, such as the ‘enclave economy’, the ‘resource curse’ and ‘rentier
economies’, suggest that oil exploration and production may hinder a country’s
economic and social development, negatively impacting the host society. Some
economists such as Ackah-Baidoo (2012), Pegg (2006), Prno and Scott Slocombe
(2012), Ross (1999, 2001) and Sachs and Warner (2001) have established correlations between limited social and economic development in resource-rich countries
and oil production.
For instance, Ross (2001), in his paper Does Oil Hinder Democracy?, implies that
there is a strong correlation between oil production and a country’s level of democracy. He argues that the amount of oil produced in a country is inversely proportional
to its levels of democracy. In other words, the more oil a country produces, the least
democratic it becomes. Ross focussed his research mainly in Middle Eastern, African
sub-Saharan and Latin American countries, which have governmental regimes that
are mainly authoritarian.
Along similar lines, Sachs and Warner (2001) posit that oil production ultimately
harms economic growth. They suggest that the economic paradoxes generated by
O&G activities in resource-rich countries lead them to “experience lower innovation,
lower entrepreneurial activity, poorer governments and lower growth” (Sachs &
2 The Study Context
the free flow of taxation generated by oil rental revenues to be the key mechanism for
promoting development. Surprisingly, steady social development is not commonly
found among ‘rentier states’ (Mahdavy, 1970).
The oil revenues offer unusual prospects for development precisely because they can make
certain shortcuts in socio-economic transformation and long-range economic development
possible. The effort and the sacrifice required to break through the educational, technological and organizational barriers are far less when relatively ample resources are available.
However, the very existence and the expectation of ever-increasing revenues in the future
– for that is how most of the Rentier States think of their prospect – seem to affect the time
preference in such countries: if in the future external rents are going to be more lucrative
than in the past, then immediate increases in consumption and welfare assume an inordinately greater weight than increases in future consumption and welfare. This deprives the
development effort of any urgency and worthwhileness. (Mahdavy, 1970, p. 443)
In the ‘rentier state’ economy, the ‘rent’ represents the country’s main revenue.
However, this does not mean that the country’s revenue is solely the oil rent (Beblawi,
1987). The income accrued from the ‘rent’ is not a result of a productive class, but a
consequence of a foreign population, or a small fraction of the domestic population,
generating the oil revenue. One example of a country whose productive population
represented a small portion of the country’s populace is Iran during the 1970s. By that
time, only 30% of Iran’s population was economically active or generating income
(Mahdavy, 1970).
Finally, in the ‘rentier state’ economy, only a few authorities control the revenue
generated by the rent. In other words, there is limited level of participation in running
the country and in deciding on the destination and distribution of the oil rent. This
system supports authoritarian, corrupt and non-transparent governments (Mahdavy,
1970).
The economic paradoxes generated by intensive oil production and exportation in
oil-rich countries, such as the ‘enclave economy’, the ‘resource curse’ and ‘rentier
economies’, suggest that oil exploration and production may hinder a country’s
economic and social development, negatively impacting the host society. Some
economists such as Ackah-Baidoo (2012), Pegg (2006), Prno and Scott Slocombe
(2012), Ross (1999, 2001) and Sachs and Warner (2001) have established correlations between limited social and economic development in resource-rich countries
and oil production.
For instance, Ross (2001), in his paper Does Oil Hinder Democracy?, implies that
there is a strong correlation between oil production and a country’s level of democracy. He argues that the amount of oil produced in a country is inversely proportional
to its levels of democracy. In other words, the more oil a country produces, the least
democratic it becomes. Ross focussed his research mainly in Middle Eastern, African
sub-Saharan and Latin American countries, which have governmental regimes that
are mainly authoritarian.
Along similar lines, Sachs and Warner (2001) posit that oil production ultimately
harms economic growth. They suggest that the economic paradoxes generated by
O&G activities in resource-rich countries lead them to “experience lower innovation,
lower entrepreneurial activity, poorer governments and lower growth” (Sachs &