Giant oilfield discoveries and internal armed conflicts

From a paper by Yu-Hsiang Lei and Guy Michaels

We use new data to examine the effects of giant oilfield discoveries around the world since 1946. On average, these discoveries increase per capita oil production and oil exports by up to 50%. But these giant oilfield discoveries also have a dark side: they increase the incidence of internal armed conflict by about 5–8 percentage points. This increased incidence of conflict due to giant oilfield discoveries is especially high for countries that had already experienced armed conflicts or coups in the decade prior to discovery. 

. . . To qualify as a giant (and thus be included in the dataset), an oilfield must have contained ultimate recoverable reserves (URR) of at least 500 million barrels of oil equivalent (MMOBE) before any oil was extracted. p. 10 (see a draft below).

The intuition behind the model is in page 1

In this model, giant oilfield discoveries increase oil revenues, generating windfall income for the incumbent. When the incumbent cannot credibly commit to share this windfall, the opposition may mobilize to challenge him, and this may lead to an internal armed conflict. Such conflicts over resources are especially likely in countries where political violence tends to translate into political and economic gains. 

A draft.  

The Politics of the Resource Curse: a review

From a paper by Michael L. Ross

This essay discusses the intellectual roots of the resource curse lit- erature, explains how scholars define natural resources, and summarizes recent findings on how resource wealth affects democracy, the quality of government institutions, and the incidence of violent conflict. It suggests there is robust evidence that one type of mineral wealth, petroleum, has at least three harmful effects: it makes authoritarian regimes more durable, increases some types of corruption, and is associated with the onset of vio- lent conflict in low and middle income countries under certain conditions. The essay also points to some of the literature’s weaknesses, unresolved puzzles, and empirical challenges.

 Ross explains

Studies that take location into account, however, show different results: when it is found offshore, oil wealth has no robust relationship with on a countrys conflict risk; if it is onshore, it has a large effect, as seen in Figure ?? (Lujala, 2010; Ross, 2012). Moreover, the precise onshore location matters: oil is more likely to spark conflict when it is found in regions that are poor relative to the national average (Østby, Nordås and Rød, 2009) and populated by marginal- ized ethnic groups (Basedau and Richter, 2011; Hunziker and Cederman, 2012); when the resource is located in a region with a highly-concentrated ethnic group (Morelli and Rohner, 2010); and where ethnic entrepreneurs use it to promote collective resistance to the central government (Aspinall, 2007).

The conclusions are very interesting and the key and somewhat unanswered question is: What should be done?
He says

Many scholars have developed ideas about policy interventions, including greater transparency, sta- bilization and savings funds, community participation, cash payments to citi- zens, and alternative tax and royalty systems (Humphreys, Sachs, and Stiglitz 2007; Collier 2011; Moss 2012; Barma et al. 2011, Ross 2012). We have little systematic knowledge, however, about which policies work and under what con- ditions. A growing number of low and middle income countries particularly in Africa are likely to become oil or natural gas exporters in the next half-decade. The need for empirically-based policy advice is more urgent than ever before.

Resource curse or resource disease? Oil in Ghana

From a paper by Dominik Kopiński, Andrzej Polus and Wojciech Tycholiz on the resource curse in Ghana

Ghana has recently joined the ranks of oil-producing states with a projected output of 120,000 barrels per day. This has greatly elevated hopes among the general public, but also sparked fears of a ‘Nigerian scenario’ in which oil becomes a problem rather than a solution. This article argues that Ghana, as a latecomer to the oil industry, may possess a structural immunity against the natural resource curse. The argument centres on three main factors: the country's stable political system, its relatively robust and diversified economy, and the strength of civil society. As a result, the usual symptoms linked to oil extraction across the developing world are unlikely to turn the country upside down. Instead, we suggest that the ‘curse’ should be perceived as a treatable ‘disease’. The article pursues this analogy by showing that, since the discovery of oil, Ghana has been strengthening its ‘immune system’ through a new legal framework, improvements in transparency and accountability, and modest attempts to strengthen non-resource sectors of the economy.

I did not find a full draft online, so I can just speculate about the results. The question is why Ghana has become relatively immune? After independence - Ghana was the first African country - Ghana went through a very turbulent period politically and economically. It was not until the early 1980s, after a period of liberalization of markets, when Ghana started a path of stability and sustained economic growth, it was modest but steady. Democracy started to gain traction and that set up the institutions of governance we see today. They are not great, but much better than other countries in the continent. See in the figure below the World Governance Indicator for countries in Africa.

But there are usually historical roots for good governance and in the case of Ghana that remains an enigma, at least for me. Probably the long term roots of governance were stablished during the consolidation of power of the Ashanti, that means going 300 years back in history.   

How to Improve the Nigerian Economy

Directly distributing the oil revenues to the public. 

According a paper by Sala-i-Martin & Subramanian (2013). 

The First Law of Petropolitics

We examine empirically the relationship between crude oil prices and the ebb and flow of democratic institutions, in order to test the hypothesis that high oil prices undermine democracy and sustain autocracy. We use a variety of time series and panel data methods over a wide range of country subsamples and time periods, finding strictly no evidence in favour of this so-called ‘First Law of Petropolitics’ (Friedman 2006).

The author looks at the period 1961-2007. 
If you wonder about Venezuela, this is the graph [the crude oil price is the dotted line]:

The title of the paper, by Romain Wacziarg, is "The First Law of Petropolitics" (Economica, 2012).

Resource Wealth and Entrepreneurship: A Blessing or a Curse?

Resource-rich countries of the Middle East and North Africa (MENA) have the highest youth unemployment rate in the world. While other parts of the world are experiencing an increasing trend in new firms’ formation as a potential solution for their unemployment problem, the MENA region has the lowest records in new business establishments. In this study, we investigate the reasons behind such a significant lag of the resource-rich countries in entrepreneurship. Panel data for more than 80 countries from 2004-2009 shows that higher dependence on resource rents reduces entrepreneurship activities. The decline is more significant in countries with higher levels of point resources such as oil and coal.

That is from a new paper by Mohammad Reza. 

The author explains:

Summing up, all lootable and non-lootable resources in model 6 also show a dampening effect on entry density across countries. This observation is in line with Torvik’s (2002) theoretical predictions. Higher reliance on lootable resource rents affects the allocation of labor forces in favor of directly unproductive activities rather than entrepreneurship ones. In a resource-based economy, fewer entrepreneurs will run firms and more will engage in rent seeking (Torvik, 2009). A 1% increase in the size of oil rents (as a share of GDP), reduces the number of newly registered limited-liability firms as a percentage of the country’s working age population by 0.06%, while the same increase in the share of coal rents in the economy limits the entry density by 0.10%.

Financial sector and the resource curse

This paper examines financial sector characteristics in resource-dependent economies. Using a unique dataset covering 133 countries, we present empirical evidence that the banking sector tends to be smaller in resource-dependent economies, even when controlling for several other factors which have been shown to have a significant effect on financial sector development in previous studies. Moreover, the threshold level at which the increasing resource-dependence begins to be harmful for domestic banking sector is very low. We also find evidence that the use of market-based and foreign financing is more common in resource-dependent economies. Further, we argue that a relatively small financial sector used to cater the needs of the resource sector might be unfavorable for emerging businesses, thereby hampering economic diversification and reinforcing the resource curse. 

That is the abstract of the new paper "Financial sector in resource-dependent economies" by Sanna Kurronen (2012). She argues:

Using a unique dataset covering 128 countries, we present empirical evidence that the banking sector indeed tends to be smaller in resource-dependent economies, even when controlling for several other factors which have been shown to have a significant effect on financial sector development in previous studies. 

Intuition says that resource wealth, like any other wealth, should be benign for financial development. Indeed, that seems to be the case at very low levels of resource dependence. We locate a threshold where the country’s mineral exports account for about 6% of total exports. With export dependence on minerals above the threshold level, correlation between resource export share and domestic banking sector size turns nega- tive.

The author argues that the financial sector that develops in the context of a resource-dependet economies plays a role in the resource curse:

Whatever the reason behind the financial development in resource-dependent economies, the financial sectors in those countries seem to have characteristics that are unfavorable to small and medium size enterprises and emerging businesses, which tend to be more dependent on the domestic banking sector than are the bigger and more mature firms. Consequently, we argue that financial sector development based on large resource endowments might play a role in the resource curse. A financial sector that is structured to serve large firms is perhaps unable to serve emerging sectors of the economy and thus restrains economic diversification.

She defines resource abundance in terms of mineral exports as a percentage of total exports. 

A similar analysis could be done for exports of agricultural commodities, which have historical importance for some countries, like coffee in Central America, or Cocoa in Ghana. In fact interest rate margins in Latin America are the highest in the world. Probably this is related to a small financial sector explained by economies concentrated on few agricultural commodities.