Term Paper, 2010
14 Pages, Grade: 1,00
When I visited Venezuela as second travel destination after Ecuador in Latin America last year, I remember very well passing by a huge mural painted on an oil refinery, showing: “Patria, Socialismo o Muerte”. I was struck by that image, as it visualized the impact of the ‘black gold’, and the attachment of national salvation and ideology to a single resource. Petroleum has changed the trajectory of all countries with the fortune (or the curse, depending on the point of view) of being located on top of its enormous basins more significantly than social scientists could have imagined. While geographically speaking the Middle East has received most academic attention, and also singular African countries have been examined thoroughly, this paper focuses on the case of Latin America, more specifically on its two OPEC members Ecuador and Venezuela. Furthermore, in the context of this course, I became inspired to explore the development and current status of the governmental authorities in both countries, based on the theoretical concept of good governance. Consequently, I will investigate in the link between national wealth in and subsequent exploitation of oil and gas, and its interaction with governance in the respective countries. I will introduce the so-called resource curse phenomenon in this context, as successful management of this somewhat messy socio-economic problem is doubtlessly an important indicator of good governance. Often overlooked in this discussion is the distinguishing feature that governance type plays in the resource curse, as most of the hydrocarbon-rich countries have no democratic political system (Ross 2001). While Ecuador and Venezuela as defective democracies do not directly fall into this category, I will argue that they nonetheless display all major features of the resource curse, so that development, defined in its broadest sense, suffers. The seemingly paradoxical outcome of resource-abundance and poor development needs further governance-focused investigation. I will hence introduce the concept of good governance, followed by an evaluation of Ecuador and Venezuela using objective measurement tools for good governance. In a final point I will address the question of causality and the related problems, due to the complex interaction of resource wealth and governance performance.
Economic Development and Resource Curse in Ecuador and Venezuela
Ecuador and Venezuela have more in common than the Andes Mountains, and Spanish colonial legacy. Yet, the features I will introduce in this section also display distinct characteristics, which justifies executing a two-country analysis with a comparative perspective. Beginning with Ecuador, second poorest nation of South America, figures indicate basically no economic growth and a constant GDP per capita of around $7000 over the last years. Interestingly, despite poor economic performance and unchanged high rate of poverty, the Human Development Index lists the country within “High Human Development” just behind Turkey (United Nations Development Program 2010). Ecuador gained independence almost 200 years ago, yet the overall state system is far from being consolidated. In the current political system established in 1979, the last three democratically elected presidents were forced to abdicate before their end of tenure, and today’s president Rafael Correa initiated the work for the 20th constitution since gaining independence (Central Intelligence Agency 2010a). The lacking political stability negatively affects the general state of democracy reflected with the Freedom House rank of “Partly Free” (2010). Ecuador’s dependency on oil exports remains significantly high with petroleum products accounting for 63% of total export earnings (United States Department of State 2009). This in return subjects the entire economic performance to the harsh international price fluctuations of that commodity.
This situation is shared with Venezuela, where the oil sector comprises roughly 30% of GDP, 90% of export earnings, and more than half of the central government's ordinary revenues (United States Department of State 2010). Windfall revenues from skyrocketing oil prices yielded an impressive domestic growth, which came to an end with the global economic slowdown in 2009 (Central Intelligence Agency 2010b). Still key indicators such as GDP per capita and HDI scores rank Venezuela in the range of European Union countries such as Romania and Bulgaria. With regards to Ecuador, the significantly better economic situation is opposed to a worsened political situation after President Chávez seized power in 1999. Infringed political and civil rights, increasing corruption and crime, with homicide rate twice as high as in Ecuador and roughly ten times the rate of Canada, have led to an overall downward trend of the country and a lower Freedom House score than Ecuador (Philip 1999; United Nations Office on Drugs and Crime 2004a; Freedom House 2010).
The brief country descriptions shall suffice as basis for identifying all major detrimental features of the resource curse, which I introduce here as theoretical framework. Numerous studies argue that resource-rich countries typically develop more slowly, are less diversified, more corrupt, less transparent, subject to greater economic volatility, more oppressive and more prone to internal conflict than non-endowed countries at similar income levels (Sachs and Warner 2001; Collier and Banno, 2003; Karl 1997; Karl 1999; Torvik 2002; Wick and Bulte 2006). Meanwhile, the outsized revenues available to resource-rich governments allow them to pursue more radical policies than they would otherwise be able to support. Stiglitz (2003) gives a brief yet comprehensive explanation of the complex phenomenon of the resource curse. National resource riches entail rent-seeking, meaning people try to get the biggest share of the revenue inflow they can. Weak state and judiciary institutions in the next step pave the way for corruption, bribery, and not seldom armed conflicts. Governments also often stop taxing citizens, which decreases civil engagement, the accountability of incumbents and in general the linkage between ruling elites and the people. These political difficulties are complemented and exacerbated by negative economic effects. First, each country runs a risk of obtaining the so-called ‘Dutch disease’, due to over-reliance on a single primary commodity export, and the adverse effect this has on exchange rates and productivity of other sectors. Marginal spillover effects, that is weak stimulating linkages of the oil industry to the rest of the economy, result in significant and persistent unemployment rates while broad based development and growth are not taking place. This in return creates even higher rent-seeking, damped development, and a country trapped in the resource curse. Stiglitz continues in remarking that any national government ruling over terrains of petroleum will be faced with formulating policies for development planning. For this reason the focus on good governance is somewhat imperative, since the resource curse is by no means God-given but can be escaped. The next section will therefore turn to the concept of good governance to allow further analysis of the resource curse in Ecuador and Venezuela.
Conceptualizing Good Governance
Good governance is more than a recent buzzword of social science literature extensively used over the last 20 years. It has been necessary to conceptualize a new term, due to the observed arising supplementation of the nation-state by other actors in a more complex geography. That is, in a first step governance shall be defined as a wider approach to policy-making beyond national governments and formal international institutions (Nye and Donahue 2000, 12). Secondly, the sequent normative idea has developed to operationalize good governance in a way that a regulative framework would determine certain desirable governance standards, and consequently allow for empirical work to evaluate governance action. The World Bank is to cite in this context, since it set the theoretical foundations on good governance from the late 1980s on. In short, it defines good governance as „a predictable and transparent framework of rules and institutions for the conduct of private and public business“ (World Bank 1994, vii). While more specific indicators will be outlined below in detail, one defining feature of good governance used for this paper is introduced here. Namely, that I find it necessary to interlink good governance with democratic structures, although the World Bank, obliged by its neutrality, points to this element merely implicitly. Yet, all principles of good governance as it will be shown, due to their very own nature, can only exist genuinely in a system of democratic governance. According to Mainwaring and Scully (2008, 113f.), democratic governance is the capacity of governments to implement policies that enhance a country’s political, social, and economic welfare. Good democratic governance then also involves policy results, which means simply governing not only democratically, but also effectively. Therefore, it is only logical to also include this form of political government as prerequisite for good governance, which is in line with the so-called compatibility school of economic growth (Dellepiane-Avellaneda 2009, 197).
A further module of good governance deserves elaboration as well, namely state institutions. Their quality has been widely argued to be of central importance, underpinned through empirical work (Knack and Keefer 1995), since development in general and successful resource wealth management in particular require a robust, well-functioning institutional apparatus. However, authors such as Siegle (2009) and Karl (2007) rightly point at the corrosive effect of natural resource holdings on political institutions. A second problem in this context is that quality must not be equalized with quantity. In fact, institutions of governance have to deal with the contrast of having the need to be efficient and thus sufficiently endowed in their structure, while they must likewise not excessively grow in size in order to prevent centralized, non-transparent and misusing institutional entities. Grindle (2000, 189) describes how only in the 1980s development specialists began to realize that mere downsizing and imperative privatizing strategies did not remedy obstacles for growth. State institutions are an important adjunct to development and for determining the political pathway. The two country case studies in the later section of this paper will enlighten those generalized statements in terms of their applicability while also evaluating to which extent the downsizing-versus-efficiency balance of institutions could be reached.
Considering now the exact itemization of good governance criteria, I will revert to the catalogue of the World Bank and its Worldwide Governance Indicators (WGI). Kaufmann, Kraay, and Mastruzzi (2009) elaborate on the six dimensions of the up to date version of the WGI. The World Bank uses Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption for measuring good governance. Although each element shall not be discussed in detail here, it is discernible how all dimensions draw from the underlying feature of democratic structures and institutional quality. For aggregating the index, the World Bank includes for instance the French Institutional Profile Database for the 85 countries covered by this database (ibid., 60). That is to say that my research focus is not in opposition to the WGI research project, but I find it important to emphasize the democratic and institutional aspect of good governance in the context of this paper. This is based on the hypothesis that the leftist governments in Ecuador and Venezuela are more likely to display effects in those dimensions, which makes it worthwhile to scrutinize the situation, bearing in mind the countries’ resource wealth. In line with treating natural resources as a pool from which every citizen should benefit, the norm that all natural resource contracts must be ratified by democratic legislatures should for example be instituted. The full disclosure of the financial conditions of the contract would provide an invaluable starting point for citizen supervision and tracking the ways in which the flows of revenues are actually going. In many resource-rich countries, these revenues are ‘off the books’ altogether.
The selection of the World Bank’s measurement tools for governance does by no means imply that there are no further distinguished good governance indicators available. For complementary information I also investigated in the UNDP Human Development Index (HDI), the Freedom in the World Index by Freedom House, and Transparency International’s Corruption Perception Index. However, an in-depth analysis or comparison of several indicators would go beyond the scope of this paper. Moreover, quantifiable factors alone would be insufficient for answering the research question and do also not take the specific interaction of a leftist regime and resource wealth into account. Therefore my methodology will be based on the hand on the Governance Matters Index by the World Bank as an objective quantifiable tool to compare governance in Ecuador and Venezuela, and on review of qualitative literature on the other hand, which serves to complete the picture. Let me conclude this section with a note of former UN Secretary-General Kofi Annan, pointing to the decisive role of good governance in the world:
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