Posts Tagged 'welfare policies'

Oil wealth and regime characteristics

By: Ingrid Krüger

How are regime characteristics affected by oil wealth? The State Fragility Index[1] (SFI) indicates that Norway is more “fragile” than, say, Sweden because of the Norwegian state’s oil wealth. The SFI measures state fragility in terms of the state’s effectiveness and legitimacy with respect to security, governance, economic development, and social development. The SFI “punishes” states that are more dependent on exports of primary goods (as opposed to manufactured goods) with a weaker economic legitimacy score and therefore with a higher state fragility score than other states, all else equal. In fact, based on SFI’s ranking, the economic legitimacy of the Norwegian state is lower than that of Zimbabwe.

The authors[2] behind the SFI point out that the petroleum producers in Africa and the Muslim regions of the world have highly autocratic regimes. Based on this statement, the motivation for “punishing” countries for their natural resource abundance appears to be the positive correlation between authoritarianism and oil wealth in the international data. However, the oil rich states’ natural resources indirectly ensure them high ratings of legitimacy and efficiency in other dimension, which measure e.g. GDP per capita, human development, and infant mortality. The oil rich Gulf States are, isolated speaking, directly “punished” – increasing the indexed fragility – for their natural resource dependence, but they are at the same time so developed economically that they in sum are deemed more efficient and legitimate than many other authoritarian states in the world.

The researcher is left with the task to explain why the Norwegian government, despite its oil wealth, is not in reality suffering from a lack of economic legitimacy, or why the regime in the Emirates, despite the high income levels and the high living standard of the UAE’s citizens, in fact suffer from illegitimacy in many respects. Theorizing the answers to these questions will help us to better understand when oil wealth matters (and when it does not matter) for the political development of states.

 

 


[1] For data and more information on the SFI, see http://www.systemicpeace.org/inscr/inscr.htm

[2] Marshall, Monty G. and George Mason. 2007 (p.13). “Global Report on Conflict, Governance and State Fragility 2007”, http://www.systemicpeace.org/peace.htm

What about Iraq?

By: Annette Wolden

The revolutions in Tunisia and Egypt and the demonstrations spreading across the Middle East have led analysts world wide to ask the question: what country will be the next? In the guesswork over which government will be toppled next, Iraq has stood largely on the outside. Perhaps because it is assumed that the population has more than enough to struggle with already and is far from being able to mobilize after the troublesome election process in 2010. Nonetheless, there have been some protests in Iraq as well over the last few months. The Iraqi government is perhaps not in the same danger of being overthrown compared to the regimes in countries such as Yemen or Libya, but given the circumstances, the demonstrations may at least be said to carry some extra weight.

It can be argued that the demonstrations in the region have all initially sprung out of various and differing national demands, in Iraq one of the more pressing issues is the lack of stable flow of electricity. In February 2011 Acting Electricity Minister Hussain Shahristani stated that Iraq had an electricity shortage of about 5000 megawatts.[1] During the most recent demonstrations in Iraq, hundreds of people gathered in Baghdad to protest against poor services and sporadic power.[2] As mentioned this has been a recurring issue. In June 2010 the distribution of electricity got so bad that it resulted in mass protest in Basra and Nassariya that eventually led to the resignation of the former Minister of Electricity.[3] This proves that protest in Iraq can indeed have severe implications for politicians.

Since the call for stable access to electricity has been a long term issue in Iraq, it is interesting to see that the large scale policy changes which have been demanded by the population for so long, are only now becoming apparent against the back drop of regional protest that have already toppled two regimes. Perhaps adding to the severity of the situation is the fact that the Iraqi government is once again approaching summer with a severe shortage of electricity to distribute. As temperature rises, so does the use of air-conditions, and thus the demand for electricity. The failure to deliver may lead to deaths, as it did in 2010 when residents in some areas had only a few hours of power a day or less with temperatures reaching 50c°.

The Ministry of Electricity has responded to the recent demonstrations by announcing that Iraqis will receive their first 1,000 kilowatt-hours of electricity for free each month.[4] This is a considerable amount of free power, and a considerable amount of money saved for Iraqis belonging to the lower and middle classes. It is thus perhaps not unreasonable to ask whether this latest offer on the government’s side to some degree refelcts the perceived severity posed by the regional


[1] Reuters, “Iraq subsidizes power after protests over services Iraq government to supply free electricity”, Alarabiya, 12.02.11, http://www.alarabiya.net/articles/2011/02/12/137362.html (Accessed 16.03.11).

[2] Reuters, “Iraq subsidizes power after protests over services Iraq government to supply free electricity”, Alarabiya, 12.02.11, http://www.alarabiya.net/articles/2011/02/12/137362.html (Accessed 16.03.11).

[3] Ben Van Heuvlen, “Iraq’s electricity minister resigns”, Iraq Oil Report, 22.06.10, http://www.iraqoilreport.com/energy/electricity/iraqs-electricity-minister-resigns-4659/ (Accessed 16.03.11).

[4] Reuters, “Iraq subsidizes power after protests over services Iraq government to supply free electricity”, Alarabiya, 12.02.11, http://www.alarabiya.net/articles/2011/02/12/137362.html (Accessed 16.03.11).

Oil revenues, welfare policies, and uncertainty in Iran

By: Ingrid Krüger

Mahmoud Ahmadinejad won the Iranian presidential election for his first term in office in June 2005 on a populist economic agenda, promising to bring oil money to people’s dinner tables. His government later made some unpopular policy changes that affected Iranians’ daily lives – efforts to change gasoline consumption through rationing and cuts in gasoline subsidies in the following years sparked angry protests. It is well-known from economic theory that the gasoline underpricing seen in Iran is a waste of resources, but trust in and support of the president is essential in order to avoid future public protests and riots in Iran as further attempts are made to change domestic gasoline consumption.

Much of the debate on Iran’s economy today concerns how the citizens are ensured a share in Iran’s natural resource benefits. Iran is OPEC’s second largest oil producer and oil exporter after Saudi Arabia and has roughly 10 percent of the world’s total proven petroleum. Iran’s economic rent from its oil resource is the difference between the international market price and the cost of producing oil. Subsidizing gasoline domestically is a way of spending these oil revenues on the Iranians.

Gasoline was already heavily subsidized when Ahmadinejad entered his first term in office in June 2005. Ahmadinejad had made himself a popular presidential candidate during his campaign by promising a more equitable distribution of Iran’s oil revenues. Although welfare policies are naturally associated with taxation in representative democracies, it is not so that once you tax, you represent. The protests sparked by Ahmadinejad’s effort to change gasoline consumption patterns domestically after he was elected president might be explained by the Iranian citizens being uncertain about how they would benefit from the oil revenues unless the distribution was made directly through low prices. A move away from low prices might be interpreted as a move away from generosity. While trying to change gasoline consumption through rationing and cutting subsidies, it might have appeared to the Iranian president that he is damned if he does, damned if he doesn’t.

Although Iran is a large producer and exporter of crude oil, Iran’s refining capacity is insufficient to satisfy domestic demand for gasoline and Iran therefore has to import gasoline, making the gasoline subsidies very costly for the Iranian government. Two years after Ahmadinejad was first elected president, he reluctantly and out of necessity attempted to decrease domestic gasoline consumption by introducing rationing of gasoline through smart cards in Iran. The central government’s fiscal balance was in red ink the year before this move and Ahmadinejad feared the dependence on oil revenues. The president has argued that cheap fuel mainly benefit people with higher income, but Iranian citizens were used to unrestricted dirt-cheap gasoline supply at the filling stations and the rationing led to angry protests.

Gasoline is still heavily subsidized in the country. The rationed amount of gasoline was increased in March 2008 and gasoline sales above it was allowed at a higher price. The Energy Information Administration (EIA) reports that the majority of motorists are permitted a monthly ration of approximately 120 liters of gasoline at around 10 cents/liter and that, in addition to this, special allowances are given to commercial vehicles, part-time taxis and government vehicles.

IMF reported in its Regional Economic Outlook from May 2009 that Iran is planning to significantly reduce its expenditures to preserve fiscal sustainability, pointing out that Iran was in deficit in 2008. At the end of 2008, Ahmadinejad proposed a bill to eliminate subsidies on basic goods and make cash transfers instead, but the lawmakers omitted this article in March this year, when approving the budget for 2009-2010. Cutting gasoline subsidies further may again spark angry protests within Iran, but there is obviously a fiscal need to reduce expenditures and it is crucial how oil revenues will be distributed instead. Although Ahmadinejad calls the doubts about the elections being free and fair ‘a psychological warfare in the West, trying to deviate the nation from its clear and bright path’, the important thing is what the majority of Iranians themselves believe, because this will be decisive with respect to the support Ahmadinejad can expect within the country as he continues on his economic reform plan to change domestic gasoline consumption.


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