22 March 2013

House of Cards (Part B) #nlpoli

Continued from Part A

Terry Lynn Karl is the author of The paradox of plenty: oil booms and petro-states., one of the best known books on the resource curse or rentierism.  Karl described the essence of rentierism in an article she originally wrote in 2007 and revised in 2009:

Oil wealth produces greater spending on patronage that, in turn, weakens existing pressures for representation and accountability. In effect, popular acquiescence is achieved through the political distribution of rents. Oil states can buy political consensus, and their access to rents facilitates the cooptation of potential opponents or dissident voices. With basic needs met by an often generous welfare state, with the absence of taxation, and with little more than demands for quiescence and loyalty in return, populations tend to be politically inactive, relatively obedient and loyal and levels of protest remain low -- at least as long as the oil state can deliver.

In the extreme, oil wealth can disconnect a state from its population.  By the same token, oil can disconnect politicians from the population, transforming them from representatives who must satisfy voters in order to get re-elected to bosses controlling subordinates.

Politicians and Patronage

Such an effect is even greater when the local economy is relatively weak and the government – and hence politicians – control significant economic power.  That was certainly the case in pre-Confederation Newfoundland with high unemployment and a small local private sector.  The fishery, which occupied a progressively smaller share of the labour force after the 1880s, was prone to periodic catch failures.  That left many in the industry looking for any form of paid work or, in the more extreme cases, some sort of public relief.  The district politician controlled tens of thousands of dollars in government money and not surprisingly he came to be enormously powerful as a result. 

High unemployment after Confederation continued the same situation.  Not surprisingly, the return to open politics after Confederation also saw the return of patronage politics. Both federal and provincial politicians had direct and indirect control over millions of dollars and used it to great effect throughout the 1950s and 60s and beyond. It remains both common wisdom among some voters and a common message from all politicians that having a member on the government side is the only way to ensure that roads get paved, children get schools, and homes get connected to clean water.

Such a political system entrenched after a century or more offers no reward for those who preach restraint or financial prudence.  And so it is that politicians typically tried to one-up each other in making ever grander promises or attacked their opponents for not delivering enough of the goodies.

The real parallel to the pre-1934 patronage system didn’t re-emerge in Newfoundland and Labrador until almost a half century after Confederation.  The year before first oil from Hibernia and after a decade of economic problems, the politicians started lifting the controls on their own House of Assembly accounts.  Money that was originally supposed to cover the costs of acting as a public representative now became cash that a politician could hand out without any accountability to whomever he wanted and for whatever purpose.

No politicians in the legislature after 1996 objected publicly to the system, apparently.  What’s more interesting is that those new politicians elected after 1996 took to the set-up with great enthusiasm. 

The Conservatives sided with the Liberals in 2001 to keep the Auditor General out of the House, for example, and in 2003, when the Tories formed the majority, their members quickly became the greatest users of the scheme. Indeed, it appears that both the largest amounts of overspending in the House took place after 2003.

One of those enthusiasts was, incidentally, the former Auditor General.  She justified the unaccounted money as being nothing more than discretionary spending of a kind common throughout government.

It wasn’t, of course. Public servants don’t get to spend money and get repaid with claims filed without receipts.  Politicians bought season tickets to hockey games with it and tickets to local school plays.  In some instances, they supplied local volunteer fire departments with equipment or paid for costs so their constituents could travel for medical treatment.  Neither government members or private members of the legislature seemed to think it was odd that they were duplicating services that were paid by government departments.  Nor did they think that it was inappropriate for them to decide on their own, without any rules who got public money and who didn’t.

Politically driven spending didn’t stop with the end of the House accounts scheme.  The Conservative simply transferred their share of it to new funds set up for things like community recreation.  They also made sure that road paving work, always a patronage staple, became entirely political, controlled by political staff in the Premier’s Office.  So widespread was the practice that one political science professor called it a “normal, transparent” process even though the process was obviously far from either. In its most nakedly partisan iteration, government allocated flat amounts of money for road paving in districts on the basis of what party represented the districts.  Government districts got one amount.  The couple of government districts got a much smaller amount.

Duplication and inefficiency all cost extra.  Politicians don’t have any incentive to hold down spending, though, when their own personal interests are involved and, as in the case of the oil windfalls of the past decade, the money appears to appear by magic.


Politicians in oil-fuelled rentier states spend public money when oil prices are high.  When prices drop, they face deficits.  But their instinct and the political pressure is not to reduce spending.  Rather they keep spending and try to get more money from the rent source.

Consider two examples from the past decade.  In 2003, the Conservatives came to office facing a relatively tough financial problem.  They started a program review and pledged to cut government spending in a televised address to the province by the Premier in January 2004.  As it turned out, the Conservatives abandoned the plan in the face of public opposition and quickly opened the spending taps. Where they went first though – in December 2003 – was to the federal government, the post-1949 source of transfer payments that made up half the provincial government’s income. 

Politicians claimed the money they wanted actually belonged to the province.  But that was as much a fiction as their claim that the spending spree that created the current mess was justified because previous governments had done – literally – nothing to build roads, schools and provide essential services.  Shortly after, the same politicians went after the new rent-source, Big Oil, looking for extra benefits and cash in the form of higher royalties and equity stakes.

What they were doing in truth was exhibiting classic rent-seeking behaviour.  Within the past couple of years, as the government’s financial situation worsened,  they even tried to claim work ought to be done in the province that they had previously agreed could be done anywhere else.  After some meetings and some public chest thumping, the government settled for a few million in cash.

Rent-seeking isn’t just the domain of elected politicians.  The provincial labour federation is fighting viciously against any public spending restraint.  Labour federation boss Lana Payne has even stated publicly that there is never any reason to cut government spending, or austerity as she called it.  Her solution is to get more money from Big Oil in order to be “fair”.  It’s the same argument the Conservative used before with the federal government and the oil companies and, incidentally, that the labour federation backed. Massive increases in the public service coupled with hefty wage increases easily co-opted groups that one might think to be natural opponents for a Reform-based Conservative party.  Financial responsibility can never be justified when politicians think that there is an easy source of endless cash that comes completely free of charge or consequence.

As long as the money holds out…

Oil-fuelled rentier states exhibit common characteristics.  The two highlighted here are the most significant politically and also the most obvious. The evidence from Newfoundland and Labrador appears to match up quite neatly.

There are other characteristics that also match up, including a tendency for governments in rentier states to become more secretive and less transparent (Bill 29), for the legislature to become less effective or ignored altogether, for the political opposition to wither, and for government to change the rules to suit its own purposes (Muskrat falls legislation).  That last one is especially fresh and worthy of a separate discussion about the relationship between government and state-owned oil companies in rentier states.

Even the most casual observer can review the literature on rentier states and the resource curse and see the similarities to Newfoundland and Labrador.  There are other aspects of the resource curse theory that would need deeper discussion.  Has the presence of easy money from external sources indirectly hindered the development of the Newfoundland and Labrador economy?  Are there other aspects of local society and culture that provide unique qualities to Newfoundland and Labrador rentierism or that provide a better explanation of the local political culture and economic (under)development?

This series started as an effort to point to the structural causes of the chronic financial problems Newfoundland and Labrador governments experience. Any government that wants to change the province,  any party genuinely concerned for the future would look to meet the challenge of that change head-on.

Otherwise, they would just do what almost every other government has done.  That tends to work, however, only as long as the money holds out.