This is the third in a four part series on the current financial crisis the provincial government is facing. The first instalment – “The origins of rentierism in Newfoundland and Labrador” – appeared on Tuesday and the second – “Other People’s Money” - appeared on Wednesday.
A rentier is a person who lives off the income from property and investments. That distinguishes a rentier from a person who earns income through labour.
For the past 40 years or so some political scientists and economists have studied something called a rentier state. In simplest terms, a rentier state is one that derives a significant portion of its national government income from the money they get from oil and other high-value, but volatile commodities. [FN 1]
For our purposes, we’ll rely on a definition of “significant portion” as being 40% or more of government income. [FN 2] We’ll also focus the discussion on states that derive most of their income from oil.
What we are talking about here goes by several names including the Dutch Disease or even the resource curse. Jeffrey Frankel of the Kennedy School of Government put it this way:
It has been observed for some decades that the possession of oil, natural gas, or other valuable mineral deposits or natural resources does not necessarily confer economic success. Many African countries such as Angola, Nigeria, Sudan, and the Congo are rich in oil, diamonds, or other minerals, and yet their peoples continue to experience low per capita income and low quality of life. Meanwhile, the East Asian economies Japan, Korea, Taiwan, Singapore and Hong Kong have achieved western-level standards of living despite being rocky islands (or peninsulas) with virtually no exportable natural resources. Auty (1993, 2001) is apparently the one who coined the phrase “natural resource curse” to describe this puzzling phenomenon. …
Rentier states (countries) are interesting because of an apparent relationship between the major source of economic activity (and government income) and political and economic development in the state.
Terry Lynn Karl studied oil states across the world for her 1997 landmark book The paradox of plenty: oil booms and petro-states. Karl argues that oil states tend to have extra-ordinarily high revenues and governments can raise money with relative ease. The oil sector may employ only one to two percent of the labour but the high wages and the earn and the money the industry generates can generate disproportionate political influence for the industry. [FN 3]
Karl notes that in periods when oil prices are high – booms – money flows easily. Governments come under enormous pressure from many sectors of society to spend the money they are collecting. States with underdeveloped bureaucracies and a political history of patronage are particularly vulnerable to the influence of petrodollars. In a country such as Venezuela, abundant cash from oil created pressure for the Venezuelan government to intervene heavily in the economy. Periodic booming oil prices fuelled increased government spending that was sustained even during periods of low prices by relentless political pressure from across society and the political competition to be the one to control the flow of money.
“Generally, oil rents produce a rentier state,” wrote Karl in 2004, “one that lives from the profits of oil rather than from the extraction of a surplus from its own population. In rentier states, economic influence and political power are concentrated, the lines between public and private are very blurred, and rent-seeking as a wealth-creation strategy is rampant.”
Provinces and States
Just as some expanded the definition of rent to include money from any source outside a country, some other political scientists began to look at provinces of states in federal countries to see if they also showed the same experiences as countries that depended on one or two resource industries.
Carlos Gervasconi’s 2011 doctoral thesis at the University of Notre Dame looked at the impact federal transfers had on political and economic development in Argentinian states. he found that states that depended heavily on federal transfers (up to 95% of revenue) also tended to be significantly less democratic than their neighbouring states, suffered from economic underdevelopment and exhibited other characteristics of rentier states and the so-called resource curse. [FN 4]
A 2008 study of three American states found that dependence on natural resources had a negative impact on economic development and economic growth. [FN 5] The study also found that incumbent politicians fared better in states that depended heavily on natural resources. They tended to win by larger margins than their counterparts in non-resource states. Incumbents were also more stable in resource states; they were better able to weather what the authors of the study called the ups and downs of the political “business cycle.”
American states that depended heavily on resource income also tended to have lower taxes, a finding consistent with the experience in resource-dependent countries. A one percent relative increase in resource dependence increased per capita government spending by about 3.5%, according to the study.
Rentierism in Canada
Rentierism as we have used it is is a complex idea. It involves the relationship between politicians and their populations, economic development, social policy and the distribution of political power in society.
To date, no one has applied the concept to Canada or to Canadian provinces. While a thorough assessment is beyond the scope of this limited series, Friday’s post will identify some specific characteristics of rentierism and apply them to Newfoundland and Labrador’s political and economic system.
Wednesday: Other People’s Money
Friday: House of Cards
- “Rentier states are those states that derive most or a substantial part of their revenues from the outside world
and whose functioning of the political system depends to a large degree on accruing external revenues that can
be classified as rents.” Rolf Schwarz, “State formation processes in rentier states: the Middle East case”. 2007.
- See, for example, Angela Carter, “Cursed by oil: institutions and environmental impacts in Alberta’s tar sands”, a paper presented at the 2007 conference of the Canadian Political Science Association.
- Terry Lynn Karl, The paradox of plenty: oil booms and petro-states, (Berkley: University of California Press, 1997).
- Carlos Gervasconi, A rentier theory of sub-national democracy: the politically repressive effects of fiscal federalism in Argentina, unpublished Ph.d thesis, Notre Dame, 2011.
- Ellis Goldberg, Erik Wibbels, and Eric Mvukiyehe, “Lessons from Strange Cases: Democracy, Development, and the Resource Curse in the U.S. States”, Comparative Political Studies, April 2008 vol. 41 no. 4-5, 477-514.