Democracy Lab

Undoing the Resource Curse

How oil can save Libyan democracy.

At first glance, Libya's massive oil dependence looks like the country's biggest weakness. Conflict and corruption spawned by oil recently brought down one government and currently threaten to tear the country apart.

Yet oil is also the key to Libya's future. It fuels the economy, generating 65 percent of GDP (over $7,300 per person each year) and 95 percent of government revenue. If Libya can reorganize the management of its natural wealth, it will turn oil from a divisive force into the tie that binds the country's people and regions together. If it fails to manage its oil wealth properly, a sad downward spiral of ethnic conflict, economic stagnation, and lawless violence is inevitable. A successful oil policy in Libya would include revenue sharing, to nurture grassroots democracy and dampen separatist tendencies; cash transfers to citizens, to demonstrate that the new democratic government can deliver on social and economic expectations; and transparency, to guard against the corrosive corruption that was the hallmark of Qaddafi's regime.

Regional and ethnic divides have long played a central role in Libya's petrol politics. Cyrenaica, the eastern region of the country, produces the majority of Libya's oil and contains 80 percent of its reserves. But the region was neglected under Qaddafi, and eastern leaders see this continuing in post-Qaddafi Libya, despite the crucial role they played in the revolution that toppled the old regime. To the south, minority Tebu and Toureg tribes have long faced political and cultural discrimination from the majority Arabs. In 2012, grievances fueled by government neglect escalated into labor strikes and oil blockades that crippled Libya's oil industry. Protestors demanded more jobs, better pay, and a bigger cut of the profits from oil production.

To mollify protestors, the government announced that it would absorb former militias and launch a jobs program in the south and east. But its inadequate response to corruption, and its failure to more equitably share the oil revenues, fueled further protests. Resistance in the east gained steam under the leadership of Ibrahim Jedhran, who orchestrated the seizure of several oil terminals, and then declared the Political Bureau of Cyrenaica as the regional government in late 2013. After months of trying to buy him off, in April 2014, the central government finally reached a deal with Jedhran to address his corruption and governance concerns. As the deal begins to take effect, it is possible that separatist groups will again target oil facilities in objection to political developments in Tripoli. Separatism remains a powerful centrifugal force, one that will continue to metastasize if the government fails to equitably share the resource wealth.

Decentralization through revenue sharing would help to address these separatist demands, bring the government closer to the people, and strengthen the capacity of local institutions to craft policies that meet local needs. Libyan oil revenue currently flows into a centralized revenue stabilization fund, the Libyan Investment Authority. This is a smart approach from a macroeconomic perspective: a well-managed stabilization fund, such as Chile's, guards against inflation, insulates a country from global business cycles, and ensures that governments don't overspend when commodity prices rise. But centralization also comes with high political costs, prompting ongoing unrest, stunting bureaucratic capacity, and weakening democratic accountability. Fortunately, it's possible to gain the benefits of decentralization without the macroeconomic costs. A predictable percentage of annual oil profits (say, 25 percent of average annual oil revenues, smoothed over 10 years to avoid windfalls in good years and shortfalls in bad) should be transferred to local governments to manage.

One of the few positive legacies of the Qaddafi regime was a relatively capable local government. Although all issues of national consequence were controlled with an iron fist from Tripoli, basic, day-to-day government services were largely administered by municipal governments elected by local "popular congresses." During the uprising in 2011, revolutionary brigades formed their own local coordinating structures, and this decentralized resistance helped topple Qaddafi. After the revolution, brigades and military councils then played a central role in organizing local elections -- long before the central government managed to get its own act together. These local councils gained strength in the chaotic post-revolution environment by filling the power vacuum.

Transferring a predictable percentage of revenues to local councils would strengthen their capacity, undermine popular support for separatist demands by opportunistic regional leaders, and nurture the grassroots accountability so essential for enduring democracies. Although some of the local councils remain tied to local militias, the central government should cut a deal: share the wealth, in exchange for a monopoly on force. Initial oil payments should be made conditional on disbanding the local militia and handing over their arms.

Revenue sharing should be based on four principles: derivation (areas where oil production operations occur get a portion of the proceeds from their production operations), need, equity, and population. Indonesia applied these principles in 2001 to decentralize the benefits of oil wealth, contributing to the country's successful process of democratization since Suharto's fall from power in 1998. Mexico likewise uses a resource revenue-sharing scheme, spreading most of oil revenues in the Mexican system relatively equally throughout all the states, with a small additional distribution to reward oil-producing municipalities. In Libya, areas that produce and process oil should receive a share of the revenues generated by their local oil operations. Population and need should be considered to ensure that areas with more people, and more poverty, receive more resources. And all municipalities, regardless of income or oil operations, should receive a baseline distribution, in order to spread the wealth across the country.

For the majority of people, democracy means not only political voice at the ballot box, but also the opportunity to realize social and economic freedoms. Failure to fulfill these hopes can fuel disappointment and violent unrest.

Unemployment is high in Libya: 13.5 percent overall, and 25-30 percent for young people. Indeed, demands for more local employment in oil-producing towns helped fueled the protests in Cyrenaica, Fezzan, and Tripolitania. Inequality is also entrenched. Approximately a quarter of Libyans live below the poverty line, despite the country's relatively high per capita income. Putting oil profits directly into the pockets of citizens will reduce social and economic exclusion and demonstrate that democracy really can deliver material benefits. The Libyan government should pay every adult Libyan at least $500 in cash each year. Although this would amount to less than 7 percent of the value of Libya's annual resource revenues, $500 a year would make a significant difference in these citizens' lives.

Alaska's Permanent Fund is the best-known example of a resource dividend program, with state residents receiving an annual payment of between $800 and $2,000 (53 percent of the Fund's average investment income). This dividend provides an important safety net for cash-poor rural households who often rely on fluctuating subsistence harvests, and also generates important broader economic benefits (the increase in purchasing power creates thousands of jobs and $1.5 billion in additional economic activity each year). Likewise, Bolivia's resource dividend program, Renta Digndidad, ensures that revenues from the country's sizable natural resources improve the livelihoods of citizens. The Direct Hydrocarbon Tax funds a pension scheme that transfers oil profits annually to every Bolivian citizen over 60.

In place of direct resource dividends, governments often use regressive subsidies to redistribute resource rents. Libya is no exception. Prior to the revolution, Qaddafi made heavy use of subsidies to placate the populace, and the situation has deteriorated since his ouster. Fuel subsidies are popular because they keep some basic living costs low, but they distort the economy, encourage the inefficient burning of precious fossil fuels, and benefit the rich far more than they benefit the poor.

Finally, Libya needs to act quickly to reign in corruption and strengthen financial management in the oil sector. Corruption is the most significant political issue facing Libya today, with militias using allegations of administrative and financial corruption, particularly in oil sales, to arrest opponents, notably abducting former Prime Minister Ali Zeidan, and rally public support. The Transitional National Council kept no audit trail to verify the oil revenues reaching the Libyan Central Bank, and outrage over illegal oil exports sparked the strikes that shut down production facilities in Cyrenaica last year. Libyan citizens, aware of their country's vast resource wealth but still failing to see the benefits, are understandably suspicious of the new officials who now control oil production and sales.

Fortunately, Libya does not need to reinvent the wheel to govern its oil wealth. It should move immediately to joining the Extractive Industries Transparency Initiative (EITI), a global coalition of governments, companies, and civil society groups that work together to ensure transparency and accountability in the extractives sector. Transparency and public monitoring guards against government officials pilfering the public coffers. To date, Libya has refused to participate in the EITI. This is serious mistake.

Liberia was likewise forced to confront the major challenge of natural resource governance in the wake of a civil war. In 2009, the Liberian government passed the Liberian Extractive Industries Transparency Initiative Act, requiring the disclosure of revenues, payments, and contracts from all government agencies and companies involved in natural resources. Liberia has since been on the cutting-edge of extractive industry transparency. Libya should follow the example of Liberia and 23 other natural resource producing countries around the world and join the EITI.

These moves towards oil revenue sharing, resource cash transfers, and transparency won't be easy, and will require confronting some entrenched and powerful interests. But they are indeed possible, as other countries rebuilding from the ashes of civil wars have demonstrated. If Libyan reformers focus their energies on these three key measures, their democratic transition will stand a fighting chance of success.

Photo: ABDULLAH DOMA/AFP/Getty Images


There's No Partnership in Pivot

If the United States is going to shift focus to Asia it’s going to have to do it without Europe.

If you've been obsessing over recent events in Iraq and Syria, or perhaps the World Cup, you probably haven't spent much time thinking about the evolving situation in Asia. But if you stand back and take the long view of global developments, the shift in economic and military power toward Asia will be far more significant than the events that have been dominating the headlines of late. For realists, the distribution of material power has always been a central driving force in world politics, and that is why smart geopoliticians will not lose sight of Asia for long.

Here's today's puzzle: Assuming China overcomes the various obstacles it is now facing and continues to become richer and stronger, what will happen to the alliance relations that have been a central feature of the global political landscape for more than 60 years? In particular, what will happen to the "trans-Atlantic partnership," which is arguably the most significant geopolitical arrangement since the "Grand Alliance" of World War II? Or, to put it bluntly: if the United States does in fact "rebalance" toward Asia, will Europe rebalance with it?

The answer is no. If "rebalancing" means NATO acting together to counter a rising China, that just ain't gonna happen. If the United States pivots to Asia in order to prevent Chinese hegemony there (as I believe it will), Europe is not going to play a significant role in that effort and its strategic importance will continue to decline. To the extent that NATO Europe does contribute, it will be by taking responsibility for security in its own region, so that the United States can focus its energies and attention elsewhere.

Here's why.

For starters, remember that states form alliances and cooperate on security issues largely to counter a common threat. Powerful states are obviously a potential danger, but the level of threat is also affected by: 1) proximity (i.e., strong states are more dangerous when they are close by), 2) offensive military capabilities, and 3) revisionist intentions. In short, threats are greatest when powerful states are nearby and seek to alter the status quo in their favor, and especially when they seem willing to use military force to do it. Under these conditions other states usually join forces to deter, contain, or defeat them.

Taken together, these factors explain why the Soviet Union was such an obvious threat to Western Europe -- it was powerful, right next door, had an offensively-oriented military doctrine, and espoused an ideology of world revolution. It's no accident NATO arose in response to this danger, and no surprise that NATO has been searching for a convincing rationale for its continued existence ever since the USSR and the Warsaw Pact imploded.

But China won't provide that rationale, because the United States and Europe don't share similar perceptions of threat. The United States wants to remain the only regional hegemon, which means it wants to keep China from establishing a hegemonic position in Asia. Hegemony in Asia is precisely what Beijing wants, however, which is why it is pressing various territorial claims, courting South Korea, and in general challenging the U.S. position there.

This situation looks very different from a European vantage point. Chinese power is growing, but it is a long, long way from Europe. Chinese power projection capabilities are also increasing -- mostly to deny the United States free access to areas close to China -- but these capabilities do not threaten European interests in any serious way. Similarly, China is a revisionist power, but the elements of the status quo that it seeks to change are all in Asia, not Europe. If Europe is worried about revisionism today, it's Russia, not China that looks like trouble.

The bottom line is that there is little basis for close security cooperation vis-à-vis China between Europe and America. As Frans-Paul van der Putten of the Clingendael Institute in the Netherlands observed in a 2013 report, one option is*:

"to closely follow the US strategy, and thus support Washington's policy of increasing pressure on Beijing. The problem in this regard is that it is not in Europe's interests to support the perpetuation of US global leadership at all costs, if this involves the danger of long-term global instability, the paralysis of global governance, and possibly even a Sino-US war."

The second reason why the EU and the United States won't be "rebalancing" together is economics.

During the Cold War, neither the United States nor Western Europe traded very much with the Warsaw Pact, so there was no tension between our military commitments and our economic ties. On the contrary: transatlantic security and economic ties were both extensive, and the Soviet bloc was outside both. But China is now the EU's No. 2 trading partner and total trade revenue quadrupled to nearly €430 billion over the past decade. Given Europe's delicate economic condition, leaders there aren't going to want to do anything that might put those ties at risk. 

Beijing is also a small but rapidly growing source of direct foreign investment and it has been a consistent supporter of the Euro, in part because the Euro is a potential rival to the dollar as an international reserve currency. Both considerations give European leaders additional incentives to remain aloof from a U.S. effort to contain China either now or in the future.

The third reason Europe and America won't "rebalance" together is the role of the arms trade. During the Cold War, NATO had elaborate export control procedures to deny the Warsaw Pact access to sophisticated weapons technology. Nothing similar exists with respect to China today. True, the EU has had a weapons embargo on China ever since Tiananmen Square, but the ban was nearly lifted a few years ago and it is increasingly a sham. According to the Stockholm International Peace Research Institute, 15 percent of Chinese arms imports are from France, which provides advanced sonars and ASW helicopters. But Britain also sells China advanced jet engines and Germany supplies the sophisticated diesel-electric engines that power many Chinese submarines. 

One may safely conclude that if Sino-American relations worsen and the United States asks its NATO allies to stop selling arms or arms-related components to China, the answer from European capitals will be "sorry, but no." After all, if France didn't stop the sale of naval vessels to Russia after Moscow seized Ukraine, its unlikely to halt arms sales to China over some territorial dispute in the Pacific.

Finally, Europe won't help the United States balance China because it has little capacity to contribute to that effort. We all know this story: European defense capabilities have been eroding for decades as military budgets have shrunk, despite repeated promises to increase spending and improve efficiencies. America's Asian allies will be crucial partners in a future coalition to prevent Chinese dominance, but not NATO.

NATO has been extremely creative in devising new rationales for its existence --mostly by taking on various "out-of-area" (OOA) missions -- and this strategy for keeping itself in business might have worked had these various adventures turned out well. But they didn't, and nobody is interested in repeating the recent wars in Afghanistan, Iraq, and Libya. Indeed, recent events in Georgia (2008) and Ukraine (2014) have raised new doubts about whether NATO expansion itself was a good idea.

In short, if trouble starts in the South China Sea, the East China Sea, or over North Korea, Taiwan, or even the Indian Ocean, Europe has no meaningful capabilities to contribute and no vital interests at stake. Nor is there any enthusiasm for a more assertive role: a recent survey by the Koerber Foundation found that only 37 percent of Germans favored "more involvement in international crises," a decline from roughly 62 percent 20 years ago. Needless to say, this feeling will be even more potent if the crisis occurs on the other side of the world.

All this is not to say that Europe has no role to play. The main contribution that Europe could make would be to take on more responsibility for security within Europe itself. Despite its recent woes, Europe is a rich continent with ample military experience and potential. Even today, its combined military spending dwarfs Russia's, and it faces no other geopolitical challenges of any consequence. If it can't handle its own security problems on its own, then something is very, very wrong. (And if divisions within Europe make effective security cooperation impossible without U.S. leadership, what does that tell you about the EU itself?) Unfortunately, the habits of the long Cold War have taught several generations of European leaders to look to Washington whenever trouble arises. 

It's time to wean our European friends off of this demeaning dependence, and a good way to start would be for the United States to announce that it no longer insisted that a U.S. officer be Supreme Allied Commander in Europe. Letting the Europeans compete to head up the Alliance might even convince a few of these countries to put some serious money into defense.

Whether they do or not, the main implication of the above analysis is that the much-heralded "transatlantic partnership" is increasingly a dinosaur. Europe and America share some important political values, they have closely integrated economies, and no reason to be rivals. But assuming China continues to rise -- which is by no means a sure thing, by the way -- Europe and America will have less and less reason to be allies either. NATO might survive as a residual insurance policy against an uncertain future, but it just won't contribute much to major international security issues. 

And one more thing: if I'm right, and if European countries strive to maintain commercial ties with America and with China, then they won't be able to complain quite so much when they find out that Washington is spying on them.

Correction, Aug. 7, 2014: The 2013 report from which Frans-Paul van der Putten was quoted was published by the European Union Institute for Security Studies. An earlier version of this article incorrectly implied that the Clingendael Institute, where Frans-Paul van der Putten works, published the report. (Return to reading.)

Photo by GEORGES GOBET/AFP/Getty Images