Environment and Security: Transforming risks into cooperation

Eastern Caspian

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Environment and Security

The “Dutch Disease”

From an economic perspective, the World Bank considers that oil-rich countries are confronted with problems related to volatility issues, quality of government spending, in- flexibility of government policies in an uncer- tain environment, and boom-bust economic cycles (World Bank, 2005: 9). However one of the key problems for oil producing countries is the “Dutch Disease”, a situation that devel- ops when the economy is overheated by an increase in oil-related revenue and the associ- ated fiscal, monetary, and credit growth. This can lead to excessive appreciation of the local currency, exerting negative pressure on sec- tors such as farming and manufacturing. Resources may also give rise to grievances if state institutions, responsible for manag- ing them fairly, engage in private accumula- tion and even criminal dealings. The weak- ness and failure of political systems is a key factor in environmentally–related instability and violent conflict (Kahl, 2006). This prob- lem is aggravated by the fact that govern- ments often rely on natural resources rather than taxation for their sustained develop- ment and prosperity. States dependent on natural resources often feel little need to respond to the demands of their citizens and consequently tend to use revenue generated by the extraction of natural resources to secure their own pow- erbase and the support of political allies (Karl, 2000). In this case links between the centres of political and economic power are very close. This situation has been qualified as the “resource curse” (Ross, 1999) 32 . An important factor worth considering is that the potential of natural resources to cause conflict varies according to their character- istics and distance from the political cen- tre (Le Billon, 2001). Valuable minerals, for example, are much more likely to produce resource curses than agriculture because

governments typically own such resources or otherwise control the bulk of their reve- nue streams (Karl, 1997; Ross, 1999, 2001). Likewise “honey pots” drive conflicts when valuable natural resources are concentrated in specific areas or otherwise easily seized and controlled; therefore, concentrated re- sources such as valuable minerals are more likely to produce conflict than diffuse re- sources such as cropland or freshwater. In this context it should be remembered that up to 80–90% of Kazakhstan and Turkmeni- stan’s proven oil reserves are concentrated in the Caspian region. Societies and countries are not powerless when confronted with tension, instability and conflict. They have the capacity to deal with such problems. How resources are managed and revenue stemming from such resources redistributed influences the overall stability of a country. Institutions, particularly political bodies, can work to defuse conflict. Exam- ples from countries such as Norway or the United Kingdom show that “Dutch Disease” or the “resource curse” are not an inevita- ble outcome for economies well endowed with natural resources. In a well-managed economy the extraction of mineral resources can have a strong, positive impact on the local economy even in peripheral regions that may face strong centrifugal forces from the national core region (Auty, 2006). Poli- cies fostering broad-base, long-term human capital investments not only enhance the population’s opportunities to find employ- ment (and improve workforce productivity too) but also mitigate potential deterioration in income distribution that oil inflows may create. The main challenge for states is how best to manage wealth generated by the extraction of natural resources. Successful countries are the ones that invest heavily and well in broad-based human capital – not just in a narrow elite (World Bank, 2005).