Book Review
In When Can Oil Economies Be Deemed Sustainable? Luciani and Moerenhout explore the notion of sustainability in oil economies, challenging many of the prevailing assumptions about oil economy sustainability. The authors discuss the various factors that negatively impact the sustainability of oil economies, such political factors, war, labor issues, economic problems, and climate and pollution challenges. Throughout the book, there is an underlying assumption that climate change poses a major and even immediate threat to the sustainability of the global economy. But Luciani and Moerenhout are much more focused on other threats to sustainability given the socioeconomic and sociopolitical nature of the book. The authors focus different chapters on different acute, regional, and long-term issues. One of the most impactful chapters is on the definition of economic sustainability in resource-rich states. Luciani and Moerenhout challenge the existing models and approaches to economic sustainability by encompassing many more factors than are often considered when defining economic sustainability. In addition, Luciani and Moerenhout discuss many of the recognized sociopolitical challenges of developing countries with major deposits of natural resources. This discussion provides a useful framework for understanding better the most appropriate considerations for economic sustainability in resource-rich countries.
Economic sustainability is tautological in the sense that one can calculate the economic sustainability of a business, country, or specific economy ex post facto based on whether the entity has sufficient economic output to continue functioning. Yet, calculating the economic sustainability of a currently operating business, country, or economy requires the recognition of trends and factors that may disrupt or progress the advancement of the entity. Luciani and Moerenhout focus on those trends and factors of economic sustainability in resource-rich countries. On one hand, resource-rich countries have the advantage of generating strong economic pushes based on the extraction and trade of resources. On the other hand, there are certain tendencies for resource-rich countries to experience political upheaval, military engagements with surrounding countries, and internal rivalry and competitiveness. Economic growth plans of resource-dependent governments have as a common objective ensuring economic sustainability (Luciani and Moerenhout 153). In light of the shortcomings of present theories in forecasting or resolving common economic difficulties, the understanding of economic sustainability must be modified to serve as the foundation of effective economic policy (Luciani and Moerenhout 153). In this way, Luciani and Moerenhout provide a compelling case for alternative approaches to the traditional means of defining economic sustainability for resource-rich countries.
Luciani and Moerenhout recognize that economic sustainability is a multifaceted notion comprised of several components. Obviously, comparative advantage continues to be a significant motivator of economic trade and specialization. Moreover, public debt, government investment, economies of scale, innovation, transport costs, and industrial structures impact economic performance (Luciani and Moerenhout 154). Not just infrastructure, governmental investments, economic strategy, and trade policy, but also taxes, distribution of domestic resources among the people, employment, and education impact economic results. In addition, sustainability evaluations and subsequent policy creation have often been discipline-driven in practice. If economic precision is separated from political and social considerations, public policy becomes shortsighted and paradoxical. Economic continuity requires economic diversity, but economic diversification alone is insufficient. Setting it as the primary policy supporting sustainability is inadequate. Luciani and Moerenhout make a strong case for economic diversity to be considered as part of a broader economic framework for economic sustainability for resource-rich countries.
Initially, diversity contradicts the principle of comparative advantage (Luciani and Moerenhout 153). The phrase is not well-defined. Diversification may be undertaken in export, budget, or value-added, each of which has distinct policy and environmental concerns. Even though most definitions involve export diversification, a restricted economy is diversified by definition (Luciani and Moerenhout 158). Moreover, successful diversification is restricted by economic development, political development, and social development, among others (Luciani and Moerenhout 153). The specific structural limits and economic distortions of GCC countries, and not the Dutch disease, are the fundamental causes of poor export and government revenue diversification. In addition, the absence of economic diversity has historically permitted the GCC states to realize economic benefits (Luciani and Moerenhout 7). Midway through 2014, the drop of the oil price showed the magnitude of their budgetary and economic woes, resulting in changes (Luciani and Moerenhout 155). Plans for growth that include changes in energy, rent allocation, industrial development, and labor are interdependent, but they can also be inconsistent and involve tradeoffs. Some states have even implemented changes in energy assistance, development of human capital and the administration of resource windfalls, but execution has been sluggish and the resource sector still dominates the industry (Luciani and Moerenhout 155). In this way, Luciani and Moerenhout demonstrate that economic diversity in itself is not a particularly useful term for describing healthy or sustainable economies. Because there are so many different aspects to economic diversity and only loose ties between these various aspects and actual sustainability, it is more than appropriate to question the utility of researchers employing economic diversity as a measure of economic sustainability.
Similarly, diversification is necessary not just because of the depletion of resources, but also because exports cannot be sustained over the resource’s lifetime (Luciani and Moerenhout 155). The export capability of a petrostate is contingent on its proved reserves, production capabilities, local energy requirements, and global demand for conventional sources of energy. Local consumption is crucial in deciding a petrostate’s capacity to continue exporting petroleum. Numerous states have been net importers for a period of years as a result of industrial shifts necessitated by local demand. Others struggle with export diversification strategies since their proven petroleum reserves are likely to run out in the next few decades (Luciani and Moerenhout 4). Additionally, technical breakthroughs and expenditures in shale oil and gas and renewable energy, on the other, threaten the global demand for and pricing of traditional energy. The energy sector’s contribution to climate science has also led to efforts to reduce the use of fossil fuels and increase reliance on renewable sources of energy. These factors resulted in the fall of the price of oil in 2015, but they have also resulted in the anticipation that low oil prices will remain despite a modest rebound (Luciani and Moerenhout 157). These factors collectively enhance oil price uncertainty and threaten OPEC’s previous capacity to manage prices by managing supplies.
The failure of Chile’s once-dominant copper sector to keep up with the technical advancements of American enterprises resulted in a rapid decrease of its market share from third highest in the globe to a fraction of that in the early 20th century (Luciani and Moerenhout 155).
There are also major differences between resource-rich countries and their economies. After all, resources have different values and different levels of scarcity. Oil and gas, for example, are only scarce because of the massive demand for such resources. In a situation in which the global economy had already shifted towards more sustainable sources of fuel such as wind and solar, the demand for oil and gas would not have been such that scarcity was sustainable. Over the last several decades, many countries have sought to force or influence scarcity of resources through a manipulation of supply, especially for oil and gas. This reflects a strategic challenge in defining economic sustainability for resource-rich countries, as their capacities to remain competitive in the global market depend partially on their capabilities to manipulate the global market and leverage political ties to encourage activities from other countries that manipulate the market in similar ways.
The longevity of natural resource earnings is only half of the equation for economic sustainability. Exchange rates and limits on production and price choices given domestic market demands and export limits can impact export viability. Moreover, resource-dependent economies, whether wealthy and poor, have distinct yet shared policy issues, with commodity price volatility being the most significant (Luciani and Moerenhout 153). This volatility is detrimental to economic performance and production growth in both petroleum exporting and importing nations. It subjects economies to boom-and-bust cycles, hindering economic growth and performance (Luciani and Moerenhout 154). These cycles are frequently accompanied by cyclical fiscal policies, in which government spending significantly increase during economic expansions and decrease during economic contractions. Such inclinations are frequently exacerbated by domestic political and economic instability. There is a beneficial direct impact of resource dependency on growth, but it is frequently overshadowed by a negative indirect volatility effect. (Luciani and Moerenhout 157) Periods of global market oversupply that lower oil price and export revenues reveal systemic flaws in governmental services. A major price decrease in 2015 has resulted in significant fiscal deficits and losses in exports, government income, and GDP for petrostates (Luciani and Moerenhout 153). Russia, for instance, has experienced a reversal of financial flows and volatility in exchange rates, while countries of the GCC have faced extraordinary deficits despite a history of substantial budgetary surpluses (Luciani and Moerenhout 162).
Moreover, the political economics of resources and rent distribution frequently exacerbates the issues encountered by resource-rich governments (Luciani and Moerenhout 163). Although diverse, the experiences of several resource-rich governments suggest the common employment of politically driven reactionary measures, such as price caps, producer incentives, nationalization, limits on foreign participation, and stockpiling, in reaction to commodity price volatility (Luciani and Moerenhout 163). These policies focus on short-term effects rather than the cause of volatility, and thus do not improve the vulnerability of countries to commodity volatility. Resource reliance is frequently accompanied with excessive consumption during booms, as well as policies that prioritize short-term gain over long-term gain (Luciani and Moerenhout 158). Consequently, resource-dependent states are under significant pressure to adopt effective fiscal policy strategies that reduce boom and bust cycles by utilizing oil rent windfall profits during revenue surges to padded downturns during busts, while also promising efficient resource allocation and diversification of the total income to achieve long-term sustained development, growth, and employment objectives. Maintaining a stable resource income and safeguarding non-depletable revenue streams are also essential policy goals (Luciani and Moerenhout 12). Economic success is contingent on both underlying diverse conditions and the effectiveness of policy regimes, as suggested by the striking disparities in the political and economic status of petrostates. Consequently, it is essential to redefine economic sustainability in light of these obstacles (Luciani and Moerenhout 15).
Thus, Luciani and Moerenhout hold that economic specialty based on relative advantage is not incompatible with sustainability or industrial diversification, and that both ideas are relevant, but inadequate, for economic sustainability in resource-dependent states (Luciani and Moerenhout 153). Dependence on resources is not unsustainable in and of itself. Rather, the amount to which such resource reliance is sustainable is determined by the policies taken to manage this dependency and the ability to continue revenue creation from it (Luciani and Moerenhout 158). Financial growth may be achievable by the management of resource availability, export payouts, and price fluctuations, in addition to the development of the resource sector and non-resource sectors that provide value (Luciani and Moerenhout 157). Therefore, according to Luciani and Moerenhout (162), sustainability in a resource-based economy is an issue with two perspectives: controlling the volatility of resource-driven income and managing the degradation of the resource and its export revenue once commodities export revenue has been depleted. Both viewpoints are significant in the short and long run, although the volatility viewpoint is more apparent in the short term while depletion is more prominent in the long term and can be mitigated by the acquisition of many other assets (Luciani and Moerenhout 153).
Consequently, the researchers sought to examine economic sustainability by adopting economic policies that meet economic growth drivers while taking both the volatility and depletion viewpoints into consideration. Economic sustainability may not necessarily need economic expansion. In addition, the latter is neither simple nor fundamental. Yet, concentrating on the sources of economic growth has the distinct benefit of examining an economy constantly across time, as opposed to merely during or after an episode of resource reliance.
Perhaps the most important aspects of the arguments from Luciani and Moerenhout regarding the definition of economic sustainability for resource-rich countries concerns the direct challenging to the standard approaches to and models of economic sustainability. Standard growth models often exclude natural resources, however assessing economic development in the context of dwindling natural resources is compatible with the objectives of attaining economic sustainability (Luciani and Moerenhout 159). Economic sustainability necessitates extending the useful life of the natural resource, which necessitates assuring adequate extraction rates. To illustrate, a basic scenario is shown in which the natural resource is the only source of production and the amount of resource that may be harvested represents a percentage of the overall value of the accessible resource. If the status of technology remains unchanged over time, the production will dwindle to nothing when the resource can no longer be harvested. However, if the degree of technology is let to evolve through time, the resource’s exhaustibility is mitigated (Luciani and Moerenhout 159). It is extremely difficult to predict technological changes. While technological changes tend to result from attempts to improve the competitive advantage of a business or country, success is unpredictable. In developed countries such as the U.S., investment into technological innovation is massive, resulting in higher rates of innovation. Yet, it is difficult to predict the impacts of such innovations on the sustainability of resource-rich economies across the globe, given that many new technologies will be unavailable to most of world until decades after they are introduced. In other cases, the impacts can be immediate and can directly affect prices for resources globally.
Another clear issue when attempting to calculate economic sustainability is the tendency for countries to sacrifice long-term sustainability for short-term boons. In democratic states with term limits for national leaders, there are pressures to produce as much as possible in the shortest time possible, which often leads to long-term sacrifices. According to Luciani and Moerenhout, there is an identified exchange between creating output now and keeping the resource in the soil for future growth, a trade-off that is understood and present in the thoughts of many politicians, foreign assistance agencies, and inhabitants of resource-rich governments (Luciani and Moerenhout 166). This is challenging due to the fact that competition for rent distribution drives quicker production, which adds to greater short-term growth but a higher depletion rate. However, the model stresses the significance of technical advancement and its influence on the longevity of the existing resource. Technology advancements can contribute to effective extraction as well as prolonging the resource’s availability and export earnings (Luciani and Moerenhout 159).
In addition, the identified trade-off involving local consumption and the net exports of a particular supply is another crucial component at the core of this balancing effort (Luciani and Moerenhout 9). This is a significant problem, especially for nations that rely on resources as a significant input in production and as the aggregate demand. In resource-dependent governments, the political economics of resources has traditionally led to enormous government expenditures and financial obligations to pay extensive resource rent redistribution and assured public employment, resulting in excessive consuming and severe budgetary constraints. The balance of monetary and exchange rate policy is crucial for moderating commodity-sourced volatility and minimizing the consequences of Dutch disease, which is important for long-term diversity and stability (Luciani and Moerenhout 157). Technological and efficiency improvements, as well as policy change, are essential for regulating domestic consumption and expanding exportable output levels. Balance involves the transparent use of oil revenues in the near term and the planning and implementation of constructive, welfare-improving development in the long-term (Luciani and Moerenhout 165). Such development can be accomplished through policies that emphasize human resource development, which increases value added and efficiency and can help develop future industries and knowledge economic activity; physical capital, which also contributes to industrial growth and national infrastructure; investments, which can provide a new accrual of resources for the near-term and long-term future; and technical advances, which can lead to the occurrence of novel industries and improve efficiencies (Luciani and Moerenhout 167).
Human factors also complicate the calculation of economic sustainability for resource-rich economies. Human capital investments are essential to economic progress (Luciani and Moerenhout 40). Not only does human capital increase the performance of resource-dependent industries, but they are additionally crucial for the development of the non-resource sector, which is required for diversification efforts and the management of the depletion viewpoint. This chance has been lost by a number of nations that have been affected by the resource curse. Countries such as Japan and Germany were able to recover after WWII despite the utter destruction of their economy, thanks in part to the retention of pre-war human resources and later investments in human capital (Luciani and Moerenhout 163). Over the last half century, China has been a source of low-cost labor for much of the developed world. As the middle class in China grows and the countries continue to industrialize, wages will continue to rise. There may be other sources of low-cost labor, such as India, but such human factors complicate the calculation of economic sustainability because of the unpredictable nature of such factors.
Despite the difficulties associated with reliance on foreign workers, the form of the employment agreements had unforeseen positive effects on the economy. Expatriate workers work intermittently in the GCC, with their stay tied to employer-sponsorship initiatives under the kafala system (Luciani and Moerenhout 14). They tend to have more flexible labor contracts, frequently at lower rates than their national colleagues. In theoretical simulations, the withdrawal of expatriate workers provides an additional important stability mechanism for the Kuwaiti market in the wake of volatile oil revenues. Depending on the characteristics of the labor market, this contractionary shock will have distinct effects on the two labor groups. As the actual salaries of expatriate employees are typically believed to remain stable, employment levels instead change. Since the vast majority of Kuwaitis are working in the public sector, wherein contracts are strict, their employment remains unaffected, although their real income fluctuates somewhat (Luciani and Moerenhout 104). In contrast, the adaptability of expatriate employment agreements enables impacted companies to alter their employment levels, resulting in drops in the employment levels of both skilled and unskilled expats. During oil booms, the number of guest workers surged enormously, whereas it reduced during busts. Therefore, model-driven policy ideas that emphasize the administration of labor contracts for expatriate workers are an example of a successful policy.
Finally, Conceptual ambiguity plagues the discourse on sustainability practices and economic sustainability specifically (Luciani and Moerenhout 6). Due to the ongoing evolution of technology and the accessibility of products and services, no economy can exist in a static condition. Every economy, business, and person must continuously change and respond to changing circumstances. What is sustainable now may not be sustainable in the future. The notion of adaptation is inherent in the sustainability discussion. Due to the impossibility of predicting the future and the frequent occurrence of unanticipated economic shocks, it is not clear what will be sustainable tomorrow or for how much longer. Oil-based economies face this exact difficulty. Adaptability is influenced by several factors. It is frequently viewed as a consequence of diversity. In general, economic reasoning promotes specialization over diversity in terms of comparative advantage. This economic logic is highlighted by the growing significance of global supply chains for development, which shifts rivalry from whole industries to single manufacturing steps and even individual employment (Luciani and Moerenhout 159). Nonetheless, shifting conditions may be disadvantageous for the particular specialty. There are several examples in economic history of the sudden extinction of individual sectors owing to technical advancement or depletion of natural resources. In some instances, economic actors whose specialty has been challenged have effectively reinvented themselves, adjusting more or less drastically to a novel specialization. In other cases, it has failed, and economic players have deteriorated and vanished. As member states of the GCC are varied, the pressure exerted on numerous Gulf states is not equal (Luciani and Moerenhout 4). One may argue that nations with enormous resource reserves and tiny populations could for the time being simply accept that periodic price shocks will occur. Nevertheless, other GCC states confront diminishing reserves and substantial populations. With the added factors of technology improvements and environmental unsustainability, it is increasingly necessary to examine diversification in this setting. As businesses accelerate the diversification of their value-added and income streams, they are under increasing pressure to invest in those areas and phases of production that can produce returns for an extended period of time.
The current paper has reviewed the arguments by Luciani and Moerenhout on the concept of sustainability in oil economies. The authors challenge a number of commonly held beliefs regarding the sustainability of oil economies. Given the social and sociopolitical basis of the book, however, Luciani and Moerenhout focus considerably more on other risks to sustainability. The authors devote separate chapters to distinct acute, regional, and long-term concerns. The chapter on the definition of economic sustainability in resource-rich states is one of the most influential. Incorporating many more aspects than are often addressed when defining economic sustainability, Luciani and Moerenhout question established models and approaches to economic sustainability. In addition, Luciani and Moerenhout explore a number of the well-known sociopolitical issues facing developing nations with abundant natural resource endowments. This debate presents a framework for better comprehending the most pertinent concerns for economic sustainability in resource-rich nations. The major takeaway here is that approaches to defining economic sustainability should directly reflect those disrupting factors for economic sustainability within any economy and the complexities and uncertainties that are common in resource-rich countries. Complicating matters even further are major disrupting events such as pandemics (e.g., COVID-19 pandemic) and war (e.g., the Russian invasion of Ukraine) both of which can not only lead to major issues for individual economies but also impact the prices of natural resources globally.
Work Cited
Luciani, Giacomo, and Tom Moerenhout. When Can Oil Economies Be Deemed Sustainable? Springer Nature, 2021.
