The oil nouveau-riche and arms imports
After discovering enormous amounts of natural gas off its coast in 2009, estimated at the time to be worth around 50 times its GDP, Mozambique experienced an unprecedented growth spurt and a foreign investment boom. It ended sharply five years later when a debt crisis hit. It turned out the government had borrowed too much, and illegally, to purchase military speedboats. This transaction worth hundreds of millions of dollars was made possible by loans worth around 2 billion dollars, or 12.5% of Mozambique’s GDP. It inadvertently revealed cracks in the political system and that was enough to derail the entire economy, stopping foreign aid and investment.
Resource wealth often unleashes malign political forces such as corruption and conflict. While news of large discoveries always suggest fantastic development opportunities, growth expectations are almost always too optimistic, and disappointments or even collapse sometimes follow.
In a recent paper I examine whether one way through which things go awry is when newly-oil-rich countries lash out on weapon imports.
While newly oil-rich countries may buy weapons to protect their resources from rebels or foreign invasion, lashing out on weapon imports might turn out to be anti-development for at least three reasons. One is that weapons can cause conflicts, and spark escalation rather than act as a deterrent. Another reason is that arms imports may lead to political repression and human right violations. A third reason is that arms purchases by governments may crowd out more development-friendly state spending, such as on health and education.
It’s not just Mozambique. Other oil-for-arms episodes include Sudan’s oil for guns deal with China, Azerbaijan wasting the wealth from its post-2010 energy boom on vast amount of weapons, or the 1990s Angolagate scandal, which saw Angola’s oil revenues exchanged against weapons from ex-Soviet countries. Figure 1 below shows that, in those four countries, arms imports surged after giant discoveries, in 2009-2011 in Mozambique, in 2003 in Sudan, in 2010 in Azerbaijan, and in 1996-1998 in Angola.
Figure 1. Giant discoveries and arms imports
Notes: The arms imports data is from SIPRI. The data on giant discoveries is from Horn, M. and Myron K. 2011, Giant Oil and Gas Fields of the World, which was updated by the Africa Resource Future World Bank regional study group.
To examine empirically the relationship between oil and gas discoveries and arms imports I combine data on discoveries from Horn (2011), updated by the World Bank, with arms imports data from the Stockholm International Peace Research Institute (SIPRI), as well as from the United Nations (COMTRADE).
Across 120 developing countries over 1990-2017, I find that in the five years following a giant oil or gas discovery, arms imports increase by 30%. The data suggests the effect may be even larger when the oil price is high. These estimates can be interpreted causally as the timing of giant oil discoveries is unpredictable due to the uncertain nature of exploration. Indeed, giant discoveries of at least 500 million barrels can be thought of as winning the jackpot when playing the exploration-drilling lottery.
And while all imports increase after discoveries, think new watches, trinkets, and shoes, the arms share of imports also increases, by 26% on average. And so does the arms imports share of GDP.
Across discovery countries, the average arms share of GDP was 0.5% during 1990-2018. This share shoots up after discoveries. In Sudan for example, the arms imports share of GDP jumped from around 0.5% to more than 8% in 2008. In Equatorial Guinea, it reached around 5% of GDP in 2003, 4 years after the giant discovery. In Azerbaijan, it went up to around 2.5% after the two discoveries in 1999 and 2010. In Congo-Brazzaville, it shot up to above 3% in 2013, the year of the discovery.
On average I estimate that 4 years after a discovery, the arms imports share of GDP is 6 times larger than it was in the discovery year.
Why do we observe this arms imports surge after discoveries? The first explanation that may come to mind is that future oil producers may want to protect their resources from rebels or foreign invasion and hence lash out on sophisticated weapons. This was Mozambique’s government justification for buying military speedboats.
Another explanation might be that, when news of these giant discoveries break out, businessmen exploit new opportunities to siphon debt money. This is in line with what happened in Mozambique, where a Lebanese businessman convinced a handful of Mozambique government officials and dodgy Credit Suisse bankers to issue debt to purchase French military ships, by paying hundreds of millions of dollars in bribes.
We only find out about such cases when they make the news. In this case, it erupted as a corruption scandal when US federal prosecutors charged the businessman for defrauding US investors in bonds backed by the Mozambique government.
This diversion of wealth also seems to be what happened during the Angolagate scandal, when the son of the ex-French president was involved in a scheme where Soviet arms were purchased with the revenues of selling oil from Angola to France.
Last but not least, the effect of discoveries on arms imports occurs only in non-democracies with high levels of corruption, and there is suggestive evidence that it is driven in part by arms imports from China and Russia. So it seems like this anti-development spending choice may be driven by corruption and a handful of greedy businessmen. And it may be one reason why oil-rich governments perpetuate the curse of oil.
This is based on "The Oil Nouveau-Riche and Arms Imports," forthcoming in the Journal of African Economies.