June 2000 Fraser Forum:
A great deal of ink has been spilled and many voices have been raised against Talisman Energy Inc.'s Sudanese oil project. The critics' assertions are that oil royalties are fuelling a brutal civil war. The demands of these critics range from third-party monitoring to sanctions against the company.
Sanctions, while popular, tend to have either perverse effects or no effect. Often, they do nothing to cease repressive practices that will, in fact, be halted by other forces. When they are effective, they may impoverish those they seek to help, and further reduce the likelihood of the development of democratic institutions (for a fuller discussion, see Samida and Zelder, 2000).
Nonetheless, regardless of the possible outcomes, these critics seek to punish those - either private firms or foreign governments - they believe culpable for the horrible conditions in Sudan. But the critics often neglect the possible role of the world's governments, including our own, in such continuing tragedies.
Consider what we know about civil war. Though limited, the available economic analysis of civil war has examined whether such wars are due to "greed" or "grievance" (Collier and Hoeffler, 2000). The "greed" theory of civil war suggests that these wars will take place when it becomes profitable to engage in such activity. In essence, rebellion can be seen as a type of organized crime. The "grievance" theory refers to social, historical, political, or other factors of contention between the rebel group and the government that result in conflict. This research suggests that greed is a more powerful determinant of civil war than grievance.
Tragically, both greed and grievance motivations for civil war can be compounded by government intervention be it foreign (foreign aid), or domestic (restrictions on economic freedom). Foreign aid, if it becomes a massive transfer into the economy, can increase the potential payoff from rebellion. Foreign aid can also fuel grievances if the expenditures are structured in order to favour one group over another.1
Restrictions on economic freedom may, in many aid-dependent countries, further concentrate power in the hands of the government.2 An analysis of economic freedom and internal warfare suggests that lower levels of economic freedom are associated with a greater probability of war (Samida, 2000). By outlawing or impeding legitimate business activities, or reserving certain opportunities for particular groups, low levels of economic freedom may raise the returns to violence for disenfranchised groups. Restrictions on economic freedom, such as import quotas or limitations on the right to exchange currency, can be ways wealth is transferred through government fiat to a favoured group. High taxes and extensive regulation can discourage wealth creation through legitimate means and consequently lower the opportunity cost of rebelling.
If greed is truly an explanation for civil war, then the combination of large foreign aid transfers and limited economic freedom could prove hazardous. Perhaps, then, it is not surprising that researchers from organizations as disparate as the London School of Economics, the Cato Institute, and the Congressional Budget Office have found little evidence that aid improves growth or living standards.3
What does this mean for the Sudan? According to CNN, the fighting in Sudan resumed in 1983, after the 1972 peace accord between the north and south was violated by the north. World Bank data reveals that Sudan received $740 million dollars ($US) in foreign aid in 1982 and $962 million ($US) in aid in 1983. From 1975 to 1982, the average annual amount of foreign aid received was $478 million ($US). In the first five years of the civil war, average aid per year jumped to $745 million ($US), reaching a peak of $1.14 billion ($US) in 1985. These massive flows ranged from 19.5 to 58.8 percent of Sudan's central government expenditures, and peaked at 11.9 percent of GNP.4 Interestingly, foreign aid receipts were rising before the start of the civil war, and didn't start declining until years later.
Contrast this with the magnitude of Talisman's financial activities. According to the company's latest annual report, it paid Can$20.3 million in royalties in 1999. This was this first year royalties were paid as oil production started in August 1999. As oil production increases, the royalty payments will undoubtedly rise. However, the many years of foreign aid transfers dwarf the royalties, both current and potential, from this project.
Furthermore, foreign aid has had an unspectacular record, while we do know that trade, investment, and economic freedom can make substantial positive contributions to development (see Michael Walker's article in this issue.) For instance, an OECD report indicates that "there tends to be a positive association over time between successfully sustained trade liberalization and improvement in core labour standards" (OECD, 1999: 7).
Nevertheless, according to Merv Schafer, the representative of several church groups and individuals, "The shares of Talisman have the colour of blood and the stench of death on them." Why does Schafer refer only to Talisman and not to the billions transferred to Sudan by various world governments, including Canada? Why have Talisman's actions been placed under such scrutiny, while foreign aid has escaped public review?
Some might claim that there is one essential difference between royalty payments and foreign aid: Royalties flow directly to the government, while foreign aid does not. This simplistic view, while comforting, is not accurate. World Bank research, for instance, has shown that aid can be "fungible," which means that aid recipients can modify their spending plans in response to outside revenue in order to further their agendas rather than those of the development agency. "For instance, although most aid is targeted to finance investment costs, estimates suggest that the net effect of a dollar of aid is to increase public investment by only 29 cents - exactly the amount which any dollar of government revenue would have raised investment" (Dollar et al., 1998: 19).5 In practical terms, this means the recipient government can use these increased revenues as it chooses. The reality of fungibility calls into question the presumed benign role of foreign aid.
Foreign government involvement in Sudan may not have played a role in the violence that has enveloped this country, but it is a possibility that the media and other commentators have ignored. Consequently, if it is the case that money transferred to the current Sudanese government is intensifying this war, we would do well to remember that royalties from Talisman's operations started flowing long after the war broke out, while Canada's foreign aid dollars have been there all along.
Bibliography
Alesina, Alberta and Beatric Weder (1999). Do Corrupt Governments Receive Less Foreign Aid? Working paper 7108.
Boone, Peter. Politics and the Effectiveness of Foreign Aid. Working paper 5308. Cambridge: NBER.
Collier, Paul and Anke Hoeffler (2000). Greed and Grievance in Civil War. Working Paper: April 26, 2000 version. Available at http://www.worldbank.org.
Dollar, David and Lant Pritchett (1998). Assessing Aid. A World Bank Policy Research Report, Toronto: Oxford University Press.
OECD (1999). Open Markets Matter: The Benefits of Trade and Investment Liberalisation
October Policy Brief. Paris: Organisation for Economic Co-operation and Development.
Samida, Dexter (1999). A Hand Out Instead of a Hand Up: Where Foreign Aid Fails. Public Policy Source #30. Vancouver: The Fraser Institute.
Samida, Dexter (1999b). "When Foreign Aid Doesn't." Fraser Forum, February, pp. 30-1.
Samida, Dexter (2000). Presentation for Open Policy Forum, March 1st. Vancouver: The Fraser Institute.
Samida, Dexter and Martin Zelder (2000). "The Hidden Harm of Sanctions." Fraser Forum, April, pp. 29-30.
World Bank (1999). World Development Indicators 1999. CD-ROM. Washington DC: World Bank.
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