The politics of unconventional oil : industrial and technology policy in Brazil, Malaysia, and Mexico

Abstract

The oil industry has been an important source of industrial and technological development for countries like the United States, United Kingdom, and Norway but is mostly associated with a range of negative outcomes by the resource curse literature. Studies in this tradition assume that this industry has limited potential for creating local jobs, fostering a domestic supply chain, and interacting with research institutions. Instead, the oil industry is treated as a pure generator of easy rents that flow to governments, which unless they are constrained by good institutions, will turn resource wealth into negative economic and political outcomes. This study questions the core assumptions of the resource curse literature. It does so through a careful analysis of the industry's characteristics and the varying sources of rents, showing the existence of Schumpeterian (innovation) rents in natural-resource production. It then provides a theory that connects geological endowments to political incentives and predicts when natural resources lead to rent-capture or creation, the types of rules of distribution of oil wealth and institutional complementarities put in place to manage it, and the conditions under which policies to foster local economic participation are more likely to emerge (local content policies). The theoretical framework is then applied to the study of three countries that have similar background conditions but have different geological endowments - one traditionally rich in low-cost oil, which is Mexico, and others which are abundant in high-cost, hard-to-get O&G, which are Brazil and Malaysia. It shows that a change in the resource base pushed policymakers in Mexico to replace the rules of the sector with a constitutional reform that aligned incentives for long-term investments, attracted private capital, relied less on oil rents for public finances, and promoted local procurement. In Brazil and Malaysia, this study shows that the technically challenging aspect of producing oil and gas in those countries both enabled and incentivized a new type of distributive and industrial policy in the natural resource sector, politicizing supply contracts but also investing in domestic capabilities, innovation, and pockets of efficiency within the state bureaucracy.