Why oil and democracy don't always mix

(breakingviews.com) -- In countries like Iran, most of the wealth comes from the government-controlled oil industry. Voters care more about who gets which share of the booty than about the government's economic competence. That favors anti-market populists like Mahmoud Ahmadinejad. It doesn't do a lot for democracy.

Ahmadinejad's claimed victory was greeted in the West with suspicion. Fraud may have been involved, but his support came primarily from rural and poorer voters. International observers, who are concentrated in Tehran, may have overestimated the electoral strength of Mir Hussein Moussavi, the reformist candidate. The election victories of Thaksin Shinawatra in Thailand, also based on rural support and undoubtedly legitimate, were equally mysterious to the Western media.

With oil at $60 a barrel, crude accounts for 80% of Iran's exports and about 28% of GDP. That's a big enough share to make Iranian living standards depend largely on world oil prices, in the short run. The gains from competent management, of oil production and the rest of the economy, only come in the long term.

Voters' living standards are much more influenced by government decisions on such matters as price controls and rationing than anything like market forces. For example, Ahmadinejad's combination of petrol rationing and price controls -- the price of a liter of petrol is only slowly moving from 1,000 to 2,000 rials ($0.10- $0.20) -- is popular among the poor, as is his ceiling on bank interest rates.

Removal of price and interest rate controls would damage voters' pocketbooks, without offering much tangible benefit to living standards. Expensive oil pushes up the rial exchange rate so much that export-oriented manufacturing industries and agriculture still wouldn't have much of a chance.

In oil-rich economies, the secret to political success is to use oil money to grease the palms of the poor. Ahmadinejad is not the only leader to have figured this out. Venezuela's Hugo Chavez and Russia's Vladimir Putin are on the same wavelength. That's no way to run an economy, but the free market only works its magic over a decade or more -- many elections from now.