In this clearly written, wide-reaching book about the politics of natural resource nationalization, Paasha Mahdavi explores why leaders take control of the natural resource sector. Scholars of political economy have long argued that there are significant costs associated with appropriating private extractive assets, and Mahdavi argues that leaders nationalize the extractive sector as the result of a calculus about their own political survival. Because nationalizing the extractive industry brings immediate fiscal windfalls that leaders can use to shore up support and deter potential challengers, leaders who believe their survival is in jeopardy are more likely to nationalize in order to consolidate their hold on power. Leaders who are confident in their survival, in contrast, are more likely to retain the status quo, leaving the sector in the hands of private firms and ensuring the future benefits of continued extraction. In other words, strong leaders can afford to wait to reap the long-term benefits from private resource extraction, whereas weaker leaders cannot. Mahdavi elucidates and tests this theory with clarity, nuance, and methodological diversity, with implications for economics, public policy, and business, as well as political science.
Mahdavi’s theory provides an account of both when nationalization is likely to occur and what form it is likely to take. For even a weak leader to decide to nationalize the extractive sector, she must believe she can get a better deal than the current extractive contract, and she must believe that nationalizing will be sufficiently beneficial to her. Consequently, nationalization should occur when sufficient information about alternative extractive contracts reaches the leader, enticing her to consider renegotiating. This kind of information diffusion, Mahdavi argues, is a sufficient spark for nationalization, because it allows leaders to imagine the possibility of a better deal, provided that the country has sufficient operational expertise to extract the resource.
Furthermore, leaders are likely to pursue operational nationalization in which a state-owned enterprise (SOE) assumes control of production and management, because it is most likely to increase the fiscal strength of the leader. Operational nationalization increases fiscal strength, according to Mahdavi, because it entails the reduction in information asymmetries that lead to reduced government revenues when the extractive sector is privately held. This form of nationalization also ensures the leader has the capacity to alter production to reflect or affect global commodity prices. However, this increase in fiscal strength is contingent on the timing of operational nationalization, given the inefficiencies at the beginning and end of the extractive cycle. As such, leaders realize the windfalls of operational nationalization immediately, while only suffering the costs associated with state ownership in the future. The consequence of this temporal inconsistency is Mahdavi’s central point: leader tenure is both affected by the decision to nationalize the extractive industry and shapes the likelihood that nationalization occurs. The probability of leader survival and the decision to nationalize are mutually endogenous.
The book advances and tests this argument over the course of seven cogently written chapters. Mahdavi begins by elucidating his theory on why leaders nationalize extractive industries, providing an overview of the causal linkages that connect a logic of political survival to the decision to appropriate and operationally control the extractive industry, with particular attention to the oil industry. It is in chapter 2 that he engages with the usual suspects of alternative explanations for nationalization, providing a comprehensive discussion of theories of the effects of natural resources on governance writ large, and situating nationalization within the branch of that literature that explores the role of ownership structure. Mahdavi first demonstrates that the empirics do not support the conventional wisdom that claims that strong leaders decide to nationalize. He then advances an argument with granular and precise conceptual differentiations—for example, between fiscal strength and fiscal regime type, differential versus quasi-rents, and different forms of nationalization—and draws attention to both the spark for nationalization and the longer-term drivers. This attention to temporal dynamics is perhaps Mahdavi’s most important theoretical contribution. He ends this theoretical chapter by providing some exploratory evidence from the cases of pre-1980s Iran and Iraq, tracing the trajectories of operational national oil companies, the resulting volatility of government revenues, and leadership turnover.
The theoretical argument yields three empirically testable hypotheses that Mahdavi evaluates with a new dataset he details in chapter 3. First, Mahdavi argues that nationalization of the natural resource sector should only occur after there is information diffusion among governments about the possibility of a better deal. Second, operational nationalization should immediately increase government revenues, relative to the status quo. And third, nationalization, particularly of oil industries with higher-than-average production levels, should increase the likelihood of leader survival.
Mahdavi’s central empirical contribution is a carefully theorized database of operational oil nationalizations, on which he relies to test these hypotheses in chapters 4 and 5. Using a combination of Bayesian hierarchical modeling techniques and frequentist approaches, Mahdavi demonstrates cross-national support for his hypotheses (and several of their implicit assumptions). Though he could do a bit more to allay concerns about the confounding effects of using OPEC membership as a proxy for information dissemination, Mahdavi’s empirical support for his hypotheses is robust and convincing. In chapter 6, Mahdavi returns to the case of Iran, providing an in-depth analysis of the Shah’s decision to nationalize the country’s oil industry in 1973. The case study is a seamless demonstration of the illuminating capacity of a mixed-methods approach to process tracing. Relying on archival data and secondary resources, Mahdavi provides a compelling account of drivers of nationalization in Iran, buttressed by a statistical analysis of oil revenue projections that allows him to construct a counterfactual against which to compare the baseline reality. This innovative approach to mitigating the challenges of observational data provides an excellent example for scholars facing similar inferential issues. Mahdavi ends the book with an assessment of the implications of his findings for the likelihood of oil nationalizations in the twenty-first century.
This book is a new and methodologically creative take on the drivers of extractive nationalization and, as is the case with most works of importance, is fertile ground for further research. Specifically, how enduring is the nationalization effect on leader tenure? Are some leaders better able than others to consolidate power in the wake of such significant windfalls? How does this particular survival strategy fit within the broader menu of strategies? In other words, if a leader believes her tenure to be uncertain, why choose this particular strategy to consolidate power over others? Finally, Mahdavi operates on the assumption that the costs of nationalization are primarily external: foreign direct investment may slow, or international institutions may sanction the leader. To what extent are there domestic audience costs of nationalization, and do they factor into the leader’s calculus?
Overall, the central argument of Mahdavi’s book rests on a logic of political survival, which in and of itself is not fundamentally new. What is new is its application to the question of resource nationalization, as well as the impressive combination and diversity of methodologies Mahdavi uses to study it. Mahdavi’s empirical approach is a refreshing return to reliance on observational data in the face of so many experimentalist approaches, with rigorous attention to its pitfalls and a broad range of steps to mitigate them. Furthermore, the work should be celebrated for its careful granularity of concepts, engagement with a wide range of literatures, and the willingness to take the problem of endogeneity head-on, and indeed construct it as a feature of this work as opposed to a flaw. The consequence is a beautifully written piece of scholarship that provides a nuanced exploration of how temporal inconsistencies shape not only why leaders nationalize extractive industries but also how such a strategy affects political survival.
