Rising leaders from some of the world’s most complex and challenging nations, including China, Russia, Ukraine, Iraq, Kenya, Nigeria, South Africa, and the Democratic Republic of the Congo, have just completed a three-week seminar at Stanford as Draper Hills Summer Fellows on Democracy and Development. This year’s extraordinary class of fellows included members of parliament, government advisors, civic activists, leading jurists, journalists, international development experts and founders of non-governmental organizations (NGOs).

Each year, several hundred applicants apply to FSI’s Center on Democracy, Development, and the Rule of Law (CDDRL), the convener of the program, for the 26-28 slots available to study and help foster linkages among democracy, economic development, human rights, and the rule of law. Now in its fifth year, the program has received generous gifts from William Draper III, a Silicon Valley entrepreneur, in honor of his father, Maj. Gen. William H. Draper, Jr., a chief advisor to Gen. George Marshall and chief diplomatic administrator of the Marshall Plan in Germany, and Ingrid von Mangoldt Hills, a former journalist, in honor of her husband, Reuben Hills, a leading San Francisco philanthropist and president and chairman of the board of Hills Bros. Coffee.

Draper Hills Summer Fellows are innovative, courageous, and committed leaders, who strive to improve governance, enhance civic participation, and invigorate development under very challenging circumstances," said CDDRL Director Larry Diamond. “This year’s fellows were absolutely extraordinary, learning from us we hope, but also teaching all of us about the progress they are making and the obstacles they confront in a diverse set of countries.  We were not only sobered by the difficulties they must address on a daily basis but also uplifted by their accounts of programs that are working to deepen democracy, improve government accountability, strengthen the rule of law, energize civil society, and enhance the institutional environment for broadly shared economic growth.”

The three-week seminar is taught by an all star faculty, which in addition to Diamond, includes CDDRL Deputy Director Kathryn Stoner, Stanford president emeritus and constitutional law expert Gerhard Casper, FSI Deputy Director and political science professor Stephen D. Krasner, Erik Jensen and Allen S. Weiner from the Stanford law school, Avner Greif from the Department of Economics, Peter Henry from the Graduate School of Business, FSI Senior Fellow Helen Stacy, former FSI Director and current Program on Food Security and the Environment deputy director Walter P. Falcon, Mark C. Thurber, acting director of FSI’s Program on Energy and Sustainable Development, and Nicholas Hope, director of the Stanford Center on International Development.

Other leading experts and practitioners who engaged the fellows included democracy and governance expert Francis Fukuyama, who joins CDDRL as Olivier Nomellini Senior Fellow in July 2010, National Endowment for Democracy President Carl Gershman, United States Court of Appeals Judge Pamela Rymer, International Center on Nonviolent Conflict founding chair Peter Ackerman, the center’s president, Jack DuVall, former Peruvian president Alejandro Toledo, and former Secretaries of State George Shultz and Condoleezza Rice.

Faculty devoted the first week of the seminar to defining the fundamentals of democracy, good governance, economic development, and the rule of law, and in the second week turned to the issue of transitions and the feedback mechanisms between democracy, development, and a predictable rule of law. The third week examined the critical – and often controversial – role of international assistance to foster and support democracy, judicial reform, and economic development, including the proper role of foreign aid.

Against this backdrop, fellows emphasized domestic imperatives for fostering growth, social inclusion, and transformation, centering on the importance of political will and sound institutions.  In session after session, they wrestled with the concrete and all too common impediments to progress—from corruption, cronyism, and authoritarian regimes, to the fragility of conflict-ridden, multi-ethnic polities.  As an activist from strife-torn Iraq said, “Democracy is not just a way of governing. It is a way of living, a way of thinking about life.”“Democracy is not just a way of governing. It is a way of living, a way of thinking about life”

In spirited debates, in the formal seminar sessions and beyond the classroom to the Munger residence where the fellows stayed, the fellows stressed how they had all taught and learned from each other.  A rising leader from South Africa aptly summarized, “We have dispelled each other’s myths.”

As the Draper Hills Fellows expressed their profound gratitude to their faculty and mentors, they reinforced the importance of staying in touch through a virtual online community – a “common space” as defined by a member of parliament from Ukraine, that would let them look forward and look back, perhaps a decade from now, at case studies of success and failure, and the all important roles that political will and leadership played in determining outcomes.  “Stay tuned,” said Diamond and Stoner-Weiss. “Important lessons are still to come.”

Peter B. Henry, the Matsushita Professor of International Economics at Stanford's Graduate School of Business and an affiliated faculty member with the Freeman Spogli Institute’s Center on Democracy, Development, and the Rule of Law (CDDRL), has been appointed by President Obama to the President’s Commission on White House Fellowships, the White House has announced. This distinguished and diverse group of 28 accomplished Americans is responsible for recommending an exceptional group of men and women to the President for selection as White House Fellows, America’s most prestigious program for leadership and public service.

“The men and women of this commission embody what makes the White House Fellows program so special,” said President Obama in making the June 17 announcement. “These leaders are diverse, non-partisan, and committed to mentoring our next generation of public servants. I am confident that they will select a class of White House Fellows that demonstrate extraordinary leadership, strong character, and a deep commitment to serving their country.”

“Peter Henry is a superb scholar, teacher, leader, and mentor,” said CDDRL Director and FSI and Hoover Institution Senior Fellow Larry Diamond. “This recognition is richly deserved and will give Peter a national venue to continue developing a new generation of leaders, scholars, and policy practitioners.”

Alumni of the White House Fellows Program include former Secretary of State Colin Powell, retired U.S. Army General Wesley Clark, and author Doris Kearns Goodwin.

Henry is also the John and Cynthia Fry Gunn Faculty Scholar and Associate Director of the Center for Global Business and the Economy at Stanford’s business school.  He is a Senior Fellow at the Stanford Institute for Economic Policy Research (SIEPR), a Research Associate at the National Bureau of Economic Research, a Nonresident Senior Fellow of the Brookings Institution in Washington, D.C., and a member of the Council on Foreign Relations.

Among the numerous awards and honors Henry has received are a National Science Foundation Early CAREER Development Award, a National Science Foundation Minority Graduate Fellowship, a Ford Foundation Graduate Fellowship, and the National Economic Association Dissertation Prize.  He has published several articles in journals and books, including “Capital Account Liberalization, the Cost of Capital, and Economic Growth” in the American Economic Review and “Perspective Paper on Financial Instability” in Bjorn Lomborg’s Global Crises, Global Solutions.

Dr. Henry received his BA in Economics at the University of North Carolina at Chapel Hill, and was later a Rhodes Scholar at Oxford University, where he earned a BA in Mathematics.  He received his PhD in Economics from the Massachusetts Institution of Technology.

Professor Henry is also part of the distinguished Stanford faculty group that teaches in the Draper Hills Summer Fellows on Democracy and Development Program each summer at Stanford.  From some 800 applicants, this program selects 25 to 30 rising leaders from important countries in transition – such as Russia, Iran, Iraq, Pakistan, Afghanistan, Nigeria, and Zimbabwe—and brings them to Stanford to examine and help foster linkages among democracy, development, human rights, and the rule of law in their countries.  Other Stanford faculty teaching the Draper Hills Summer Fellows include Stanford President Emeritus Gerhard Casper, FSI Deputy Director Stephen Krasner, CDDRL Director Larry Diamond and Deputy Director Kathryn Stoner-Weiss, FSI Senior Fellow Helen Stacy, Avner Greif from economics, and Erik Jensen from Stanford Law School.

Joshua Cohen's Program on Global Justice (PGJ), which explores issues at the intersection of political norms and global political-economic realities, has joined CDDRL Center Director Larry Diamond has announced.  Cohen, a professor of political science, philosophy, and law, came to Stanford from the Massachusetts Institute of Technology (M.I.T.) in 2006 to launch a new program on global justice at FSI.

The aim of his program, Cohen said, "is to build dialogue and research that integrates political values - toleration, fairness, and the common good - into discussions about human rights, global governance, and access to such basic goods as food and clean water."  "These issues of global politics are all ethically consequential," Cohen points out, "and addressing them well requires a mix of philosophical thought with the best current social-scientific research."

CDDRL Director Diamond and Associate Director for research Kathryn Stoner joined in saying "We are delighted to welcome Josh Cohen to our team.  His path-breaking work bridges the normative, empirical, and policy dimensions of our Center's ongoing concerns for democracy, equitable economic development, and the rule of law."

Under Cohen, the Global Justice Program's largest effort has focused on the Just Supply Chains project. As globalization of production creates a need for new models of fair treatment for workers in global supply chains, fresh thinking is also needed on the role of unions, the rights of workers to associate, and the role of trade agreement in promoting just working conditions.

Cohen, Diamond, and Terry Winograd, Stanford professor of computer science, have also initiated a the new Program on Liberation Technology which brings together Stanford colleagues from computer science and applied technology with social scientists to explore ways that new information technologies can improve economic, political, and social conditions in low income countries, and materially improve human lives. As Cohen and Diamond note, Liberation Technology "seeks to understand how information technology can be used to defend human rights, improve governance, empower the poor, promote economic development, and pursue of variety of other social goods."  

A prolific author, Cohen has written extensively on issues of democratic theory, especially the theory of deliberative democracy, and implications of that idea for personal liberty. He is the author with Joel Rogers of On Democracy (1983), Rules of the Game (1986), and Associations and Democracy (1995). A volume of his selected papers, Philosophy, Politics, Democracy is forthcoming from Harvard University Press, and his Rousseau: A Free Community of Equals, is forthcoming from Oxford University press.  

Cohen is also the editor of Boston Review, a bi-monthly magazine of political, cultural, and literary ideas, and has edited 18 books that grew out of forums that appeared in the Review. He moderated the Global Poverty and Development Course offered by Google.org in 2007 for google.com employees. The ten week-course addressed issues ranging from growth and globalization to education and urbanization, and can still be watched on YouTube.

Diamond, Stoner-Weiss, and Cohen are part of the distinguished Stanford faculty group who lead the Just Supply Chains each summer.  This highly competitive program each year selects from 600-800 applicants some 30 rising leaders from major transitioning countries such as Russia, Iran, Iraq, Pakistan, Afghanistan, Nigeria, Kenya, and Zimbabwe and brings them to Stanford to examine and foster linkages among democracy, sustainable economic development, and good governance. As Diamond and Cohen point out, in today's challenging environment, putting new information technologies to socially, politically, and economic constructive uses is a powerful tool and of growing interest to many of these rising leaders from transitioning countries.   

Stephen D. Krasner, the Graham H. Stuart Professor of International Relations, and senior fellow at the Freeman Spogli Institute for International Studies (FSI) and the Hoover Institution, has been named deputy director of FSI, announced FSI Director Coit D. Blacker, the Olivier Nomellini Professor in International Studies. Larry Diamond, a senior fellow at FSI and the Hoover Institution, and professor, by courtesy, of political science and sociology, has been named director of FSI's Center on Democracy, Development, and the Rule of Law (CDDRL).

Krasner succeeds political science Professor Michael McFaul, former deputy director of FSI and CDDRL director, who has joined the Obama administration as special assistant to the president for National Security Affairs and senior director for Russian and Eurasian Affairs at the National Security Council.  Diamond will direct CDDRL while McFaul is on leave.

"We are delighted that Steve Krasner and Larry Diamond are assuming these leadership roles at this dynamic time in FSI's growth and development," said Blacker. "Steve and Larry's exemplary scholarship, research, and teaching, and their passionate commitment to the expansion of democracy and good governance, are a wellspring of inspiration to Stanford faculty and students, and to current and aspiring leaders the world over."

Krasner served as deputy director of FSI and CDDRL director from January 2003 to January of 2005. He then served as director of policy planning at the U.S. Department of State from February 2005 through April of 2007. In that role, Krasner was the driving force behind foreign assistance reform designed to more effectively target American foreign aid. He was also involved in activities related to the promotion of good governance and democratic institutions around the world.

Among extensive publications, Krasner is the author of Defending the National Interest: Raw Materials Investment and American Foreign Policy (1978), Structural Conflict: The Third World Against Global Liberalism (1985), and Sovereignty: Organized Hypocrisy (1999). Publications he has edited include Problematic Sovereignty: Contested Rules and Political Possibilities (2001). He taught at Harvard and UCLA before coming to Stanford in 1981.

Krasner received a BA in history from Cornell University, an MA in international affairs from Columbia University, and a PhD in political science from Harvard. He is a fellow of the American Academy of Arts and Sciences and a member of the Council on Foreign Relations.
Diamond is the founding coeditor of the Journal of Democracy, the co-director of the International Forum for Democratic Studies of the National Endowment for Democracy, and has been coordinating CDDRL's democracy program. His newest book, The Spirit of Democracy: The Struggle to Build Free Societies Throughout the World (Times Books, 2008), explores the sources of democratic progress and stress and the prospects for future democratic expansion.

Diamond's other published works include Squandered Victory: The American Occupation and the Bungled Effort to Bring Democracy to Iraq (Times Books, 2005), Developing Democracy: Toward Consolidation (1999), Promoting Democracy in the 1990s (1995), and Class, Ethnicity, and Democracy in Nigeria (1998).

In May 2007, Diamond was named "Teacher of the Year" by the Associated Students of Stanford University for teaching "that transcends political and ideological barriers." At Stanford Commencement ceremonies in June 2007, he was honored with the Dinkelspiel Award for Distinctive Contributions to Undergraduate Education and cited, inter alia, for "the example he sets as a scholar and public intellectual, sharing his passion for democratization, peaceful transitions, and the idea that each of us can contribute to making the world a better place."

Diamond received a BA, MA and PhD from Stanford, all in sociology.

Krasner and Diamond are part of the distinguished Stanford faculty group who lead the Draper Hills Summer Fellows on Democracy and Development Program each summer, which brings to Stanford some 30 rising leaders from major transitioning countries such as Russia, Iran, Iraq, Pakistan, Afghanistan, Nigeria, and Kenya to examine and foster linkages among democracy, sustainable economic development, and good governance.

Larry Diamond, Senior Fellow at the Freeman Spogli Institute for International Studies at Stanford and the Hoover Institution was appointed Director of the Center on Democracy, Development, and the Rule of Law in February 2009, when former Director Michael McFaul went on public service leave to join the National Security Council in the Obama Administration.

Larry Diamond, Senior Fellow at the Freeman Spogli Institute for International Studies at Stanford and the Hoover Institution was appointed Director of the Center on Democracy, Development, and the Rule of Law in February 2009, when former Director Michael McFaul went on public service leave to join the National Security Council in the Obama Administration.

Diamond is the founding coeditor of the Journal of Democracy, the co-director of the International Forum for Democratic Studies of the National Endowment for Democracy, and has been coordinating CDDRL's democracy program. His newest book, The Spirit of Democracy: The Struggle to Build Free Societies Throughout the World (Times Books, 2008), explores the sources of democratic progress and stress and the prospects for future democratic expansion.

Diamond's other published works include Squandered Victory: The American Occupation and the Bungled Effort to Bring Democracy to Iraq (Times Books, 2005), Developing Democracy: Toward Consolidation (1999), Promoting Democracy in the 1990s (1995), and Class, Ethnicity, and Democracy in Nigeria (1998).

In May 2007, Diamond was named "Teacher of the Year" by the Associated Students of Stanford University for teaching "that transcends political and ideological barriers." At Stanford Commencement ceremonies in June 2007, he was honored with the Dinkelspiel Award for Distinctive Contributions to Undergraduate Education and cited, inter alia, for "the example he sets as a scholar and public intellectual, sharing his passion for democratization, peaceful transitions, and the idea that each of us can contribute to making the world a better place."

Diamond received a BA, MA and PhD from Stanford, all in sociology.

The Center on Democracy, Development, and the Rule of Law (CDDRL) at Stanford University is pleased to announce its new class of %fellowship1%. This year’s fellows – 26 outstanding civic, political, and economic leaders from 23 countries in transition – have been selected from more than 800 applications. They will be on the Stanford campus for three weeks, from July 28 to August 15, 2008.

Since its inception, the Summer Fellows Program has created a network of more than 90 emerging leaders from 30 transitioning countries including Iraq, Afghanistan, Iran, Pakistan, China, Russia, Nigeria, Kenya, and Rwanda. Draper Hills Summer Fellows are former prime ministers and presidential advisors, senators and attorneys general, journalists and civic activists, academics and members of the international development community. They are united in their dedication to improving or establishing democratic governance, economic growth, and the rule of law in their countries.

The three-week program is led by an interdisciplinary (and all-volunteer) team of leading Stanford University faculty associated with the center. Class sessions, however, are not only led by CDDRL-affiliated faculty and researchers but also by the fellows themselves, who focus discussions on the concrete challenges they face in their ongoing development work. In this way, fellows have the opportunity to learn from one another’s rich experiences in the field of international political and economic development.

One of the selected fellows, an opposition politician from Singapore, was prevented from leaving her home country shortly before the program began.

“Emerging democracies must demonstrate that they can solve governance problems and meet citizens’ expectations for freedom, justice, a better life, and a fairer society.”

If the big global story of the 1980s and 1990s was the remarkable expansion of democracy, the bad news of this decade is that democracy is slipping into recession. In the two decades following the Portuguese revolution in 1974, the number of democracies tripled (from 40 to 120) and the percentage of the world’s states that are at least electoral democracies more than doubled (to about 60 percent). Since the late 1990s however, there has been little if any net progress in democracy. To be sure, significant new transitions to democracy took place in countries like Mexico, Indonesia, Serbia, Georgia, and Ukraine. But globally, the democratic wave has been neutralized and is now at risk of being overtaken by an authoritarian undertow, which has extinguished democracy in such states as Pakistan, Russia, Nigeria, Venezuela, Bangladesh and Kenya. In fact, two-thirds (15) of all the reversals of democracy (23) since 1974 have taken place just in the last eight years, since the October 1999 military coup in Pakistan.

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Two other negative trends are important to note. One is the implosion of democratic openings in the Arab world. Under pressure from the George W. Bush administration beginning in 2003, several authoritarian Arab regimes liberalized political life and held competitive, multiparty elections. Then, Islamist political forces made dramatic gains in Egypt and Lebanon and won a majority of seats in Palestine and Iraq — and suddenly the Bush Administration got cold feet. Arab democrats who had surfaced and mobilized felt abandoned and betrayed. The liberal secular politician Ayman Nour, who had the temerity to challenge President Hosni Mubarak in Egypt’s first contested presidential election, languishes in prison three years later. The country’s political opening is now frozen, while more than a billion dollars in American aid continues to flow to the regime.

The second negative trend is that authoritarian states have, unfortunately, learned some of the lessons of democratic breakthroughs of the past decade, particularly the color revolutions that brought down neocommunist autocracies in Serbia, Georgia, Ukraine, and Kyrgyzstan. As a result, they have closed political space, swallowed up or arrested independent media, crushed independent political opposition, sabotaged or shut down innovative uses of the Internet, and sought to block or sever external flows of democratic assistance. Vladimir Putin’s Russia (with its sinister cabal of savvy Kremlin “political technologists”) has blazed the trail in this authoritarian pushback, but China, Belarus, Iran, Azerbaijan, Uzbekistan, and other “post” communist and Middle Eastern dictatorships have followed suit. To make matters worse, China and Russia have drawn together with the Central Asian dictatorships in a new club, the Shanghai Cooperation Organization, to formalize and advance their authoritarian pushback.

To renew democratic progress in the world, we must understand the reasons for the democratic recession. Authoritarian learning is one. Another has been the inconsistent and often unilateralist policies of the United States. Although President Bush has done much to put democracy promotion at the center of American foreign policy and has substantially increased funding for U.S. democracy assistance programs, he has also alienated potential allies in the effort to advance democracy globally by associating democracy promotion with the use of (largely unilateral) force, as in Iraq; by promoting democracy with a tone that was often self-righteous and a style that was too often poorly coordinated with our democratic allies; and then by failing to sustain pressure for democratic change when the going got rough in the Middle East.

Structural factors have also driven the recession of democracy. One has had to do with the global political economy. As the price of oil has gone up, the prospects for democracy have receded. Russia, Nigeria, and Venezuela have all seen their democracies slip back into authoritarianism as oil prices have skyrocketed, sending huge new infusions of discretionary revenue into the hands of autocratic leaders, which they have used to buy off opponents and strengthen their security apparatuses. In Iran and Azerbaijan, surging oil revenues have shored up authoritarian states that once seemed vulnerable.

A second and more pervasive factor has had to do with the performance of the new democracies. Some new democracies are holding their own (like Mali) and even making progress (like Brazil and Indonesia) in the face of enormous accumulated problems and challenges. But the general reality, even in these countries, is that democracy often does not work for average citizens. Rather, it is blighted by multiple forms of bad governance: abusive police and security forces, domineering local oligarchies, inept and indifferent state bureaucracies, corrupt and pliant judiciaries, and ruling elites who routinely shred the rule of law in the quest to get rich in office. As a result, citizens grow alienated from democracy and become susceptible to the patronage crumbs of corrupt political bosses and the demagogic appeals of authoritarian populists like Putin in Russia and Hugo Chávez in Venezuela.

“If democracies do not work better to contain crime and corruption, generate economic growth, relieve economic inequality, and secure freedom and a rule of law, people will eventually lose faith and turn to authoritarian alternatives.”Before democracy can spread further, it must take deeper root where it has already sprouted. Emerging democracies must demonstrate that they can solve governance problems and meet citizens’ expectations for freedom, justice, a better life, and a fairer society. If democracies do not work better to contain crime and corruption, generate economic growth, relieve economic inequality, and secure freedom and a rule of law, people will eventually lose faith and turn to authoritarian alternatives. Struggling democracies must be consolidated, so that all levels of society become enduringly committed to democracy as the best form of government and to the country’s constitutional norms and restraints. Western governments and international aid donors can assist in this process by making most foreign aid contingent on key principles of good governance: a free press, an independent judiciary, and vigorous, independently led institutions to control corruption. International donors also need to expand their efforts to assist these institutions of horizontal accountability as well as initiatives in civil society that monitor the conduct of government and press for institutional reform.

The only way to stem the democratic recession is to show that democracy really is the best form of government — that it can not only provide political freedom but also improve social justice and human welfare.

Just look at the number of construction cranes around you and you’ll immediately know that you have landed in a petrostate. What’s special about the Caspian oil giant Kazakhstan is the fact that there are two types of cranes—the idle ones and the busy ones. This becomes nowhere more apparent than in the country’s new capital Astana. The idle cranes stand on private construction sites and the busy ones on public construction sites.

Kazakhstan is probably one of the countries worst hit by the global credit crunch. After years of aggressive borrowing on international markets Kazakh banks have had to pull the plug on many domestic projects after their own cash stream evaporated and it became clear that they would need to settle most of the $14 billion in scheduled principal repayments on external debt this year. The International Monetary Fund (IMF) had been warning about the unsustainability of the ever growing debt ratio for the past two years, but to little avail. Growth rates above 9 percent for the past seven years and great future prospects thanks to ever expanding oil production earned Kazakhstan a credit rating of “stable” from Standard & Poor's rating agency. Now, the bubble burst, the S&P rating turned “negative”, and the private cranes stopped.

The busy cranes—in contrast—run 24/7. No effort is spared to make sure that the fancy new government building, the pavement, the flower-adorned square will be finished in time for the highlight of the year: the birthday of both the President Nursultan Nazarbayev and the capital on July 6 (their 68^th and 10^th, respectively). This simultaneity is no coincident. Astana is largely Nazarbayev’s creation. It was him who anointed the city in the middle-of-nowhere the new capital of the young Republic, who chose its no-nonsense name (“Astana” literally means “capital”), and who caused its population to triple. The upcoming celebrations almost turned into a Nursultan & Nursultan party. If Mr. Sat Tokpakbaye and his fellow parliamentarians had gotten their way, the capital would yet again have undergone a name change—this time to honor its creator more explicitly by endowing it with the President’s first name (there is already an oil field named after him). But out in his modesty, the President declined. With his proposal Mr. Tokpakbayev, achieved the near-impossible: to distinguish himself by loyalty in a Parliament whose members all come from the same Nur-Otan party.

The idle and the busy cranes both stand for different answers to petrostates’ most burning policy question—how to best use the ballooning governmental revenues from the thriving oil and gas sector. Save or spend?—is the 500 billion dollar question (to take the value OPEC earned from net oil export in 2007). Kazakhstan, like 23 other oil and gas producing countries, followed the IMF’s advice and established an oil fund with the goal of sterilizing, stabilizing, and saving governmental oil revenues. The so-called National Fund of the Republic of Kazakhstan (NFRK) has accumulated more than $26 billion in the eight years since inception, and the total value of all oil-related funds around the world is estimated to surpass the astronomical sum of $2.300 trillion. While the theoretical logic underlying the creation of oil funds is compelling, their actual track record in achieving macroeconomic stability and fair intergenerational income distribution is more mixed. As a number of recent studies demonstrate (e.g. Shabsigh and Ilahi 2007; Usui 2007), oil funds are no substitute for the strengthening of all institutions involved in the revenue management and budgeting process. Strong expenditure and deficit control mechanisms are indispensable because such richly endowed funds make it easier for the government to borrow money on international financial markets whereby the fund acts--explicitly or implicitly—as a collateral, which in turn undermines the fiscal prudence that the fund was meant to ensure in the first place. More indirectly, the accumulation of large sums of money creates a moral hazard problem also with respect to private sector spending. The temptation is huge for private (and state-owned) companies to take overly risky decisions in the hope that the oil fund will bail them out in case their speculations turn sour. When oil fund assets correspond to more than a quarter of the country’s GDP—as it is the case in Kazakhstan—this temptation is hard to resist. Recent demands by Kazakh banks to dip into the NFRK for alleviating their liquidity problems provide just one case in point, and the national oil company KazMunaiGas may soon follow suit.

However, spending, rather than saving, does not provide a panacea either and is fraught with its very own set of problems.

First, governments of oil rich countries faces a challenge similar to that of rich parents who want to raise their children to become productive members of society. As the US billionaire investor Warren Buffet was once quoted saying: “a very rich person should leave his kids enough to do anything but not enough to do nothing.” Political scientists refer to this concern as the risk of a growing “rentier mentality” (Beblawi 1990), i.e. the tendency of citizens in petrostates to expect the government to solve all their problems rather than relying on their own initiative. The resulting societal dependency may actually suit governments very well since who will bite the hand that feeds him/her? Innovation and entrepreneurship are undermined and undemocratic structures perpetuated. Second, pro-cyclical spending of highly volatile oil revenues results in a series of negative macroeconomic consequences ranging from soaring inflation, exchange rate appreciation, and a further accentuation of the crowding-out of private investments. Finally, a massive explosion in government revenues (e.g. the newly introduced oil export tariff alone is expected to add another $1.5 billion per year) makes it close to impossible for the governmental apparatus to identify and supervise a sufficient number of new spending projects with a satisfactory social return. The floodgates are wide open to white elephant projects, mismanagement, and corruption.

The Kazakh government is acutely aware of this dilemma. Like all other oil producing nations around the world, Kazakhstan is desperately trying to navigate safely between Scylla (saving) and Charybdis (saving). As a possible solution to this dilemma a number of scholars and activists are now proposing the direct distribution of oil revenues to all citizens (and thus the ultimate owners of a country’s natural resource endowment), thereby empowering them to decide for themselves how they want to spend the monetized share of their subsoil assets.

The only real world examples of direct distribution arrangements can be found in the US state Alaska and the Canadian province Alberta. This option has also been proposed for Nigeria (Sala-i-Martin and Subramanian 2003), Iraq (Birdsall and Subramanian 2003; Palley 2003; Sandbu 2006), and Kazakhstan (Makmutova 2008).

While direct distribution arrangements may mitigate some of the problems highlighted above, they have to be greeted with some degree of caution. High levels of corruption and patronage-driven politics not only undermine the effectiveness of top-down development projects but can also jeopardize the fair distribution of oil revenues. Furthermore, even if every entitled citizen does receive his or her share of oil revenues, the long-term impact on a country’s economic development may be small or possibly even negative because of increased inflation and spending on unproductive goods and services imported from abroad. These considerations are not of particular relevance in the two existing examples of direct distribution of oil revenues. Alaska and Alberta both enjoy a relatively good record in fighting corruption and in observing the rule of law. They are both part of a larger, highly developed economy which helps to mitigate inflationary pressure and the risk that citizens will spend most of their additional income on goods imported from abroad. But the picture looks very different in most other oil dependent countries.

One possibility for addressing the risk that directly distributed oil revenues will be spent unproductively is to combine the direct distribution scheme with certain conditions that are intended to encourage citizens to invest in ways that boost their own productivity. This approach has so far not been discussed in academic or policy circles, but the conditional distribution of oil revenues (CDOR) offers the potentials of marrying the merits of two programs that are generally considered to be successful, namely the direct distribution of oil revenues and conditional cash transfer programs employed throughout the world to fight poverty in a more targeted and bottom-up fashion. A whole range of different design options are compatible with this overarching concept. CDOR schemes do not have to adopt the exclusive pro-poor focus of conditional cash transfer programs. In fact, both in Alaska and in Alberta oil revenues are deliberately distributed in an income-blind manner, staying true to the logic that citizens are entitled to a share of oil revenues in their capacity as the ultimate owners of these resources. Also in contrast to most existing conditional cash transfer programs (e.g. Oportunidades in Mexico), the conditions attached to the direct distribution of oil revenues would probably be primarily linked to the use of these revenues rather than some pre-qualifying behavior (e.g. taking infants to regular health check-ups). Eligible spending areas would be selected based on their potential to maximize productivity gains and could include education, health, energy efficiency, start-up capital for small enterprises. Additional design options worth examining include the saving and pooling of CDOR money, which would allow citizens to realize a medium to larger scale common project within the approved spending priorities. For instance, the most promising strategy for greater productivity in Kazakhstan’s agricultural sector lies in the creation of larger units (co-operatives, publicly traded agricultural complexes), and specific incentives may therefore be built into the CDOR scheme to promote such a move away from subsistence farming.

The conditional distribution of oil revenues under any of these design options presents a promising discussion platform for a new initiative the World Bank announced in April 2008—tentatively labeled EITI++. This initiative is meant to help resource rich countries to “manage and transform their natural resource wealth into long-term economic growth that spreads the benefits more fairly among their people”, by focusing not only on the transfer of oil revenues from companies to governments (as does the “original” Extractive Industry Transparency Initiative (EITI) of 2002) but also on the generation, management, and distribution of oil revenues. The transparency mechanism of double disclosure pioneered by EITI could thereby be used to ensure that all citizens receive the share of oil revenues they are entitled to. Transparency could be further enhanced by tools currently developed by the Google Foundation’s Inform & Empower program.

The implementation of the CDOR scheme could build directly upon the experience gained under conditional cash transfer schemes, including the scientific testing of its effectiveness in a randomized experiment setting. The bottom-up development philosophy underlying the conditional distribution of oil revenues ties nicely in with other approaches to strengthen the consumers of public goods and services that have gained currency over the past decade (e.g. vouchers for health and education services).

With this sketch of a conditional distribution of oil revenues scheme in my pocket (and and unconditional love for the kicking baby in my belly) I navigated my way through yet another construction site to see Mr. Kuandyk Bishimbayev, one of Kazakhstan’s young and rising stars (now the head of the so-called “Division of Socio-Economic Monitoring” within the Presidential Administration). During our meeting I got the impression that my enthusiasm for this novel approach to oil revenue management proved contagious, and since my return to Stanford I have rolled out my networking machinery to spread the virus among my academic colleagues. The time is certainly ripe. With oil prices set to remain high for the foreseeable future Kazakhstan and all other petrostates cannot afford to miss this historic opportunity to promote the diversification of their economies and to create the foundation for a future where oil may lose its dominant position to alternative sources of energy.