Egypt, Oil and Democracy

NATE SILVER @ 538 POLITICS BRINGS THE HEAT. 

By NATE SILVER

Revolutions are, by their very nature, difficult to predict. The unrest that gripped Eastern Europe and the Soviet Union from 1989 to 1992, and led to the fall of Communist governments there, was anticipated by few policymakers and political scientists in advance.

If a similar transition is now underway in Egypt, as well as in other parts of North Africa and the Middle East, it too will come as a surprise to most in the international community. Tunisia, for instance, where President Zine el-Abidine Ben Ali was overthrown in mid-January, had ranked just 118th out of 177 countries according to Foreign Policy magazine’s Failed States Index, a measure of the likelihood of regime change. Egypt’s ranking, 49th, was considerably higher — and a few experts can be said to have seen some of last week’s events coming — but some of the brightest minds in the business were predicting Egypt’s government would remain intact, even after the ouster of Mr. Ben Ali in Tunisia.

One thing that links Egypt and Tunisia, however — and which forms part of the background against which attempts at revolution might have been more likely in those countries — is that as compared to most of the region, they do not have much oil.

There is a large body of literature in political science connecting oil wealth and democratization. Although the conclusions are not universally accepted and there are some exceptions — Norway, for instance, is one of the most petroleum-rich countries in the world, and also one of the most democratic — the consensus view is toward what Thomas L. Friedman refers to as The First Law of Petropolitics: oil and democracy do not mix. 

Below is a table of statistics on the 16 countries that are traditionally thought of as making up the Middle East and the six that make up North Africa (Egypt is in both groups), along with the United States. For each country, I have listed its oil export revenues (as estimated by the C.I.A. World Factbook) divided by the country’s gross domestic product, as well as by its population. (The calculation assumes an average price of $80 per barrel, which is about the average in recent years.) I have also listed a country’s level of democratization as measured by the Democracy Index published by The Economist magazine.

Egypt does have some oil: it produces about 600,000 barrels a day, with a retail value of about $18 billion annually. Still, because of Egypt’s large population, this would translate to only about $220 per capita. And most of Egypt’s oil stays in its domestic market: it exports only 89,000 barrels a day, which would produce $2.6 billion a year at a price of $80 per barrel, or just $32 per person. This is much less than the aggregate figure for the Middle East, which is $1,605 per person.

Egypt also ranks 18th in natural gas production, which may have some similar effects. But — as with its petroleum — most of it is retained for the domestic market; its exports produce only about $20 annually per capita at prevailing prices.

Whichever measure is chosen, Egypt belongs with the Middle Eastern countries that have relatively few fossil fuel resources, rather than those that have them in abundance. Tunisia’s oil exports are slightly higher, but still well below the regional average.

It’s the resource-poor countries, however, that are more likely to be at least partially democratic. The Economist ranks Cyprus and Israel, which have little to no oil, as being democracies (albeit what it calls “flawed democracies”). Likewise, it classifies Lebanon and Turkey, which also have little oil, as “hybrid states” leaning toward being democracies.

By contrast, The Economist rates all of the oil-rich countries in the region as being authoritarian, with the partial exception of Iraq which — after the United States’ intervention there — was assigned a score of 4.00, placing it just at the brink between authoritarian and partially democratic.

Many of the studies that have identified this effect have concluded that it is not necessarily confined to the Middle East — some evidence also been cited in Africa, for instance, as well as the countries of the former Soviet Union. And many have also concluded that the effects are not merely incidental but, also, causal: when new oil discoveries are made, they tend to retard democratization and enhance authoritarianism (a recent example of this is Equatorial Guinea, which discovered significant amounts of oil in the late 1990s).

Michael Ross, a political science professor at U.C.L.A. who is among the foremost proponents of the hypothesis, has concluded that democratic transitions are 50 percent more likely in oil-poor states than in oil-rich ones. That fact alone is certainly not sufficient to explain why Tunisia has undergone regime change, or why Egypt may be on the brink of it — but it does suggest that the underlying probabilities were greater in those countries than for some of their regional neighbors.

What gets quite complicated are the relationships between oil wealth and the health of a country’s economy more generally, which requires one to sort through several theories that are not obviously complementary. On the one hand, wealthier countries tend to be more democratic. On the other, it is not clear that the discovery of natural resources actually produces more wealth (one well-known theory, the so-called resource curse, holds to the contrary).

But, also, Dr. Ross has hypothesized that the mechanism by which authoritarian regimes perpetuate themselves in oil-rich states is through what he calls the “rentier effect“: popular dissent is quelled through low taxes and lavish government spending. Countries like Qatar and the United Arab Emirates — authoritarian and oil-rich regimes where most citizens nevertheless enjoy a high standard of living — are generally thought to be more stable than others that provide fewer services for their citizens.

Complicating matters further is that it is one thing for a regime to be toppled, and another for it to actually be replaced with a functional (or even semifunctional) democracy. It may be that poorer nations are more likely to experience political upheaval, but that wealthier ones — particularly if the wealth comes from sources other than oil riches — are more likely to successfully transition into being democracies.

How oil wealth is distributed — it usually goes to the few rather than the many, but to different degrees in different countries — is yet another factor. But regimes like the one in Qatar, which earns the equivalent of $26,000 per citizen per year from its oil exports, at least have some good choices to make.

That is not true for Egypt, which would not make enough from oil to materially improve its standard of living no matter how the revenues were distributed. Nor is it true for some of the other countries in the region that are experiencing political tension. Yemen, for instance — although its oil exports constitute a relatively large share of its G.D.P. because its economy is so underdeveloped otherwise — earns only about $350 per capita per year from its oil exports. Syria, whose authoritarian regime is said to be nervous about the developments in Egypt, makes about $200 per head, as does Sudan, which is about to split in two. And Jordan has no oil exports at all. If the theory holds, then governments like these — and not oil-rich ones like Libya, Algeria, or the states of the Arabian Peninsula — are more likely to be the next to fall.

h/t reader Adam. #readersubmission

Black? White? Asian? More Young Americans Choose All of the Above

Great article from Sunday’s frontpage. Yes, Sunday. We’ve been busier than you can possibly fathom. Excerpt below (along with embedded chart). Click photo or text linke for full piece. Enjoy…

From left: Shannon Palmer, Japanese/Irish; Vasco Mateus, Portuguese/African-American/Haitian; Laura Wood, black/white.More Photos »

COLLEGE PARK, Md. — In another time or place, the game of “What Are You?” that was played one night last fall at the University of Maryland might have been mean, or menacing: Laura Wood’s peers were picking apart her every feature in an effort to guess her race.

“How many mixtures do you have?” one young man asked above the chatter of about 50 students. With her tan skin and curly brown hair, Ms. Wood’s ancestry could have spanned the globe.

“I’m mixed with two things,” she said politely.

“Are you mulatto?” asked Paul Skym, another student, using a word once tinged with shame that is enjoying a comeback in some young circles. When Ms. Wood confirmed that she is indeed black and white, Mr. Skym, who is Asian and white, boasted, “Now that’s what I’m talking about!” in affirmation of their mutual mixed lineage.

Then the group of friends — formally, the Multiracial and Biracial Student Association — erupted into laughter and cheers, a routine show of their mixed-race pride.

The crop of students moving through college right now includes the largest group of mixed-race people ever to come of age in the United States, and they are only the vanguard: the country is in the midst of a demographic shift driven by immigration and intermarriage.

One in seven new marriages is between spouses of different races or ethnicities, according to data from 2008 and 2009 that was analyzed by the Pew Research Center. Multiracial and multiethnic Americans (usually grouped together as “mixed race”) are one of the country’s fastest-growing demographic groups. And experts expect the racial results of the 2010 census, which will start to be released next month, to show the trend continuing or accelerating.

Many young adults of mixed backgrounds are rejecting the color lines that have defined Americans for generations in favor of a much more fluid sense of identity. Ask Michelle López-Mullins, a 20-year-old junior and the president of the Multiracial and Biracial Student Association, how she marks her race on forms like the census, and she says, “It depends on the day, and it depends on the options.”

They are also using the strength in their growing numbers to affirm roots that were once portrayed as tragic or pitiable.

“I think it’s really important to acknowledge who you are and everything that makes you that,” said Ms. Wood, the 19-year-old vice president of the group. “If someone tries to call me black I say, ‘yes — and white.’ People have the right not to acknowledge everything, but don’t do it because society tells you that you can’t.”

No one knows quite how the growth of the multiracial population will change the country. Optimists say the blending of the races is a step toward transcending race, to a place where America is free of bigotry, prejudice and programs like affirmative action.

Pessimists say that a more powerful multiracial movement will lead to more stratification and come at the expense of the number and influence of other minority groups, particularly African-Americans.

And some sociologists say that grouping all multiracial people together glosses over differences in circumstances between someone who is, say, black and Latino, and someone who is Asian and white. (Among interracial couples, white-Asian pairings tend to be better educated and have higher incomes, according to Reynolds Farley, a professor emeritus at the University of Michigan.)

Along those lines, it is telling that the rates of intermarriage are lowest between blacks and whites, indicative of the enduring economic and social distance between them.

Prof. Rainier Spencer, director of the Afro-American Studies Program at the University of Nevada, Las Vegas, and the author of “Reproducing Race: The Paradox of Generation Mix,” says he believes that there is too much “emotional investment” in the notion of multiracialism as a panacea for the nation’s age-old divisions. “The mixed-race identity is not a transcendence of race, it’s a new tribe,” he said. “A new Balkanization of race.”

But for many of the University of Maryland students, that is not the point. They are asserting their freedom to identify as they choose.

“All society is trying to tear you apart and make you pick a side,” Ms. Wood said.

Who Is Marrying Whom

Tech Talk: Groupon and Options.

As you know, we love infographics.

Here’s another one. H/t Business Insider.

Curious about why Goldman Sachs CEO Lloyd Blankfein is flying to Chicago to woo Groupon and win its IPO? This chart should help.

Needham & Company analysts Mark May and Kevin Allen projected the revenues for the local daily deal market for the next five years. As you can see, they’re very bullish.

Even these bullish projections are probably coming up short. We’ve heard late last year Groupon was on a $2 billion annual revenue run rate, and Needham thinks it’s only 60-65% of the market.

(What’s funny about this chart is that it looks exactly like a joke chart Andrew Mason drew on a napkin when Groupon, then called “The Point”, picked up a round of funding.)

Now for the options. We ran into a friend this weekend who works at a very hot startup. He’s basically the $4bn man. We started talking about how he would play his cards with respect to options. It’s actually a lot more complex than it used to be with private/secondary market liquidity and valuations now in the picture. He sent a link to this article. Pretty cool. It’s a rundown on option acceleration by a partner at Union Square Venturer Partners (NY). Excerpt below, click this link for the full story. In case you were wondering, The Scrambler offers a generous all-in compensation package to early stage employees.

This MBA Mondays M&A case study is about the effect that stock option acceleration provisions have on M&A transactions. I am reblogging a blog post that Feedburner founder/CEO Dick Costolo (now Twitter CEO) wrote in the wake of the acquisition of Feedburner by Google. This post is still live on the web at its original location. While the names are fictional, the situations are not. It’s a really good read and addresses a whole host of issues that you will face as you think about stock option acceleration for your team.

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Question number 1 comes from an invisible Irish gentleman named Bernie in Wichita. Bernie writes, “Can you explain options acceleration? And when would I want to use it? And when wouldn’t I? And what’s single trigger vs. double trigger acceleration and how do you feel about those kinds of things?”

Those are great questions Bernie! Hopefully, I can at least get you to realize there’s a lot to think about here. Let’s dive right in.

Most options plans for your employees have a vesting schedule the defines how the options vest (ie, when the employee can exercise them). Vesting schedules for tech startups all generally look like a four year vesting period, with 25% of the total options grant vesting on a one year cliff (ie, nothing vests for a year and then 25% of the options vest on the 1 year anniversary), and then the rest of the options vest at 1/48th of the total options every month for the next 36 months.

Now let’s say you’ve got this classic vesting schedule and you hire somebody named Bobby Joe after you’ve been in business for one month, and he gets an options grant equal to 1% of the total outstanding shares. He works hard at your company for 11 months, after which your company is acquired for an ungodly sum of money. The acquirer decides that they were buying your company because of it’s cool logo and they don’t need any actual employees so they are all terminated effective immediately.

Bobby Joe’s options are worth how much? If you answered “Bubkas”, “Zero”, “nothing” or laughed at the question, you are correct. Although Bobby Joe has worked at the company for almost the entire life of the company, he gets nothing and the person that started 30 days before him gets 25% of their total options value. Doesn’t seem fair. Or as Bobby Joe would undoubtedly say “I’m upset, and I will exact my revenge on you at some later date in a compelling and thorough fashion”

Enter acceleration. Acceleration in an options plan can cause vesting to accelerate based on some event, such as an acquisition. For example, you might have a clause in your plan that states that 25% of all unvested options accelerate in the event the company is acquired.

…..(use the link above to get to the crux of the story)