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Global Poverty Research Group

Democracy and resource rents

Paul Collier and Anke Hoeffler

Global Poverty Research Group

26 April 2005

SARPN acknowledges the ESRC Global Poverty Research Group as a source of this document:
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The phenomenon of the resource-rich developing country is once again of global importance. Reversing a trend, the number of such countries has sharply increased due to a wave of resource discoveries, the break-up of the USSR, and the rise in commodity prices. It is now conventional that resource rents have usually reduced growth. The explanation has shifted from the purely economic - Dutch disease - to political economy: rents both undermine governance, and are dysfunctional in the context of poor governance. This shift in explanation is important because the new resource boom is occurring against a backdrop of democratization. During the resource boom of the 1970s, the average resource-rich country scored only 0.96 on the Polity IV scale of political rights (the scale ranges 0-10). By the mid-1990s the score had risen to 3.47.1 American policy following the intervention in Iraq is explicitly to democratize the Middle East, the world's most important resource-rich region. The purpose of this paper is to investigate, theoretically and empirically, how democracy and natural resource rents are likely to interact.

Our analysis contributes to the active literature on the relationship between geography, institutions, and growth. However, to date that literature has disputed causal structure only in its broadest terms. One thesis is that geography causes institutions which are highly persistent and in turn cause growth (Acemoglu et al. 2000). Another is that geography directly causes growth (Sachs and Warner, 2000) or does so by affecting the distribution of income (Easterly, 2004). A third is that institutions are fluid consequences of political choices that determine growth (Glaeser et al. 2004). Our thesis is that geography and institutions must be analyzed together because their effects on growth depend upon their interaction: conditional upon geography, some institutions matter a lot for growth in the early stages of development. The specific aspect of geography that matters is not disease vectors but resource rents: in the context of resource rents democracy reduces growth unless electoral competition is bolstered by atypically strong checks and balances such as press freedom. Resource rents not only interact with democratic institutions to determine growth, they also adversely influence those institutions. However, this influence is gradual: democratic institutions are fairly fluid and so can be changed by political choices: for example, press freedom fluctuates. Further, since income also influences these institutions, a phase of good institutional choices can induce a virtuous circle. Geography is not destiny, but it determines which institutional choices matter when.

The interaction of resource wealth and institutions has begun to attract rigorous analysis. Robinson et al. (2002) develop a theory of patronage politics in the context of resource wealth and suggest that this dysfunctional behavior may be restrained by good institutions. Mehlum et al. (2005) find some empirical support for the idea that institutions are particularly important in the context of natural resources, but do not investigate what institutions are important. Finally, Smith (2004) makes the point that because institutions usually pre-exist oil discoveries, the effects of oil rents are likely to be dependent upon this institutional variation. The present paper extends this literature both through a simple model of how resource rents undermine democracy and through econometrics.

In Section 2 we develop a model of democracy in which resource rents undermine its normally beneficial effects on the utilization of public resources. Citizens can potentially discipline governments through either voice or exit. Since democracy enhances the option of voice, our model focuses on how resource rents might weaken its effects. We distinguish between two mechanisms by which voice normally disciplines governments into providing public goods: electoral competition and checks and balances such as press freedom. A key result of the model is that natural resource rents undermine both of these mechanisms and thereby facilitate patronage politics, reducing public goods provision in the process. Our approach can be contrasted with that of Tornell and Lane (1999) who also model a political process in which resource rents can be adverse - the 'voracity effect'. Tornell and Lane rely upon exit rather than voice: taxation is constrained by a participation constraint which a resource discovery relaxes.

We then turn to empirical analysis. In Section 3 we develop a general-purpose empirical measure of natural resource rents, country-by-country. In Section 4 we use this measure to investigate whether the effect of democracy upon growth is altered by the presence of natural resource rents. We find a large adverse interaction of natural resource rents and electoral competition and a large positive interaction of natural resource rents and checks and balances. We then investigate the routes by which electoral competition and checks and balances might have these effects. Controlling for a range of intermediating variables, we come down to a few channels by which electoral competition in the context of natural resource rents is damaging, and by which checks and balances offset these effects. In Section 5 we investigate whether over time resource rents erode democracy. We find that both electoral competition and checks and balances tend to be eroded. Section 6 concludes.

  1. The scale ranges from 0-10. Details of these figures are given in Section 2.

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