"Power Struggles and the Natural Resource Curse" Francisco - - PowerPoint PPT Presentation

"Power Struggles and the Natural Resource Curse"

Francisco Caselli (LSE) April 2006

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The Resource curse

Example: Nigeria , ! started generating signi…cant oil revenues in 1965 , ! per capita growth since then has been close to zero More general observations: , ! countries with large natural resource endowments are not generally rich , ! extremely resource–abundant countries have not experienced sustained growth Puzzle: one can imagine a country squandering its resource wealth. But how can it make them “worse o¤”?

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Chart 3: Cumulative Revenues from Oil, 1965-2000 (at 1995 Prices) 50 100 150 200 250 300 350 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 500 1000 1500 2000 2500 3000 3500 cumulative revenues per capita, right scale cumulative revenues in US$ billions, left scale

GDP per capita in constant US$, right scale

Basic idea of this paper

Natural resources are more easily appropriated by governing elites than other sources of wealth , ! countries with more natural resources experience stronger competition for power , ! this reduces the e¤ective rate of return to incumbents from investing in a country’s development Model is consistent with observations that countries with more natural resources (1) adopt worse policies and (2) experience more civil con‡ict

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Model Assumptions

Two period economy: t = 1, 2 All agent’s risk neutral and no discounting Two activities , ! exploitation of natural resources: generates per-period ‡ow α per capita , ! “industry” generates per capita output yt = ρht where ht = human capital per capita Period 2 human capital: h2 = h1 + I where h1 is exogenous and I = government investment (period 1)

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Two sources of government revenue , ! direct recipient of income from resources , ! tax on industrial output, τ < 1 Allocation of political power , ! exogenous in period 1 , ! in period 2 a “leader” emerges who may stage a coup If a coup takes place, it succeeds with probability γ , ! if it succeeds the leader forms the new government , ! if it fails, the leader incurs a punishment cost, D

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Invest in h Don't Invest Coup Coup No coup No coup Succeed Succeed Fail Fail G L L N N

Figure: Game Tree

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Analysis

Solve by backwards induction. Conditional on h2, should the “leader” stage a coup? Expected payo¤ of leader if she stages a coup: γ [α + τρh2] (1 γ)D Expected payo¤ if she doesn’t (1 τ)ρh2 A coup takes place if and only if γα (1 τ γτ)ρh2 > (1 γ)D

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Assuming 1 τ > γτ then a coup takes place if and only if h2 < h = γα (1 γ)D (1 τ γτ)ρ , ! threat of coup gives current government incentive to invest in human capital , ! the required level h is increasing in α , ! governments with more natural resources must invest more to avoid challenges to their power , ! if α2 (1 γ)D/γ, a coup never takes place

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Incumbent government’s problem in period 1

Choose I to maximize expected income α + τρh1 + Z(α + τρh2) I where Z = 1 if h2 h 1 γ if h2 < h subject to h2 = h1 + I I

• ρτh1 + α

, ! assumes no government debt

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Assume τρ > 1, but (1 γ)τρ < 1 , ! then, if the government has enough period 1 income to ensure h2 h, it will invest to the max: I = ρτh1 + α and no coup will occur , ! but if h1 + I < h it will not invest at all and a coup may occur So, no investment if h1 + ρτh1 + α < γα (1 γ)D (1 τ γτ)ρ

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This implies that if α > α = (1 γ)D + (1 + ρτ) (1 τ γτ)ρh1 γ + τρ + γτρ ρ the period 1 government makes no investment and faces a coup in period 2. Otherwise, it uses all its resources to develop the country and no coup occurs ) countries with a lot of natural resources fail to industrialize and experience political instability

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Implications for GDP

GDP in period 2 is given by GDP = α + ρh1 if α > α α + ρ [(1 + τρ)h1 + α] if α < α ) non–monotonic relationship , ! GDP rises with α within the two groups of countries, but falls at the critical value α GDP growth between periods 1 and 2 GDP in period 2 GDP in period 1 = ( 1 if α > α 1 + ρ

• α+τρh1

α+ρh1

• if α < α

, ! growth increases with α for α < α, but falls to zero when α α

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GDP Resource Endow ment α∗

Figure: Implied relationship between Resources and Per capita GDP

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Policy Implications

There are gains from reducing the amount of royalties that rule elites can appropriate for their own bene…t , ! reduces incentives fo potential chanllengers to stage a coup d’etat , ! increases incumbent’s chances of staying in power , ! raises rate of return on development investments Re‡ected in recent policy initiatives , ! UK’s Extractive Industries Development Initiative (EITI) , ! World Bank conditions for …nancing Chad-Cameroon oil pipeline , ! IMF requires borrowers to be more open about use of resource revenues

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