Political transition in resource economies

• Date: 01 September 2018
• Published date: 01 September 2018
• Author: Samer Atallah
• DOI: http://doi.org/10.1111/ijet.12154

doi: 10.1111/ijet.12154

Political transition in resource economies

Samer Atallah∗

This paper explains the lack of democratization in resource- exporting countries using a two-

period resource extraction model. There are two classes of agents: the elite who own capital and

natural resources, and citizens who own labor. Governmentpolicies are designed to ensure that

the elite remain in power and that citizensdo not have the incentive to revolt. On the other hand,

policies in the democracy case are not constrained by the threat of revolution. Compared to

the democratic case, the resource is over-extractedand the investment is lower. Non-democratic

institutions are the rational choice of the elite.

Key wor ds resource curse, political transition, institution

JEL classification D72, Q32, Q34

Accepted 9 July2016

1 Introduction

Among the top 25 fuel-exporting countries, only Norway is classified as a “full democracy” accord-

ing to the Economist Index of Democracy. Similarly, a handful of countries are considered “full

democracies” within the top countries exporting ores and minerals. This observation is backed by

several empirical studies that found a negative correlation between natural resources, specifically oil,

and democracy, suggesting that resources have a negative impact on democracy (Ross 2001; Jensen

and Wantchekon 2004; Smith 2004; Frankel 2010). Alternatively, it could be that oil is present in

countries where democracy is absent. Most of these countries are located in the Middle East where

authoritarian regimes are the common denominator. The same applies tomajor oil-expor ting coun-

tries in Africa such as Nigeria, Gabon and Sudan. Either way, the question still remains why it is

that resource-dependent countries do not make the transition to democracy,whereas resource-poor

countries make the political transformation. To my knowledge, there are no economic theoretical

models that attempt to answer this question. This is mainly due to the fact that, until recently,

economists have not dealt with democratization with an economic perspective.

The literature on democratization suggests that political transition could takeplace either through

the rise of an economic class that demands more political power or through a political mass that

poses a credible threat of revolution. In the former case, the resource dependence crowds out other

important economic activity in other sectors that are deemed necessary for growth and development

such as investment in humanand physical capital (Gylfason et al. 1999; Sachs and Warner 2001). This

crowding-out effect blocks the channel of modernization, as suggested by Lipset (1959), as it hinders

the growth of a class of agents that is powerful economically and politically. As for the revolution

channel, there is a new stream of economic literature that attempts to explain political transition

∗Economics Department, American University in Cairo,New Cairo. Egypt. Email: satallah@aucegypt.edu

International Journal of Economic Theory 14 (2018) 233–255 © IAET 233

International Journal of Economic Theory

Political transition in resource economies Samer Atallah

but does not deal with resource-dependent economies. It is based on conflict between two classes of

agents: a rich minority that actually holds political power and a poor majority that demands political

power.In a non-democracy setting , the eliteuse their political power to set redistributive policies for

their own benefit. Obviously, poor agents would favor a more redistributivescheme which they can

only obtain in a democracy, where policies are, in principal, determined through voting and reflect

median voter preferences. It is important to emphasize that if decisions are solely economic and

rational and there are no ideological preferences for one political structure over another,the elite will

have the incentive to keep the political structure as it is. They might eventually consider “extending

the franchise” if they are faced with a credible threat of revolution. Such a move from citizens has

potentially unfavorableconsequences for the elite as they would lose more than they would have given

away in the case of a democracy. The process of political transition, or democratization, is initiated

when the cost of extending the franchise for the elite and the cost of revolution for citizens are both

low. Incomeinequalit y playsan impor tant rolein this process. The higher inequality is, the more the

redistribution of income will hurt the elite and benefit the poor in a non-democracy (Acemoglu and

Robinson 2001, 2006). One can argue that democratization in Europe during the late eighteenth and

early nineteenth centuries followed this pattern. This literature opens the field for further analysis on

the special case of countries where resource revenues are substantial and are concentrated within a

small group of agents or collected by the government.1Theother interesting characteristic, particular

to resource- dependent economies, is the non-renewable supply of the resource.

This paper is an extension of the literature on democratization. It also uses the insights on the

importance of rent-seeking behavior in resource-dependent economies. When rents generated by

resource exports are collected by a group in power, they increase the value of staying in power and

increase the cost of giving it away (Caselli and Cunningham 2009; Robinson et al. 2006). When

faced by a challenger, the rational response by incumbent governments is to adopt policies such

as patronage and unproductive investment that would increase the probability of retaining power.

These create inefficiencies in the resource and non-resource sectors. There are a couple of missing

elements in the existing political economy models of resource management. The first is that they do

not address the possibility of a threat of revolution by the rest of the population in the economy. The

only threat they consider is the threat of a challenging politician with a competing set of policies.

The challenging politician does not necessarily represent median voter preferences. If the transition

does in fact take place, it is from one dictator to another. The other missing element is that the

policies offered by the challengers cannot be affected by the incumbent government. I address these

missing elements in this paper. I model the threatof revolution conducted by citizens where the main

benefit is to capture a representative part of the resourcerents. This threat is a way to model different

kinds of collective action. It could be a full-fledged revolutionor it could be social unrest that would

negatively affect the elite. Taking the threat into consideration, the elite adopt policies that affect the

whole economy and ensure that the revolution does not take place.

I also make the argument that the type of political institution determines whether a resource

endowment is a blessing or a curse. Decentralized models that explore the institutional nature of

the resource curse seem to dismiss this type of institution.2Institutional quality is modeled as

an exogenous parameter (Mehlum et al. 2006), as the initial number of productive entrepreneurs

1Oil extraction within the members of OPEC is either controlled bygovernment directly or indirectly through government-

controlled firms.

2The empirical literature on the resource curse has found a robust negativecorrelation between resource dependence and

economic growth; see Sachs and Warner(1995, 1999, 2001) and Brunnschweiler and Bulte (2008). For a comprehensive

overview, see Hodler (2006) and Sachs and Warner(2001).

234 International Journal of Economic Theory 14 (2018) 233–255 © IAET