"Power Struggles and the Natural Resource Curse"

Transcription

1 "Power Struggles and the Natural Resource Curse" Francisco Caselli (LSE) April 2006 Francisco Caselli (LSE) () Power Struggles April / 14

2 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? Francisco Caselli (LSE) () Power Struggles April / 14

3 350 Chart 3: Cumulative Revenues from Oil, (at 1995 Prices) cumulative revenues per capita, right scale cumulative revenues in US$ billions, left scale GDP per capita in constant US$, right scale

4 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 Francisco Caselli (LSE) () Power Struggles April / 14

5 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 where Period 2 human capital: y t = ρh t h t = human capital per capita h 2 = h 1 + I where h 1 is exogenous and I = government investment (period 1) Francisco Caselli (LSE) () Power Struggles April / 14

6 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 Francisco Caselli (LSE) () Power Struggles April / 14

7 Coup N Succeed Fail Invest in h L No coup G Coup N Succeed Fail Don't Invest L No coup Figure: Game Tree Francisco Caselli (LSE) () Power Struggles April / 14

8 Analysis Solve by backwards induction. Conditional on h 2, should the leader stage a coup? Expected payo of leader if she stages a coup: γ [α + τρh 2 ] (1 γ)d Expected payo if she doesn t A coup takes place if and only if (1 τ)ρh 2 γα (1 τ γτ)ρh 2 > (1 γ)d Francisco Caselli (LSE) () Power Struggles April / 14

9 Assuming 1 τ > γτ then a coup takes place if and only if h 2 < 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 α 2 (1 γ)d/γ, a coup never takes place Francisco Caselli (LSE) () Power Struggles April / 14

10 Incumbent government s problem in period 1 Choose I to maximize expected income α + τρh 1 + Z (α + τρh 2 ) I where subject to 1 if h2 h Z = 1 γ if h 2 < h,! assumes no government debt h 2 = h 1 + I I ρτh 1 + α Francisco Caselli (LSE) () Power Struggles April / 14

11 Assume τρ > 1, but (1 γ)τρ < 1,! then, if the government has enough period 1 income to ensure h 2 h, it will invest to the max: and no coup will occur I = ρτh 1 + α,! but if h 1 + I < h it will not invest at all and a coup may occur So, no investment if h 1 + ρτh 1 + α < γα (1 γ)d (1 τ γτ)ρ Francisco Caselli (LSE) () Power Struggles April / 14

12 This implies that if α > α = (1 γ)d + (1 + ρτ) (1 τ γτ)ρh 1 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 Francisco Caselli (LSE) () Power Struggles April / 14

13 Implications for GDP GDP in period 2 is given by α + ρh1 GDP = α + ρ [(1 + τρ)h 1 + α] if α > 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 1 if α > α GDP in period 1 = 1 + α+τρh1 ρ α+ρh 1 if α < α,! growth increases with α for α < α, but falls to zero when α α Francisco Caselli (LSE) () Power Struggles April / 14

14 GDP α Resource Endow ment Figure: Implied relationship between Resources and Per capita GDP Francisco Caselli (LSE) () Power Struggles April / 14

15 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 Francisco Caselli (LSE) () Power Struggles April / 14