We saw in our last post that cross-national evidence suggests countries with poor institutions, such as lack of checks and balances or high levels of corruption, experience economic contractions when they discover natural resources? The question is why.
There is no consensus amongst academics on this. A very nice overview of many arguments is provided in a recent 2011 survey by Rick van der Ploeg, an expert on resource economics, “Natural resources: curse or blessing?”.
One set of hypotheses is developed in our work “Economic Backwardness in Political Perspective” and in Daron’s survey article “Modeling Inefficient Institutions”. The idea is simple: if a dictator or a group of elites is willing to do inefficient things in order to cling to power — in the way that the Russian and Austria-Hungarian elites in early 19th century were willing to block railways and industrialization as we discussed in Why Nations Fail — then greater natural resource rents will make matters worse. In particular, natural resources will raise the “political stakes” and increase the desire of such elites to cling to power and expand the range of inefficient policies, institutions and repressive strategies they would be willing to utilize in order to achieve this objective.
Another related idea that greater political stakes will not only make the elites more likely to pursue inefficient policies or repression to cling to power, but also encourage would-be elites to contest power in order to take control of natural resources rents — a possibility only made more plausible by the all too frequent civil wars in resource-rich countries. (Theoretically, this result follows from standard contest models applied to politics, for example, as in the work of Stergios Skaperdas, and also has a bit of the flavor of the “war of attrition” games, though these may not be as natural in this context).
A related theory, perhaps better suited to some of the dynamics of Cameroon, is the one developed by James in collaboration with Ragnar Torvik and Thierry Verdier (“The Political Economy of the Resource Curse”). In this model an incumbent politician is trying to stay in power when faced with an election, or more generally a contest, by engaging in patronage. In the model patronage takes the form of granting employment in the public sector to some selected groups. This is socially inefficient because people are more productive in the private sector but the role of public sector employment is to tie people’s future incomes to the incumbent staying in power, thus giving them an incentive to support him in the election/contest. If there is a boom in natural resources, it becomes much more desirable for the incumbent to stay in power and so he engages much more aggressively in patronage, expanding the size of the public sector. This reduces national income. Of course the increase in natural resource wealth mechanically increases national income.
The paper shows however that the indirect negative effect can actually be so large as to dominate the direct positive effect so that a resource windfall can lead to a fall in national income. This happens when patronage is a very effective way of staying in power that the paper interprets in terms of institutions. When there are few checks and balances for example or when the state is weak so it is easy to over-ride meritocratic criteria for employment in the public sector as was the case in Cameroon at the end of the 1970s, then a boom in natural resource wealth can reduce income per-capita.