Wednesday
May292013

Natural Resources and Political Institutions: Democracy  

The discussion of the curse of natural resources in the Cameroon raises the issue of whether or not natural resources wealth, specifically oil, might influence political institutions as well as economics. The mechanisms we proposed for the resource curse, not surprisingly, worked through politics. But it did take political institutions as given.

Might oil or more generally natural resource wealth lead to institutional deterioration in the political sphere? Might the oil wealth have helped, or even induced, President Biya in Cameroon to subvert the hoped-for transition to democracy in the 1990s?

These questions were first articulated in two articles by political scientists. Their answer was a resounding yes.

Michael Ross did this at the world level in his 2001 paper “Does Oil Hinder Democracy?”. Nathan Jensen and Leonard Wantchekon did it for Africa in “Resource Wealth and Political Regimes in Africa”. Both papers showed that different measures of natural resource abundance or importance in the economy were negatively correlated with how democratic a country was. Greater resource wealth, less democratic was the resounding message of these papers that became conventional wisdom in political science.

One can think of many mechanisms via which this might work. For instance when resource wealth goes up, as in the theoretical papers we discussed, it becomes more valuable to be in power. Thus autocratic leaders are more prepared to use repression or other means to avoid having to democratize or to avoid losing power if they have to hold elections (which is exactly what Biya did).

Yet there is a gnawing issue with this literature. The empirical evidence used the cross-sectional variation to estimate the effect of resource wealth on democracy. Yet almost by definition poor countries are resource dependent and natural resource wealth is large in the total size of the economy, exports and as a source of finance for the government. For example, poor countries do not have good fiscal and tax systems and thus tend to rely on natural resource rents. But poor countries also tend to be much less democratic. Hence this literature left the concern that the correlation between resource wealth, however measured, and autocracy might not represent a causal relationship at all.

This issue was tackled by Stephen Haber and Victor Menaldo who switched attention to the “within variation,” i.e. what happened within a country to the level of democracy when natural resource abundance or dependence changes? In their paper “Do Natural Resources Fuel Authoritarianism? A Reappraisal of the Resource Curse”, they find there is no negative effect of natural resource wealth (oil in fact) on democracy at all. They even find some evidence for positive effects.

Such a finding is not a complete surprise. In fact there is case study literature for Venezuela arguing that oil wealth was crucial for sustaining democracy because it meant that democratic governments could fund public expenditure without taxing rich people, reducing the threat of a coup d’etat. This argument was developed in Thad Dunning’s Crude Democracy, which argued that resource abundance had democracy promoting and democracy retarding effects, the strength of which are conditional on inequality. In his model and empirical results, oil wealth only retards democracy when inequality is low.

Dunning’s work suggests that Haber and Menaldo’s findings may not be the last word. Just as resource wealth may have heterogeneous effects on economic growth depending on institutions, it probably also has heterogeneous effects on democracy.

But what institutions and historical factors are important in these heterogeneous effects? This is a research question that nobody has attacked yet to our knowledge.

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