Natural Resources and Political Institutions: The Rentier State
Tuesday, June 25, 2013
Daron Acemoglu and James Robinson

Let us return to the topic of natural resources and institutions.

In a previous post we saw how there has been a debate about whether or not natural resource wealth undermines democracy. The other argument which has connected resource wealth, specifically oil, and political institutions, is that of the “rentier state”.

First made by the Iranian economist Hossein Mahdavy in his 1970 paper, “The Pattern and Problems of Economic Development in Rentier States: The Case of Iran”, the basic thrust of this argument is that if a country is heavily dependent on natural resources, particularly for the financing of the government, then this leads it to have a weak state.

In other words, rentier state = weak state.

It also tends to breed unaccountability since if a state can fund itself via natural resource rents then it does not need to bother developing a fiscal system to tax people. When people are not taxed by the government, the argument goes, they have less incentive to make the government accountable.

These ideas have stimulated a vast literature in social science. They find many resonances in economic history as well. In Why Nations Fail, for example, we discussed how the influx of mineral wealth from its American colonies in the 16th century helped to reduce the checks and balances on the Spanish state but also make it less effective. Indeed, Spain went from being perhaps the dominant power in Europe to an “also-ran” in European geo-political competition.

To our knowledge there is as yet no convincing empirical test of the rentier state thesis possibly because it is very hard to measure state “capacity” or “strength”. 

It seems likely that many of the issues that have arisen in the empirical literatures on natural resources and economic growth and democracy will be relevant.

Maybe natural resource wealth can weaken state capacity in some circumstances, but in others it seems quite likely it could strengthen it. For example, the monarchies of the Persian Gulf had almost no modern state or bureaucratic infrastructure when they discovered and began to exploit oil. Today these states are much larger and more capable even if completely financed by oil. 

Article originally appeared on Why Nations Fail by Daron Acemoglu and James Robinson (http://whynationsfail.com/).
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