Resource Abundance, Political Corruption, and Instability of Democracy

Abstract

We analyze data on sustainability of democratic regimes in resource rich countries and suggest a model to explain why resource abundance may lead to instability of democracy in some countries, but does not create any difficulties for a democratic system in other ones.Our central idea is as follows. If a country is abundant by point resources, this creates a prerequisite for resource owners to have dominant economic power. If institutions are weak under democracy, the economic power may be converted into political one. Resource owners ("oligarchs") can thrust their preferred decisions on a parliament, bribing politicians. This creates a base for a potential Autocrat's strategy to get power.Rate of resource rent tax is considered as the only policy instrument in our simple model. The tax affects the income of a representative voter. Choosing a tax rate, Autocrat competes with conventional Politician (a representative political party) for the office.Our model demonstrates the existence of a threshold for propensity to corruption such that the probability of the democracy preservation is decreasing in the amount of resources if the propensity is higher than the threshold and is independent of resources or even grows with the amount of resources if the propensity is lower. It is shown also that Autocrat may use two types of policies depending on the qualities of governance (abilities to allocate tax revenues without big losses) that the public assigns to her and to Politician. More efficient Autocrat is inclined to follow populist high tax policy whereas lower Autocrat's efficiency results in pro-Oligarch low tax policy when the country is resource abundant.

Democratization, Quality of Institutions and Economic Growth

“…Indeed, in another paper (Polterovich, Popov, Tonis, 2006) we show that the stability of the newly born democracies depends on the initial level of democracy in It is noteworthy that the equation does not work, if we substitute AUTlast_MIN with ∆ (∆ becomes insignificant), but works perfectly well, if we instrument AUTlast_MIN with net fuel import (which is not correlated with residuals, but is good predictor of AUTlast_MIN).…”

The problems of identification of resource-type regions

“…V. Polterovich, V. Popov, A. Tonis and other researchers attempted in their works to develop institutional mechanisms creating the conditions to overcome the resource curse and the conversion of revenues from exports of natural resources into a source of growth and development of the Russian economy. The authors expressed disagreement with the fact that there is an inevitable direct relationship between resource wealth and underdevelopment of countries and noted that the vector of the resource wealth influence on the economy is determined by the quality of institutions [7]. The authors emphasized that the "resource curse" is the manifestation of the negative influence of the economic structure on the economic growth (rather than the development) [8].…”

“…[1]. In Russian researches, resource economies are analyzed both within national economies [7], and from the standpoint of a particular region [8]. Most often, resource regions are understood as the regions within the borders of a subject of the Russian Federation, which have significant deposits of natural resources and actively explore them [10].…”

Why the West Became Rich Before China and Why China Has Been Catching Up with the West Since 1949: Another Explanation of the ‘Great Divergence’ and ‘Great Convergence’ Stories

“…Second, the recent Chinese success (1979 onwards) is based on the achievements of the Mao period : strong state institutions and efficient government, improved infrastructure, and an increased pool of human capital (Popov, 2007a). Third, unlike in the Former Soviet Union, these achievements were not squandered in China due to gradual rather than shock-therapy-type economic liberalization and democratization (Popov, 2007b;Polterovich and Popov, 2007). Fourth and finally, and probably most importantly, until today, China has never really departed from the collectivist institutions that allowed low income and wealth inequality to be maintained; the short-lived Westernization attempt (1840s-1949) was aborted.…”

“…Part of the answer is the impact of democratization on the quality of institutions: as argued in previous papers (Polterovich and Popov, 2007;Tonis, 2007, 2008;Zakaria, 1997), democratization carried out in a poor rule of law environment (weak state institutions) is associated with further weakening of institu- 16 On June 15, 1976, when Mao's illness became more severe, he called Hua Guofeng and some others in and said to them: "I am over eighty now, and when people get old, they like to think about post-mortal things … In my whole life, I have accomplished two things. One is the fight against Jiang Jieshi [Chiang Kai-shek] for several decades and kicking him out onto a few islands and fighting an eight-year resistance war against the Japanese invasion that forced the Japanese to return to their home.…”