Oil and democracy: New insights

Francesco Caselli, Andrea Tesei, 22 December 2011

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Looking at the historical experiences of many countries it seems uncontroversial that an abundance of natural resources can shape political outcomes. Few observers of Venezuela, Nigeria, Saudi Arabia, and many other resource-rich countries would take seriously the proposition that political developments in these countries can be understood without reference – indeed without attributing a central role -- to these countries' natural wealth.

Yet the mechanisms through which natural-resource abundance affects politics frustrate attempts to identify simple generalisations, with resource-rich countries displaying great variations in measures of autocracy and democracy, and political stability. For example, Saudi Arabia and Nigeria both feature a strong tendency towards autocracy but the former is extraordinarily stable while the latter has experienced nine successful coups since independence (and many unsuccessful ones). Venezuela seems to go back and forth between democracy and autocracy, with swings that closely follow the price of oil, while of course Norway appears to be safely and robustly democratic irrespective of the oil price. As more and more countries come to discover and exploit new deposits of mineral resources, such as offshore oil made accessible by new technologies, the question of the consequences for political institutions becomes increasingly important.

A ‘resource curse’

An important literature in political science studies the relationship between resource abundance and democratic/autocratic institutions using predominantly comparative case studies or cross-country correlations (eg Ross 2001a, 2001b, 2009, Ulfelder 2007, Collier and Hoeffler 2009, Alexeev and Conrad 2009 and Tsui 2010). While there is some heterogeneity in the conclusions this literature tends to reach, the evidence in these studies points to a negative relationship between resource abundance and democracy/democratisation. But correlations across countries do not always reflect causation. For example, countries in the Middle East, may be more autocratic because they have oil, but they differ from others in so many other respects that it is difficult to be fully confident that oil is the key variable.

A more recent literature narrowly focused on oil uses changes over time within a country, ie it looks at how a country responds to a change in oil resources (Haber and Menaldo 2010, Wacziarg 2009, Brückner et al forthcoming). We can be more confident about interpreting the results from these papers causally, but a possible concern is that they assume that the effect of oil is the same in all countries. The examples we began with in this column suggest that this may not be a particularly good assumption.

Democracy vs autocracy: New insights

In recent research (Caselli and Tesei 2011) we use a large panel of countries to show that natural-resource windfalls (not limited to oil) have no effect on the political system when they occur in democracies. However, windfalls have significant political consequences in autocracies. In particular, when an autocratic country receives a positive shock to its flow of resource rents it responds by becoming even more autocratic. Importantly, there is heterogeneity in the response of autocracies. In deeply entrenched autocracies the effect of windfalls on politics is virtually nil. It is only in moderately entrenched autocracies that windfalls exacerbate the autocratic nature of the political system. Hence, our evidence generalises casual observation – windfalls have little or no impact in democracies (the Norways) or very stable autocracies (Saudi Arabia), but change the political equilibrium in more unstable autocracies (Nigeria, Venezuela).

To reach these conclusions we measure natural-resource windfalls as changes in the price of a country's principle export commodity. We argue that such changes are exogenous to a country's political system. While total resource exports may depend on political developments, the identity of a country's main export commodity (eg oil vs. gold) is unlikely to depend on politics. Similarly, the vast majority of countries individually account for a relatively small share of world output in their principal export commodity, so it is unlikely that political changes there will have an important effect on prices. Our main measure of political institutions is from the Polity IV database. Crucially for our analysis this is a continuous measure that varies from extreme autocracy to perfect democracy, so it allows us to condition the analysis on infra-marginal differences in the degree of autocracy/democracy, as well as to capture the effects of windfalls on infra-marginal changes in autocracy/democracy. As this variable captures the extent to which the political system is open to competition, we also refer to our measure of autocracy/democracy as a measure of ‘political contestability’.

Why does the impact of resource windfalls depend on the initial level of contestability? We propose a simple explanation based on the incentives of ruling elites to distort the rules of the political game in their favour. In our framework, the benefits of staying or obtaining power are larger in countries with large resource rents, as much of the rents accrue to those in power. In countries with relatively small resource deposits incumbents have therefore little incentive to behave autocratically, so these countries will tend to be democracies. Furthermore, small changes in the flow of resource rents will not alter the incumbent’s calculation, so democracies will be observed not to change political institutions following changes in the price of its main natural resources.

On the other hand for countries with resource revenues over a certain threshold incumbents are motivated to attempt to reduce political contestability to increase their chances of retaining power. They do so by investing in what we call ‘self-preservation activities.’ These range from the mild (eg direct or indirect vote-buying) to the extreme (violent repression of the opposition). Crucially, the larger the pie, the more the incumbent finds it optimal to spend on self-preservation, so the degree of autocracy is increasing in the size of the resource rents. This also implies that in autocracies, further increases in resource rents lead to a tightening of the screws by autocratic regimes, leading to our result that resource windfalls make autocracies even more autocratic. However, we show that if the marginal productivity of self-preservation spending is decreasing, the effects of windfalls on autocracy are smaller for very entrenched autocracies than they are in ‘middling’ autocracies, as we find.

The threshold levels of resource income that cause the shift from one political regime to the other depend on parameters that may vary across countries. In a very simple extension to our basic model, in particular, the thresholds depend on a parameter that could be interpreted as the return offered by the markets on the human capital of defeated politicians. If former politicians can look forward to decent returns on their talent in the market, the range of values of natural wealth for which the ruling elite accepts free and fair challenges is (potentially much) wider than in places where politics is the only road to riches. In this way, the model can potentially also explain cases, such as Norway, where great natural-resource wealth is associated with democracy.

References

Alexeev, M and R Conrad (2009), “The Elusive Curse of Oil", Review of Economics and Statistics 91: 586-598.

Brückner, M, A Ciccone and A Tesei (forthcoming), “Oil Price Shocks, Income, and Democracy" Review of Economics and Statistics.

Caselli, F and A Tesei (2011), “Resource windfalls, political regimes, and political stability”, CEPR Discussion Paper 8662.

Collier, P and A Hoeffler (2009), “Testing the Neocon Agenda: Democracy in Resource-Rich Societies", European Economic Review 53: 293-308.

Haber, S and V Menaldo (2010), “Do Natural Resources Fuel Authoritarianism? A Reappraisal of the Resource Curse", American Political Science Review 105(1).

Ross, ML (2001a), Timber Booms and Institutional Breakdown in Southeast Asia, Cambridge: Cambridge University Press.

Ross, ML (2001b), “Does Oil Hinder Democracy?" World Politics 53: 325-361.

Ross, ML (2009), “Oil and Democracy Revisited" mimeo, UCLA.

Tsui, K (2010), “More Oil, Less Democracy: Evidence from Worldwide Crude Oil Discoveries", Economic Journal.

Ulfelder, J and M Lustik (2007), “Modeling Transitions to and from Democracy" Democratization 14(3): 351-387.

Wacziarg, R (2009), “The First Law of Petropolitics" mimeo, UCLA.

Topics: Energy, Politics and economics
Tags: autocracy, democracy, natural resources, oil

Professor of Economics at the London School of Economics

Andrea Tesei

PhD candidate, Universitat Pompeu Fabra