resource abundance, underdevelopment and the genesis of poor institutions syed mansoob murshed...

RESOURCE ABUNDANCE, UNDERDEVELOPMENT and the

GENESIS OF POOR INSTITUTIONS

SYED MANSOOB [email protected]

[email protected]

Murshed------1st September 2012

In the post-1973 WORLD developing countries with a lot of natural resources experienced growth failure, at least up to 2000, with exceptions such as Botswana and Indonesia


1960 or before During 1960s During 1970s During 1980s

Central African Republic Cote D'Ivoire Burundi Kenya

Chad Mauritania Cameroon Republic of Congo

Democratic Republic of Congo3

Togo Gabon

Ghana Malawi Ecuador

Liberia Bolivia Mali Paraguay

Madagascar Jamaica Zimbabwe Trinidad and Tobago

Niger

Nigeria1

El Salvador Jordan

Rwanda Guatemala

Senegal Guyana

Sierra Leone Honduras

Somalia Peru

Zambia

Algeria1

Haiti Iran2

Nicaragua Saudi Arabia

Venezuela

Philippines1

3Economy considered large, 1960 population clearly above 15 million.

Table 1. Countries with growth failure

Source: Murshed and Perälä (2001). Based on a sample of 98 countries for whom data is available.

Source: World Development Indicators, World Bank, various issues; UNDP, Human Development Report, 1996.19961

Economy considered large, 1960 population clearly above 25 million.2Economy considered large, 1960 population clearly above 20 million.

Catastrophic Severe


Reasons:

Dutch Disease Inter-sectoral linkages: Big Push and

Dynamic Sectors Endogenous Comparative Advantage Natural Resources and

Industrialisation (Christopher Columbus Models are an exception explaining North America and Australasia)


Besides these there are:

Political Economy Considerations: Rent Seeking Contests Voracity Effects Extractive States These are not independent of the

macroeconomic causation above


I outline an endogenous Tullock-type model of rent seeking which is a race to capture the largesse in the economy

I then relate to a diminution in the productivity of capital and growth failure.


Rent seeking contest


iii cPE Where E is the expected utility of agent i, P is the prize and π is the probability of winning. BUT, it entails a cost, c of trying to capture the prize.


The probability of success is a function of agent i’s rent-seeking outlays compared to everyone else (2 agents in this case), s is a scaling parameter.

ijicc

cscc

ss

is

jii

;2,1;),,(21

But there might be increasing returns to scale (s > 1) to rent seeking.


This will cause agents to engage in excessive rent seeking dissipating resources. Ultimately it will lead to a reduction in the productivity of capital.

Macroeconomic problems

z )f(k(t))z - (1 = Y(t) 10


Where y is output z represents a diminution of

capitals (k) productivity

Figure 1: Growth Collapse, fall in k is a fall in y

pk

SS2

k

E2

E1 k = 0

pk0 = 0

F

pk1 = 0.

.

.

F’


It may not be natural resource endowment or dependence (measured by export concentration) per se that retards growth, but rather its coexistence with poor institutions.


TWO TYPES OF NATURAL RESOURCE ENDOWMENTPOINT SOURCED: MINERALSAND DIFFUSE: AGRICULTURAL

Poor institutions may be more likely when natural resource endowments are more concentrated (point source).

Abundance versus Dependence: Many abundant countries are not dependent on them. Dependence can be measured by export share.


WHAT ARE THE CHANNELS RELATING RESOURCE BOOMS toPOOR INSTITUTIONS


Institutional Quality

The resource curse is a curse only if the society in question has institutions that favour rent seeking over relatively more productive activities.

However, the presence of resources or aid may encourage rulers to dismantle checks on their power (to facilitate corruption); so rents may endogenously lead to institutional decline (separation of powers, independent judiciary etc.)Murshed------1st September

2012

Institutional Quality: Mechanisms

Voracity effects in the presence of natural resource rents.

Extractive economies low middle-class share of income Civil war: contests over capturable or

lootable resources.


Institutional Data Voice and accountability The rule of law Control over corruption Government effectiveness Political Stability Encapsulated in DEMOCRACY. Polity 4,

ranging from 0-10. Autocracy from -10 to 0. Average of the two

Fraser governance data 17


What are the probabilities of transition from one type of exporter to another?

A diffuse exporter has a 90.6% chance of continuing and a 7% chance of turning into a point-source exporter.

Point source exporters have a 3.5% chance of switching to diffuse and 95% chance of remaining the same.

In Africa and Latin America point source exports occur more than 60% of the time.

Asia accounts for 72% of manufacturing exports.


Democracy

Only 8 countries have the maximum score of 10.

About 50% of observations have zero scores in the 1970-2000 period.

End of cold war effect, raises democracy.

Zero democracy occurs for 68% of African observations, 37% for Asia and 26% for Latin America. Similar pattern in reversal for high scores of 10.

19


ANOCRACY Means the system has features of

both democracy and autocracy. Regular electoral competition But insufficient separation of

powers and checks on the executive.


Probability of remaining a democracy

New democracies with a score below the mean (5) risk falling back to zero.

Higher scorers of 7 or 8 consolidate or move up.

African mean democracy score is 1.78

Asian mean democracy score is 4.24

Latin American mean democracy score is 5.26

21


Institutional Data

Hard to get time series on governance data.

But there is a Fraser institute data set in this regard. Concentrates on “economic” institutions.

However, there is data on participatory democracy: POLITY 2 or 4 as a time series.


Econometric techniques In total, five different econometric

techniques were used: cross-sectional time-series random-effects generalized least squares (Table 5), cross-sectional time-series feasible generalized least squares (Table 6), cross-sectional time-series feasible generalized least squares with a heteroskedastic error structure (Table 7), maximum likelihood random-effects (Table 8) and instrumental variables GMM estimation (Table 9)


Findings (1)

First, in 24 out of 28 cases of different estimation procedures, two types of data definitions of point and diffuse export dependence, and two definitions of institutions, the impact of the institutional variable upon growth is positive and significant.


Findings (2) Secondly, governance seems to be more

important for growth, as it is significant in all cases when compared to democracy.

Thirdly, both types of resource dependence, point and diffuse exert a negative influence on growth via institutions when compared to manufactured goods exporting economies. Resource dependence of any kind is bad for institutional development


Findings (3) Fourthly, and most importantly, it is not always

the case that a point sourced is worse than diffuse resource dependence as far as institutional development is concerned. It depends upon which institution we are looking at.

Here we must again reiterate the differences between governance, as measured by the Fraser index, and democracy captured by Polity 2. The first is a picture of how well a country is run, and the latter an indication of the right to choose leaders and executive constraints.

Sometimes, a fairly unconstrained autocracy can be well administered, Singapore for example. Also, not all dictators were the same (compare Mobutu to Suharto who both had similar tenures in office in Zaire and Indonesia).


Findings (4) Note that both types of resource dependence

retard both categories of institutional development.

With regard to governance point resources are worse than diffuse.

Democratic development is also retarded by diffuse endowments.

Point-sourced dependence bad, however, for both governance and democracy. But they are worse than diffuse resources when it comes to good governance, which is more important for future growth prospects.


Lacunae:How are bad institutions really formed? We have to go back to the origins of the state.


War makes the state, and the state makes war State building and war are

complementary activities. State building allows the “state” to acquire a Weberian monopoly of violence.

The state also makes war (internally and externally) to “protect” the (mercantile economic) interest of its supporters/financiers.


State building allows it to acquire a Weberian monopoly of violence.

The state also makes war (internally and externally) to “protect” the (mercantile economic) interest of its supporters/financiers.

Thus, the “state” has to acquire resources in order to wage war.


State Building Coercive activities of the state:

Gradually as wars and state-building become more complex and expensive the state needs an administrative machinery to extract resources.

In time it will need to bargain with more and more actors who need to be taxed; the state will need to nurture the tax base and provide public goods that foster tax collection, security and the economy.


Acquisition of Resources Tribute Rent

Payment can be in kind Taxes on fixed factors: land

Requires monetization Taxes on consumption and movement of goods

(flows) Requires greater monetization and economic

sophistication Income tax (invented by British Prime Minister Pitt

during Napoleonic wars)


Acquisition of Resources (from whom) Force

Still requires bargaining with intermediaries

Landlords in an agricultural economy Merchants in a more commercial economy Rentiers in a mineral economy

Volition Common interest public goods No taxation without representation

(democracy)Murshed------1st September

2012

Acquisition of Resources

As wars become more complicated and expensive rulers have to bargain and co-opt more actors because they need more revenues Fiscal innovation Institutional innovation


Evolution of the modern state

Patrimonialism−Brokerage −Modern national state (nationalisation, specialisation and civilianisation)


Modern developed state High standard of living

Result of economic growth: modern growth needs technical progress

Public good intensive Big government

Government consumption to GDP is about 40% in rich countries; size of government and per-capita income positively correlated

Large state revenues/borrowingMurshed------1st September

2012

Better functioning institutions evolve when there are common interest public goods rather than factional rents in a state in a patrimonialist or brokerage related state of development


To begin with the first (common interest scenario), the utility (UI) of the group in power is:

UI = GS + [1-tI](GS)YI(GS)+ φR

For the opposition(O):UO = GS + [1-tO](GS)YO(GS)+ [1 – φ]R

GS refers to the provision of common national interest public goods across both factions of society. It enhances the utility of both social groups equally, and is non-excludable and non-rivalled, also enhancing the productivity of national output.


The parameter t, refers to the tax rate imposed on income. The ability to raise revenues rises with the provision of the common interest public good, which in turn enhances the state’s fiscal capacity. The last term R refers to a rent, which is shared according to some factional rule. A fraction φ accrues to the incumbent group and a proportion 1- φ is the share of the opposition. Alternatively, φ can be viewed as the probability of remaining in power in the next period for the incumbent, and 1 – φ the probability that the opposition gets into power in the next period.


Factional State

UI = αGI + [1-tI](GI)YI(GI)+ R

UO = [1 –α]GO + [1-tO](GO)YO(GO)

Where GS = αGI +[1 –α]GO


In this case, the common interest public good becomes akin to a group specific club good. These are non-rivalled, but somehow it is excludable for the outside group. Here the state collects the revenues for the public good and apportions a fraction α to its own group and a proportion 1 – α to the opposition. One may assume that the more factional the state, α > ½, and in the limit as α→1, we have a completely repressive state that taxes the opposition but gives it no benefit, instead appropriating all the revenues for its own group. Only the politically incumbent group enjoys the rent, R, and no thought is given to the future consequences of excluding the opposition.


Finally, we have the possibility of outright repression and civil war. In this case, α, φ = 1 with no national provision of public goods to the opposition.

UI = αGI + [1-tI(GI, FI)]YI(GI, FI)+ ψ(FI)R

UO = [1-tO]YO(FO) + [1- ψ](FO)R

Here both sides violently compete over the non-produced rent R, utilizing a fighting effort F; ψ and 1- ψ are the probabilities of success in this civil war for the government and rebels (opposition) corresponding to a Tullock contest success function


resource abundance, underdevelopment and the genesis of poor institutions syed mansoob murshed...

Documents

productivity murshed

indonesia murshed

rent seeking contestmurshed

excessive rent

growth failuresource

productivity of capital

growth collapse

world bank