Natural resource rent-cyclingoutcomes in Botswana, Indonesia andVenezuela

Richard M. Auty

Context

The application of multi-country regressions totest the natural resource curse thesis has reacheda stalemate. The resource curse thesis received aboost when Sachs and Warner (1995, 1999)concluded that the disappointing performanceof resource-rich governments during 1970–1989was associated with trade policy closuredesigned to counter the employment-diminish-ing effects of Dutch disease. Later econometricanalysis suggested, however,that the quality of the institu-tions inherited from thecolonial experience was amore critical determinant ofdevelopment outcomes thannatural resources per se(Acemoglu et al. 2001). Thisfinding was in turn chal-lenged by Glaeser et al.(2004), who queried the uti-lity of the institutional indices selected andfound that human capital accumulation andpolicy choice determined institutional quality.Subsequently, Collier and Hoeffler (2006)reported that, in the presence of high rent,autocracies outperform democracies in terms ofeconomic growth whereas in the presence of lowrent the reverse is true. Most recently, Ledermanand Maloney (2007) use estimates of mineralrent to suggest that natural resources have apositive effect on economic growth and that therole of institutions is equivocal at best.

Comparative country case study analysis canrevitalise research into the resource curse byidentifying the factors that govern rent deployment

and by tracing their interaction, thereby settingthe econometricians’ hyperbolic ‘‘silver bullet’’explanations in their broader context. As anexample, Collier and Hoeffler (2006) suggestthat high mineral rent makes it politically moreprofitable for democratic governments to chan-nel public revenue through patronage networksto secure swing voters, rather than into provid-ing public goods, which confer no electoral edgesince they benefit supporters and opponentsalike. The successful rent deployment by demo-

cratic Botswana is there-fore an anomaly, whichthey attribute to stronginstitutional checks andbalances. This chapterqualifies their hypothesisafter comparing rent cyclingin Botswana since the late-1960s with that in demo-cratic Venezuela, whichexperienced a collapse in

growth andwith Suharto’s autocratic Indonesia,which sharply cut poverty during 1967–1997.

The chapter begins by briefly introducingrent-cycling theory. It then sets out, first, theinitial conditions of the three case studycountries in the early 1970s on the eve of sizeableincreases in their mineral rent; and, second, thenature of their subsequent rent streams. In thesubsequent sections, rent-cycling theory is ap-plied to explain, respectively, the Venezuelanfailure, Botswana’s success and the broad-basedwelfare gains of Suharto’s Indonesia. Thechapter argues that high rent corrodes institu-tions when it is cycled via patronage networksbut that successful rent cycling owes less to

Richard Auty, Professor Emeritus ofEconomic Geography at Lancaster Uni-versity, has advised many multilateralagencies on economic development issues.He previously taught at Dartmouth Col-lege and the University of Guyana. Hisresearch interests include industrial policyand rent-cycling theory.Email: r.auty@lancaster.ac.uk

r UNESCO 2009. Published by Blackwell Publishing Ltd., 9600 Garsington Road, Oxford, OX4 2DK, UK and 350 Main Street, Malden, MA 02148, USA.

resilient institutions and more to country-specific incentives for the elite to create wealth.

The emerging theory of rentcycling

Rent-cycling theory focuses upon the frequentlyneglected interaction between politics and theeconomy in developing countries. It grows outof the fact that the three principal forms of rent(natural resources, geopolitical [foreign aid] andregulatory [from government intervention tochange relative prices]), can each comprise asizeable fraction of GDP in low-income coun-tries (5–20 per cent of GDP), and more inaggregate, which can distort the political econ-omy. Since rent can be detached from theactivity that generates it, it elicits politicalcontests to capture it (Krueger et al. 1992).Consequently, rent streams strongly impactboth on the incentives of the political state andon the structure of the economy. Since rent fromsubsoil assets is the theme of this ISSJ mono-graph, this chapter concentrates on naturalresource rent.

The central premise of rent-cycling theory isthat the scale of the rent systematically mouldspolitical incentives to vary the degree of aneconomy’s divergence from its optimum devel-opment trajectory. Stylised facts models of low-rent and high-rent economies explain why (seeAuty 2007 for a detailed description). The low-rent competitive industrialisation model pro-vides a ‘‘best practice’’ counterfactual againstwhich to compare the high-rent staple trapmodel, which is strongly associated withmineral-driven economies. The model is based on thepremise that low rent encourages wealth crea-tion because the principal means for thegovernment to increase its revenue is by taxingan expanding economy. Low rent thereforecreates incentives to provide public goods andto maintain efficiency incentives. These incen-tives favour channelling rent through marketsrather than patronage networks. The economytherefore adheres to its comparative advantage,which in a low-rent economy initially lies inexporting labour-intensive manufactured goods.This drives a pair of virtuous economic andsocial circles.

The low rent economic circle sees rapidexport-oriented industrialisation quickly absorbsurplus rural labour, which drives up wages andtriggers competitive diversification of the econ-omy into more productive activity. Early indus-trialisation also advances urbanisation, whichaccelerates the demographic cycle so populationgrowth slows and the dependency : worker ratiofalls. This lifts the saving and investment rateswhile competitive diversification maintains in-vestment efficiency to sustain rapid per capitaGDP growth. The virtuous low-rent social circlelimits income inequality because labour scarcityputs a floor under the wages of the poor whilethe rapid accumulation of skills through eco-nomic diversification puts a ceiling on the skillpremium. In addition, sustained rapid per capitaGDP growth strengthens three sanctions againstanti-social governance to nurture an endogen-ous democratisation that is consensual. Specifi-cally; (a) the rapid diversification of taxationfrom exports to profits, incomes and expenditureincreases pressure for political accountability;(b) market-driven urbanisation strengthens civicvoice and (c) the growth of private firms elicitsdemands to protect profits by strengtheningproperty rights and the rule of law.

In contrast, high rent deflects political andeconomic agents into rent capture and distribu-tion at the expense of wealth creation becausethe benefits of rent redistribution are bothsubstantial and immediate, whereas the benefitsof wealth creation accrue through the long termandmay be captured by successors. This triggersa negative economic circle because it boosts thefraction of rent cycled through patronagechannels rather than markets, which reducesinvestment efficiency so that GDP growth slowseven if the rent sustains high investment. Aprolonged reliance on primary exports also skipsthe labour-intensive industrialisation phase ofthe low-rent model so that surplus rural labourpersists and feeds income inequality. Wary ofurban unrest, governments deploy rent to createemployment that markets will not support,typically by protecting infant industry andover-extending the bureaucracy.

The burgeoning demands of this rent-seeking sector eventually exceed the capacity ofthe primary sector to meet them due to eitherongoing structural change or a negative priceshock. Governments must then reform the

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economy by promoting markets and rationingrent, which rent recipients resist. High-rentgovernments therefore find it politically expedi-ent to augment the rent by extracting returns tocapital and labour from the primary sector,which further undermines its viability. In thisway, the high-rent economy becomes locked intoa staple trap as an expanding rent-dependentsector corrodes the viability of the primarysector upon which it increasingly depends. Inaddition, declining investment efficiency slowseconomic growth and retards competitive re-structuring of the economy, undermining itsresilience to shocks.

Finally, the high-rent negative social circleis rooted in the rise in income inequalityexplained above. The resulting social tension isexacerbated when faltering GDP growth neces-sitates rent rationing. High rent also corrodesinstitutions by weakening all three sanctionsagainst anti-social governance. First, the rentsubstitutes sovereign revenue for revenue fromincome, profits and value added taxes so thatpressure for political accountability falls. Sec-ond, patronage-driven rent channelling creates adependent form of social capital. Third, corrup-tions worsens because businesses increase theirreturns by lobbying politicians and civil servantsfor favours rather than by investing productivelyand pushing for a strengthened rule of law toprotect returns to economic risk-taking. Thefollowing section now compares initial condi-tions in the three case study countries and thenature of their subsequent rent streams.

Initial conditions in the early1970s and subsequent rentshocks

On the eve of the expansion in mineral rent thatall three economies experienced through the1970s and into the 1980s, Botswana andVenezuela were both consensual democracies(that is, with broad agreement on the directionof economic policy). The Botswanan elite hadlong-evolved forms of consensual governanceand in 1965 backed a rural-based political partythat won the first election and retained powerover four decades, despite rising urbanisation(Acemoglu et al. 2003). In Venezuela the

collapse of the Jiminez dictatorship in 1958ushered in a two-party consensual democracythat deployed oil rent to consolidate its position,initially commanding widespread support andhigh electoral turnouts (Hausmann 2003).Lastly, Indonesia remained an autocracy asSuharto consolidated army power followingthe chaotic ‘‘guided democracy’’ of Sukarno(Bevan et al. 1999).

The Venezuelan democracy was less healthythan it appeared. The imposition of sizeableincome taxes on the multinational oil companiesin 1943 established the state’s reliance on oil rentto subsidise socio-economic activity and limitnon-oil taxation (Karl (1997, pp. 88–89). Privatecapital and the trade unions captured the importsubstitution policy in the 1960s to siphon awayrent by retaining protection so the infant indus-tries had no incentive to mature (Bourguinon1988). Consistent with the staple trap model, amoderate GDP growth (of 4.6 per cent) during1960–1974 masked a fall in investment efficiencyand slowing per capita GDP growth (Elias1978). Rent cycling had already distortedVenezuela’s economy by the eve of the 1973 oilshock. Table 1 generates an index of Dutchdisease effects by comparing the actual structureof GDP with the predicted structure for acountry of Venezuela’s per capita income, basedon an analysis of market economies (Syrquinand Chenery 1989). The Venezuelan Dutchdisease index in 1972 was high at 13.9, becauseagriculture generated less than half its predictedshare of non-mining GDP while manufacturingproduced barely two-thirds of its expected share.Yet, high as it is, the index underestimates theDutch disease effects because most Venezuelanmanufacturing and much agriculture requiredprotection from imports.

Botswana achieved independence in 1966 asan impoverished drought-prone country thatdepended heavily upon foreign aid and cattleherding, although a mining boom was justcommencing. The economy was relatively un-distorted, however, with a Dutch disease indexof 5.4, due more to neglect by the Britishprotectorate than to shrewd economic manage-ment. The ruling elite of tribal leaders and largecattle herders was well aware of the economy’sfragility. It displayed considerable cautiontowards macro-policy and fashionable interven-tionist policies and showed no haste to replace

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expatriate civil servants. The elite maintainedproperty rights, open trade and limited expan-sion of state-owned enterprises, all of whichpromoted wealth creation. All this was alsoinitially true for the elites in Kenya and Coted’Ivoire, which closed their economies duringthe 1970s, but this was not the case forBotswana, as further explained below.

Suharto also promoted broad-based wealthcreation for reasons explained below. To achievethis his government vested responsibility formacro management in able technocrats andcontrolled (but by no means eliminated) rent-seeking (MacIntyre 2000). In addition, mindfulthat the downfall of his predecessor owed muchto rural neglect Suharto ensured that rentreached the majority poor in rural Java (Timmer2007), a policy that supported broad-basedgrowth. Despite decades of oil extraction, theIndonesian economy was minimally distorted inthe early 1970s: the share of tradeables in non-mining GDP was barely 1 per cent less thanexpected and the economy was recoveringstrongly from its nadir in the 1960s.

Turning to the subsequent rent streams: thetwo oil exporters experienced several strongprice shocks, both positive and negative,whereas Botswana’s rent stream was stable.Gelb and Associates (1988) provide a measureof the scale of the 1974–1978 and 1979–1981 oil

windfalls by projecting the pre-shock trend andmeasuring the actual departure from it expressedin terms of non-oil GDP (Table 2). By thismeasure, the 1974–1978 rent windfall wasequivalent to an extra 16 per cent of non-oilincome per annum for Indonesia and 11 per centextra for Venezuela whereas the 1979–1981windfall added 23 per cent and 9 per cent ofnon-mining GDP respectively. Hausmann(1999) estimates the scale of the negative oilprice shock of 1983–1985 at the loss of 7 per centof GDP annually in Venezuela and the 1986price fall lopped off another 7 per cent.Indonesian oil rent was around 10 per cent ofGDP annually lower through 1985–1989 thanthe previous five years, according toWorld Bankestimates of oil depletion shown in Table 3.

Table 3 also traces the shift in the terms oftrade, which from the mid-1970s exhibit greateramplitude for the two oil exporters thanBotswana. The total rent stream of Botswanawas even steadier because the price stabilityconferred by the diamond cartel was comple-mented by the fact that the expansion ofdiamond rent offset a decline of initiallygenerous aid (Table 3). Copper and nickel rentexpanded ahead of diamonds and peaked at 4.9per cent of gross national income during 1975–1979 before slowly tapering off as diamondscame to dominate the rent stream. The World

Table 1. Economic structure in 1972 and structural change for 1972–1981 (Venezuela and Indonesia) and 1972–1996(Botswana)

VenezuelaActual

VenezuelaSyrquin norm

IndonesiaActual

IndonesiaSyrquin norm

BotswanaActual

BotswanaSyrquin norm

Share of NM GDP 1972 (%)Agriculture 7.6 14 45.1 46 36.9 37Manufacturing 19.5 27 11.0 11 6.6 12

Construction 6.0 7 4.3 3 12.4 11Services 66.9 52 39.7 40 44.1 40

Share of mining GDP 1972 (%) 20.5 1 12.1 6 5.8 6

Annual change in share ofNM GDP (%)

1972–1981 1972–1981 1972–1996

Agriculture � 0.10 � 0.32 � 1.50 � 1.31 � 1.19 � 0.75Manufacturing � 0.04 0.06 0.77 0.34 0.04 0.42Construction 0.02 0.03 0.26 0.10 0.00 0.24Services 0.13 0.24 0.48 0.86 1.25 0.12

DDI 1972 � 13.9 0 � 0.9 0 � 5.2 0DDI change 1972–1981 � 1.3 0 � 2.4 0DDI change 1972–1996 n.a. n.a. n.a. n.a. � 20.0 0

DDI, Dutch disease index; NM, non-mining. The norm refers to the mean share of GDP for all countries at a similar levelof economic development.Source: Gelb 1988, p. 88. Author’s calculations for Botswana.

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Bank does not estimate diamond rent due to lackof published statistics, but Harvey and Lewis(1990) calculate Botswana’s diamond rent at 50per cent of export earnings through the 1980swhile Auty andMikesell (1998) estimate the rentfrom company reports at 60 per cent of export

revenue for the early 1990s. Assuming rentcomprised 60 per cent of exports from the startof production, the share of diamond rent in GDPsteadily expanded to peak at 26 per cent in theearly 1990s before commencing a slow relativedecline of 1 per cent of GDP annually (Table 3).

Table 2. Oil windfall deployment 1974–1981 for Indonesia and Venezuela (% non-mining GDP)

Indonesia Indonesia Venezuela Venezuela1974–1978 1979–1981 1974–1978 1979–1981

Domestic oil windfall/year 15.9 22.7 10.8 8.7Real 1.6 � 2.5 � 20.5 � 28.0Price effect 14.3 25.2 31.3 36.6

Absorption effectsTrade and non-factor service 5.3 9.6 � 1.0 1.1Current balance 4.8 6.1 3.9 7.0Non-oil growth effects � 2.4 � 3.5 5.9 � 6.6

Real allocation1growth effectPrivate consumption � 1.5 7.7 1.9 20.0Public consumption 1.5 3.0 1.6 � 0.7Private investment � 3.4 7.9 3.3 � 6.0Public investment 7.9 n.a. 4.9 n.a.

The table is based on a counterfactual of the outcome in the absence of the oil windfall and makes four key assumptions:1. Relative price deflators remain constant at their average 1970–1972 ‘‘base period’’ ratio.2. The ratio of real mining output to non-mining GDP is constant.3. The ratio of total absorption to output is constant.4. Consumption and investment change their share of absorption as per capita income rises in line with their ‘‘normal’’shares (derived from Syrquin and Chenery [1989]).The windfalls and their uses are derived as deviations of actual supply and demand shares from the projections andexpressed relative to non-mining GDP to aid comparison. It then becomes possible to distinguish the contribution ofvolume changes and price changes, and also to adjust for any acceleration or slow-down in the growth of non-miningGDP(assumed attributable to windfall absorption) compared with the base period (See Gelb 1988, pp. 56–59).Source: Gelb 1988, pp. 62–65

Table 3. Rent stream indices 1965–2004 for Botswana, Venezuela and Indonesia

1965–1969

1970–1974

1975–1979

1980–1984

1985–1989

1990–1994

1995–1999

2000–2004

BotswanaAid (% GNI) 23.8 14.7 11.9 9.3 7.8 3.0 1.8 0.5Ore depletion (% GNI) n.a. 0.1 4.3 2.8 3.9 1.0 0.7 0.5Diamond depletion (% GNI)1 n.a. 7.0 8.7 17.4 18.5 25.9 21.4 18.9Net barter terms of trade2 n.a. 128.6 89.4 71.4 91.6 91.8 96.3 96.9

VenezuelaAid (% GNI) 0.2 0.1 0.0 0.0 0.0 0.1 0.0 0.1Oil output (mbpd)3 3.6 3.4 2.4 2.0 1.9 2.5 3.2 3.0Oil depletion (% GDP) n.a. 15.7 29.3 36.4 24.2 28.7 22.6 29.0Net barter terms of trade2 n.a. 61.0 108.8 151.2 91.0 71.8 65.3 94.8

IndonesiaAid (% GNI) 3.9 4.2 1.5 1.0 1.4 1.4 0.9 0.7Oil output (mbpd)3 0.5 1.1 1.5 1.5 1.4 1.6 1.5 1.3Oil depletion (% GDP) n.a. 4.5 16.0 21.1 10.4 7.2 5.9 9.6Net barter terms of trade2 n.a. 71.3 124.3 177.5 105.0 89.5 87.1 99.9

1Auty and Mikesell (1998)220005 100, with 1970–1979 rebased from World Bank 19893BP 2007GNI, gross national income, mbpd, million barrels per daySource: World Bank 2006a

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Venezuelan rent cyclingfollows the staple trap modelof cumulative deterioration

Venezuela’s development since the 1960s isconsistent with the staple trap model. Withgovernments electing to diversify the economyby overriding markets in the 1950s and 1960s,the extra rent from the 1974–1978 and 1979–1981 oil booms was used to accelerate theprocess. In brief, the booms fed patronageentitlements that absorbed the rent too rapidly,and further distorted the economy and erodedinstitutions. Subsequent policies to ration rentwere inadequate so that stabilisation failed. Thisdiscouraged investment in economic restructur-ing, which prolonged the growth collapse andincreased income inequality that polarised theelectorate.

More specifically, although half the 1974–1978 windfall was earmarked to a long-termsaving fund to limit Dutch disease effects,parliamentary scrutiny was weakened when thefund was placed under presidential discretion tospeed decision-making. The windfall wasabsorbed too rapidly so that, far from savingrent during the booms, Venezuela accumulatedforeign debt. The boom also added two rent-seeking constituencies, consumers and stateenterprises, to the existing duo of private capitaland unions. Table 2 indicates that the 1974–1978windfall boosted consumption by an extra 16 percent of non-mining GDP annually compared tothe pre-boom trend, mainly through subsidisedprices and lower taxes on income and expendi-ture. Investment increased by half as much asconsumption, mostly to diversify the economyby expanding the Orinoco metal complex. Steeland aluminium are capital intensive, however,and require large investments that state enter-prises undertook. They accounted for 70 percent of manufacturing investment but createdfew jobs, so additional rent was cycled to boostpublic sector employment more generally (Karl1997, p. 104).

Consumption dominated domestic absorp-tion during the 1979–1981 oil boom. Instead ofcooling the overheating economy by cuttingcurrent public consumption, the governmentresorted to price controls and subsidies. Thepolicy failed because it squeezed producermargins, which cut supply so domestic prices

rose and strengthened the real effective exchangerate by 20 per cent during 1982–1983 (Gelb andAssociates 1988, p. 79). Efforts to slow publicinvestment also failed because the state enter-prises substituted inadequately monitored over-seas finance for domestic capital. Worse, poorproject implementation delayed the start-up ofthe metal plants and rendered them uncompeti-tive so they were unable to service their debt.Little non-oil tradeable activity was competitiveby 1981, so that Table 1 grossly underestimatesthe Dutch disease effects. The economydepended on oil for 94 per cent of exports andtwo-thirds of government revenue when the1983–1986 negative oil shocks struck.

Failure to ration the rent when oil prices fellbroke Venezuela’s consensual democracy (Karl1997, pp. 179–88). Cuts were required in socialspending and support for loss-making stateenterprises, but opposition from state enterpriseunions and management shifted expenditurecuts on the more diffuse and weaker consumerlobby (Marquez 1995). Public expenditure stillremained excessive, however, and the electoralcycle further undermined stabilisation policies.In 1982 a newly elected government attemptedto grow out of recession by reflating theeconomy instead of cutting the fiscal deficit.Similar electoral concerns launched anotherpopulist boom in 1986 when a sharp fall in oilprices required fiscal tightening. Sachs (1989)analysed Latin America’s populist booms: theycollapse within four years leaving the economyworse off than when the boom started. Finally,in 1989 a left-leaning government sprang marketreforms on an unsuspecting electorate, cuttingGDP by almost 10 per cent and spiking inflationto 80 per cent (Hausmann 2003, p. 270). Labourwas inadequately cushioned against the policy,which the government diluted in 1992 after twofailed coups.

The failure of successive Venezuelan gov-ernments to ration rent and stabilise theeconomy caused the real exchange rate tofluctuate sharply. This discouraged domesticinvestment to replace the lost output, revenueand exports that oil had previously generated.Private sector investment slumped from almost25 per cent of GDP in the 1970s to 11 per cent inthe 1980s and then to 7 per cent in the 1990s.Massive capital flight combined with low econ-omy-wide investment efficiency to perpetuate

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the growth collapse. Relative poverty increasedfrom 39 per cent of the population to 48 per centduring 1986–1995 (Marquez 1995, p. 411) andthrough 2000–2004 mean per capita income wasless than three-quarters of its peak in 1975–1979(Table 4). Income inequality rose sharply as theshare of wages and salaries in GDP slumped to36 per cent after averaging 47 per cent through1950–1988. Much of the corresponding gain inthe share of capital was held offshore.

The regressive redistribution of incomediscredited both economic reform and theprincipal political parties, spawning short-livedpolitical parties under charismatic leaders thatpursued specialised interests. In 1998 the democ-racy polarised when a left-of-centre coalitionwon power and chose Chavez, the leader of oneof the 1992 coups, as president. The positive oilshock of the mid-2000s boosted patronage-driven rent cycling by easing pressure to createwealth by economic reform. Extra-parliamen-tary protest grew as the middle class sought toprevent the government from cutting the com-mercial independence of the state oil corpora-tion in order to channel more rent intopatronage. In summary, consistent with bothrent-cycling theory and Collier and Hoeffler(2006), Venezuela shows how cycling high rentcorrodes checks and balances as part of anegative socio-economic spiral.

Botswana’s precarious butstable rent has sustainedwealth creation, so far

This section argues that although Botswanadeveloped healthy institutions, they remainuntested by severe price shocks. Hill and Knight(1999, p. 313) identify just two mild downswingsduring 1980–1983 and the early 1990s (whenmarkets were briefly over-supplied) and oneupswing associated with amajor mine expansionin the late 1980s. Rather, Botswana’s moresuccessful rent deployment reflects the perpetua-tion of the initial bias of the elite towards wealthcreation. This appears to result from theeconomy’s precarious dependence on a cartel-sustained diamond rent arising from Botswana’sstrongly skewed natural resource endowment.However, the remarkable stability of the rentstream to date has, along with limited ethnicfactionalism and astute leadership, facilitatedboth macro-economic management and controlof rent seeking.

Barely 5 per cent of Botswana’s land area issuitable for cultivation and even then rainfall isunreliable. Yet industrial diversification is con-strained by the small size of the domesticmarket,the lacklustre performance of adjacent econo-mies and a land-locked location. Consequently,the expansion of diamond rent to one-quarter of

Table 4. Economic growth indices 1965–2004 for Botswana, Venezuela and Indonesia

1965–1969

1970–1974

1975–1979

1980–1984

1985–1989

1990–1994

1995–1999

2000–2004

BotswanaPer capita GDP (US$2,000) 302.2 581.0 904.7 1328.4 1876.9 2468.7 2894.1 3912.1Population growth (% per yr) 2.8 3.2 3.4 3.3 3.0 2.6 1.9 0.4GDP (% per yr) 8.7 19.9 11.5 11.0 11.9 4.5 7.6 6.2Per capita GDP (% per yr) 5.8 16.1 7.8 7.3 8.7 1.9 5.6 5.9Crop output index1 70.0 88.7 96.2 81.3 91.2 98.7 103.5 108.0

VenezuelaPer capita GDP (US$2000) n.a. n.a. 7379.2 6309.2 5969.4 6122.5 6027.4 5411.7Population growth (% per yr) 3.3 3.4 3.5 3.0 2.5 2.2 2.0 1.8GDP (% per yr) 3.3 3.9 4.0 � 1.9 1.5 4.1 0.9 1.7Per capita GDP (% per yr) � 0.1 0.5 0.5 � 4.7 � 2.3 1.7 � 1.1 � 0.1Crop output index1 45.6 51.6 58.7 60.9 74.6 79.7 89.9 98.4

IndonesiaPer capita GDP (US$2000) 203.5 261.3 335.3 429.0 516.9 692.7 832.1 848.1Population growth (% per yr) 2.3 2.4 2.3 1.9 1.8 1.6 1.4 1.3GDP (% per yr) 4.9 8.2 7.4 6.7 6.1 8.0 1.7 4.6Per capita GDP (% per yr) 2.5 5.6 5.0 4.7 4.2 6.2 0.3 3.2Crop output index1 31.2 38.2 43.7 56.8 70.6 85.0 96.5 108.1

Note 11991–20015 100Source: World Bank 2006a

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GDP as a result of an unusually long-lived cartelrendered Botswana’s mineral dependence poten-tially precarious, exerting strong pressure forcautious rent cycling. Although the central roleof the government in absorbing the rent pushedpublic spending to two-thirds of GDP (Harveyand Jefferis 1995) the rent was sensibly trans-ferred to the private sector through publicpurchases of goods and services rather than bylowering taxes, subsidising prices or protectinginfant industrial activity, which all build rent-seeking constituencies and unsustainable entitle-ments. In addition, the government converteddiamond rent into alternative forms of capital byinvestment in human capital (education andhealth) and eliminating the backlog in economicinfrastructure.

In contrast to most resource-rich countriesin sub-Saharan Africa and Latin America, theBotswana elite eschewed import substitutionpolicy, which (as in Venezuela) invariablydegenerates into a system for rent extractionthat intensifies barriers to trade and heightenseconomic distortion. The government initiallystimulated the rural economy because until the

late 1990s the majority resided in rural areas.It supported export-oriented cattle-rearing, whichwas dominated by the elite, but also boosted ruralsmallholding through a policy of food self-sufficiency, which was phased out in the 1990s.Some mineral rent was invested in state-owneddirectly productive activity in the late 1980s but ityielded few profitable projects and the loss-makers were quickly divested (IMF 1999). Byminimising protection, Botswana’s rent deploy-ment limited rent seeking and the associatedcorrosion of institutions. Table 5 shows thatBotswana compares favourably with the middle-income oil-exporters in terms of its quality ofgovernance, with both a robust civic voice andrule of law, as Collier and Hoeffler (2006) note.

However, the resilience of Botswananinstitutions remains to be tested because theunusual stability of diamond prices facilitatedboth macro-economic management and controlof rent-seeking. The absence of unexpectedsurges in Botswana’s rent stream avoided thesudden ignition of political pressure for govern-ment spending, while price stability avoidedabrupt and draconian rent rationing. Moreover,

Table 5. Per capita GDP and institutional quality 2005: selected high-rent mineral economies

CountryPer capita GDP(US$PPP 2005)

Voice1accountability

Politicalstability

Effectivegovernance

Regulationburden

Ruleof law

Control ofgraft

Aggregateindex

Nigeria 1,113 � 0.65 � 1.48 � 1.02 � 1.26 � 1.44 � 1.11 � 6.96Sudan 2,151 � 1.84 � 2.05 � 1.30 � 1.29 � 1.48 � 1.40 � 9.36Angola 2,425 � 1.02 � 0.95 � 1.14 � 1.40 � 1.33 � 1.12 � 6.96Indonesia 3,843 � 0.21 � 1.42 � 0.47 � 0.45 � 0.87 � 0.86 � 4.28Ecuador 4,272 � 0.19 � 0.83 � 0.85 � 0.60 � 0.71 � 0.75 � 3.93Azerbaijan 5,607 � 0.97 � 1.52 � 0.81 � 0.57 � 0.85 � 1.04 � 5.76Libya 6,4001 � 1.79 � 0.02 � 0.73 � 1.52 � 0.65 � 0.91 � 5.59Venezuela 6,531 � 0.46 � 1.10 � 0.96 � 1.24 � 1.10 � 0.94 � 5.80Algeria 7,111 � 0.91 � 1.42 � 0.46 � 0.93 � 0.73 � 0.49 � 4.94Iran 7,979 � 1.36 � 0.91 � 0.66 � 1.33 � 0.83 � 0.59 � 5.68Kazakhstan 8,515 � 1.21 � 0.11 � 0.63 � 0.89 � 0.98 � 1.10 � 4.92Mexico 10,209 10.36 � 0.13 � 0.02 10.55 � 0.26 � 0.27 10.23Botswana 10,790 10.68 10.94 10.79 10.76 10.70 11.10 14.97Russia 10,897 � 0.81 � 0.85 � 0.21 � 0.51 � 0.70 � 0.72 � 3.80Trinidad &Tobago

13,758 1 0.49 10.04 10.47 10.61 10.17 10.02 11.80

Saudi Arabia 14,729 � 1.63 � 0.60 � 0.06 � 0.34 10.20 10.15 � 2.27Oman 15,2601 � 0.90 10.76 10.91 10.43 10.98 10.78 10.49Kuwait 21,5341 � 0.48 10.29 10.55 10.10 10.65 10.71 11.82UAE 24,0561 � 1.01 10.91 11.20 10.95 10.85 11.23 14.13Qatar 26,000 � 0.75 10.83 10.55 10.20 10.87 10.82 12.52Norway 40,199 11.53 11.53 11.97 11.33 11.95 12.11 110.42

Note 12004The six index scores each range from 2.5 to � 2.5 and are based on several surveys in each country. PPP, purchasing powerparity.Source: World Bank 2006b

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the government cushioned against rent volatilityby establishing saving funds in 1972, whichtypically allocated two-fifths of the rent tooffshore investments that pushed financialreserves to 125 per cent of GDP by 1998 (IMF1999). Unlike Venezuela, Botswana respondedpromptly when mineral prices briefly faltered inthe early 1980s and executed a 20 per cent depre-ciation of the real exchange rate, lifted interestrates, made modest cuts in public investmentand postponed public sector pay rises.

Controlled rent-seeking and cautiousmacro-economic management were part of apositive economic circle that drove the economyat similar rates to the East Asian dragon econo-mies during 1972–1990 and contrived a slowdeceleration thereafter (Table 4). The sus-tained per capita GDP growth raised all boatsand although income distribution was skewedthe GINI coefficient remained stable, unlikeVenezuela, at around 0.51 (Sarraf and Jiwanji2003: 15). This in turn helped the ruling party toconsistently retain a majority of the seats inparliament whereas its largest opponent onlyonce captured one-third of the seats andtypically garnered one-sixth. The ruling partymaintained its parliamentary majority despitethe relative decline of its bedrock rural consti-tuency by accommodating social pressure ratherthan repressing it or buying it off with subsidies.For example, the loss of seats in the 1969 electionprompted an acceleration of rural developmentwhile electoral setbacks in 1996 led to anextension of the franchise to 18-year olds andto nationals resident outside the country.

The economy remained largely mineral-driven during 1995–2004 as the diamond rentwent into a relative decline (Bank of Botswana2006) and the government struggled to maintaineconomic growth and employment. Table 1 showsthat the diamond expansion pushed Botswana’sDutch disease index up fivefold to 25.1 per cent ofnon-mining GDP by 1996. This departure fromthe projected norm reflects in equal measure therapid demise of agriculture and the slow growth inmanufacturing (Lange and Wright 2004). Pro-gress with competitive diversification of theeconomy lagged, due more to the geographicalconstraints on agriculture and manufacturingthan, as in Venezuela, to maladroit rent cycling.

Overall, Botswana’s rent deployment todate has postponed a growth collapse rather

than eliminated the threat. Somewhat ominously,the government responded to the recent miningslowdown by raising public expenditure in anunsustainable manner. It expanded public sectoremployment which, in combination with risingexpenditures to combat HIV/AIDS, swelledthe public sector deficit (IMF 2005, p. 16). Thefinancial reserves declined from 125 per cent ofGDP in 1998 to 75 per cent in 2005 (Bank ofBotswana 2006). The prospect of ever-tighterrent rationing will provide a sterner test of thecountry’s institutions than has occurred hitherto.

Natural resource exhaustionexplains autocraticIndonesia’s economic gain

The Suharto government shared with itsBotswana counterpart the aim to create wealth.The anticipated depletion of the Indonesian oilreserves andmounting rural population pressurein densely settled Java engendered a bias forcaution from the outset which, as in Botswana,led to policies to control rent seeking andprioritise macro-economic management. Inaddition, learning from its predecessor, theSuharto regime allocated rent to boost thewelfareof the majority poor in a sustainable manner aspart of a strategy to competitively diversify theeconomy. These three policies underpinnedthree decades of successful rent deployment,but the regime was eventually undone by itsfailure to maintain its pro-growth politicalconstituency.

Although some rent was deployed aspatronage to maintain political support, whichspawned ‘‘crony capitalism’’, the Suhartoregime exerted sufficient control on rent seekingto limit its adverse economic effects (MacIntyre2000). This outcome conferred two benefits.First, it facilitated macro-economic manage-ment in contrast to Venezuela, which lostcontrol of rent absorption. Second, it enabledIndonesian firms to plan for rent obligations andbenefits, whereas their counterparts in, forexample, the Commonwealth of IndependentStates economies, experienced arbitrary rentextraction that greatly heightened risk (Jones-Luong 2004). In addition, Indonesian rentcycling built a dualistic manufacturing sector

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in which state enterprises and some private firmstook the rent in terms of reduced levels ofefficiency, passing the costs on to domesticconsumers in terms of prices above world levels,whereas other private firms, mostly Chinese-owned, strove for efficiency and took the rent interms of higher profits that they reinvested. Thisdualism spawned dynamic competitive firmsalongside sluggish protected ones. When oilprices fell in the mid-1980s and the technocratsdepreciated the real exchange rate to helpstabilise the economy, dynamic domestic firmsalong with new Japanese investors expandedrapidly into global markets (Timmer 2007).Within 15 years the Indonesian economyrestructured from oil dependence to competitivemanufacturing (Table 6), helping to sustainrapid per capita GDP growth until the 1997financial shock (Table 4).

Sound macro-economic management wasthe second policy behind successful rent cyclingin Indonesia. During the 1974–1978 oil boomthe technocrats sterilised 40 per cent of the oilrevenue in a largely successful attempt to slowthe rate of domestic rent absorption and limitDutch disease effects. They had also begun torein in public expenditure and to depreciate thereal exchange rate in response to softening oilprices prior to the 1979 price shock. As in mostoil-rich countries, a laxer fiscal stance wasadopted during the 1979–1981 boom (Table 2,column 2) and the economy exhibited modest

Dutch disease effects. By 1981 the tradeablesshare of non-mining GDP was an additional 2.4per cent smaller than the norms predict (leavingthe index at a still modest 3.4), due mainly to aslightly faster rate of decline in the share ofagriculture (Table 3). Unlike Venezuela, how-ever, the mid-1980s oil price collapse waspromptly met by sharp depreciation of the realexchange rate, the opening of trade policyand public expenditure cuts, which stimulatedmanufacturing exports and revived agriculture(Table 6).

The third key policy was to channel rent tothe majority poor, which in Indonesia meantrural communities, mainly in Java. This wasachieved by expanding infrastructure, notablyrural roads to improve farmers’ access tomarkets, and by diffusing green revolutiontechniques. The resulting expansion in labour-intensive agriculture helped drive Indonesia’sremarkably rapid per capitaGDP growth during1967–1997 (Table 4), maintain the GINI coeffi-cient around 0.34 and cut the headcount povertyindex from two-thirds of the population to one-eighth (Timmer 2007). Incomes rose becausehigh productivity growth in manufacturing andagriculture spilled over into a demand for goodsand services from the rural informal economy,which still employed 45 per cent of the workforcein the 1990s. Neither Botswana nor Venezuelasucceeded in drawing such a high fraction ofworkers into unsubsidised market activity.

Table 6. Changing export composition 1965–2004 for Botswana, Venezuela and Indonesia (% total)

1965–1969 1970–1974 1975–1979 1980–1984 1985–1989 1990–1994 1995–1999 2000–2004

BotswanaAgriculture n.a. n.a. n.a. n.a. n.a. n.a. n.a. 3.3Fuel n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.1Ore1 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 89.4Manufacturing n.a. n.a. n.a. n.a. n.a. n.a. n.a. 7.0

VenezuelaAgriculture 1.2 1.5 0.9 0.6 2.1 2.7 3.1 1.5Fuel 92.9 92.2 93.6 94.1 81.9 79.4 77.9 83.3Ore 4.6 4.7 3.9 3.0 7.2 6.4 5.0 3.4Manufacturing 1.2 1.5 1.5 2.3 7.4 11.6 14.0 11.7

IndonesiaAgriculture 50.5 43.7 31.2 15.0 21.0 16.1 22.6 15.3Fuel 41.3 48.9 63.5 76.4 50.0 34.1 23.6 23.7Ore 6.6 6.0 3.5 3.5 5.2 4.1 5.1 5.7Manufacturing 1.6 1.4 1.8 5.1 23.8 45.7 48.7 55.3

Note 1Ore comprised 1.3% of exports in 1968, 43.6% in 1972, 52.7% in 1977, 81.4% in 1980 and 84.1% in 1986, accordingto Harvey and Lewis (1990, p. 110)Source: World Bank (2006a)

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In achieving control of rent-seeking, asound macro-economic policy and the absorp-tion of surplus labour Indonesia conforms to thelow-rent model. However, the low-rent modelpredicts broadening of the pro-growth politicalconstituency, whereas in response to pressure toration rent in the mid-1980s the Suharto regimenarrowed it. The regime concentrated thereduced rent on cronies at the expense of thearmy and the main political party, Golkar. Theneglected groups continued to support theregime as long as it sustained rapid GDP growthbut they increasingly resented the elite (Timmer2007). They swiftly withdrew support during theEast Asian financial crisis when the elitepressured the ageing Suharto to tailor macro-economic policy to defend their rents and shiftthe costs of a 14 per cent contraction in GDP in1998 onto the majority.

Conclusions

This chapter reaches four principal conclusionsthat can inform econometric analyses of theresource curse and strengthen rent-cyclingpolicies. First, the strength of the incentives forthe elite to prioritise wealth creation over rentdistribution is a critical determinant of rent-cycling outcomes. Rent-cycling theory explainswhy low rent encourages wealth creation, butthis chapter shows that pro-growth incentivescan also be conferred through reliance on aprecarious rent stream, as in the case ofBotswana, or concern for resource exhaustion,which motivated the Suharto regime to promoteeconomic growth to ease poverty in denselysettled Java. (Although it is not demonstratedhere, regression studies should note that elitesmay also be motivated to create wealth bytargeted geopolitical rent and external securitythreats). In contrast to Botswana and Indonesia,Venezuelan governments expected the country’svast size and rich and diversified naturalresource endowment to transform a small andunderpopulated mid-income import substitu-tion economic enclave into a large, high-incomediversified economy. To this effect,MassachusettsInstitute of Technology planners were commis-sioned in the 1960s to draft a growth polestrategy to develop a metallurgical complexbased on exploitation of the water and ore

resources of the Orinoco. This was expected togenerate capital to reduce reliance on oil rentand construct further generations of growthpoles to open up the southern two-thirds of thecountry that remained virtually empty (Fried-mann 1966).

The second conclusion is that patronage-driven rent cycling tends to corrode institutions,whereas market-driven development tends toconsolidate them. The quality of institutions ispositively related to per capita income but high-rent economies tend to have poorer institutionsthan the mean for their per capita income peers.Venezuela exemplifies institutional corrosion,which deteriorated from policy capture duringthe 1960s into the establishment of unsustain-able rent entitlements during the 1973–1981 oilbooms. The quality of institutions weakenedfurther as failure to ration rent destabilised theeconomy and prompted first extra-parliamen-tary protest and then populist authoritarianism.In contrast, the expansion of diamond rent tooffset the withdrawal of geopolitical rent inBotswana sustained a remarkably stable rentstream that helped the wealth-creating elite tosustain a positive circle so that the country’sinstitutions have yet to be severely tested by rentshocks. In Suharto’s Indonesia, the co-existenceof crony capitalism and effective macro-economic management also cautions againstascribing a dominant role to institutions which,contrary to some parsimonious explanationsproduced by regression studies, appear to reflectrent-cycling incentives rather than to shapethem.

Third, the case studies underline the cumu-lative impact of rent deployment, whethernegative or positive. Venezuela illustrates thenegative spiral associated with the high-rentstaple trap model. Over-rapid absorption of theoil windfalls further weakened constraints on therent-seeking that had emerged in the 1960s.Successive governments repressed markets in acounter-productive attempt to sustain growth,expand employment, diversify the non-oil econ-omy and curb Dutch disease effects. Subse-quently, the inertia of rent-seeking prevented thepolitical parties from crafting a coalition toration rent so that the Venezuelan economycould be stabilised and investment in economicrestructuring could occur. The negative spiralcumulated further as the prolonged growth

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collapse amplified asset inequality and polarisedthe electorate, which empowered a populistgovernment that cycled the mid-2000s’ windfallrent through patronage networks.

In contrast, wealth-creating elites in Bots-wana and Indonesia espoused policies of timelymacro-economic management and control ofrent seeking that triggered positive cumulativecircles. However, the fourth conclusion is thattwo additional policies characterise sustainedsuccessful rent deployment. These are effectivelytargeting rent at the poorest and building a pro-growth political coalition. Indonesia deployedrent to lift the incomes of the majority rural poorin a sustainable fashion, which replicated a keyfeature of the low-rent competitive industrialisa-tion model that facilitated competitive diversifi-cation of the economy. However, Suhartorationed rent in the mid-1980s to favour the

elite and lost support when the financial crisiscut GDP by 14 per cent in 1998. Botswana todate has successfully adapted its pro-growthpolitical coalition to the declining importance ofthe rural population, but competitive diversifi-cation has lagged due to a landlocked locationand an arid environment so that deceleratingmineral expansion will test the resilience of itsinstitutions.

Rent-cycling theory cautions against silverbullet diagnoses. Development requires manythings to ‘‘come right’’, not all of which areeasily controlled, so that it is unsurprising thatdeveloping countries struggle to grow or thatsustained growth spells are relatively rare.However, more nuanced policy prescriptionsbased on the emerging theory of rent cycling thatis grounded in accumulated country experiencecan improve the prospects of positive outcomes.

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