RESOURCE ABUNDANCE, UNDERDEVELOPMENT and the GENESIS OF POOR INSTITUTIONS SYED MANSOOB MURSHED...
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Transcript of 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]
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
Murshed------1st September 2012
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
Murshed------1st September 2012
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)
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Besides these there are:
Political Economy Considerations: Rent Seeking Contests Voracity Effects Extractive States These are not independent of the
macroeconomic causation above
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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.
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Rent seeking contest
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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.
Murshed------1st September 2012
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.
Murshed------1st September 2012
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
Murshed------1st September 2012
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’
Murshed------1st September 2012
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.
Murshed------1st September 2012
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.
Murshed------1st September 2012
WHAT ARE THE CHANNELS RELATING RESOURCE BOOMS toPOOR INSTITUTIONS
Murshed------1st September 2012
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.
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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
Murshed------1st September 2012
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.
Murshed------1st September 2012
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
Murshed------1st September 2012
ANOCRACY Means the system has features of
both democracy and autocracy. Regular electoral competition But insufficient separation of
powers and checks on the executive.
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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
Murshed------1st September 2012
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.
Murshed------1st September 2012
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)
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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.
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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
Murshed------1st September 2012
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).
Murshed------1st September 2012
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.
Murshed------1st September 2012
Lacunae:How are bad institutions really formed? We have to go back to the origins of the state.
Murshed------1st September 2012
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.
Murshed------1st September 2012
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.
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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.
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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)
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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
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Evolution of the modern state
Patrimonialism−Brokerage −Modern national state (nationalisation, specialisation and civilianisation)
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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
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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.
Murshed------1st September 2012
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.
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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
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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.
Murshed------1st September 2012
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
Murshed------1st September 2012