Democracy, Development and Natural Resources

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1 Democracy, Development and Natural Resources IDEA Annual Democracy Forum 2014 James A. Robinson Harvard Gaborone, November 24, 2014 Robinson (Harvard) DDNR Gaborone, November 24, / 17

2 Introduction The Determinants of Development and Economic Growth Proximate Factors The proximate factors behind economic growth are well understood investment in physical and human capital by both the private and public sectors innovation and adoption of new technologies (total factor productivity growth) developing new natural resources Robinson (Harvard) DDNR Gaborone, November 24, / 17

3 Introduction The Determinants of Development and Economic Growth Fundamental Factors Lying behind factor accumulation and innovation are di erent patterns of incentives and opportunities. Many things can in uence these at certain moments - geography, culture, ideologies. But research suggests that the overwhelmingly important factor are economic and political institutions. Institutions are de ned as the rules (both formal - written laws and the constitution - and informal - like social norms - I pelegeng) that structure economic, political and social life and generate di erent patterns of incentives, rewards, bene ts and costs. Robinson (Harvard) DDNR Gaborone, November 24, / 17

4 Main Concepts Inclusive and Extractive Institutions A Theory of Institutions and Development Inclusive economic institutions: Create incentives and opportunities for the broad mass of the population. A level playing eld and a rule of law based on universal principles. Inclusive political institutions: Political institutions allowing broad participation and placing constraints and checks on politicians. But also some degree of political centralization for the states to be able to e ectively enforce law and order. Extractive economic institutions: Create incentives and opportunities for a few, none for most. Barriers to entry and a tilted playing eld and the absence of the rule of law. Extractive political institutions: Political institutions concentrating power in the hands of a few, without constraints, checks and balances. Robinson (Harvard) DDNR Gaborone, November 24, / 17

5 Main Concepts Inclusive and Extractive Institutions Inclusive and Extractive Economic Institutions Inclusive: The 18th Century US Patent system. Great example of how to harness the talent and creativity of a society - inclusion! Extractive: The Color Bar in Apartheid South Africa. Robinson (Harvard) DDNR Gaborone, November 24, / 17

6 Main Concepts Institutions and Growth Growth in Botswana Based on both dimensions of inclusive political institutions I mentioned, the historical centralization of the Tswana polities and the participatory nature of political institutions (kgotla). Deepened and modernized in the 1960s (vesting sub-soil mineral rights in the state, developing a non-politicized and meritocratic civil service, national language). Resulted in inclusive economic institutions All these licenses should be shared out, so that most people can have a chance to open a business no matter how small Seretse Khama 1956 (Parsons, Henderson and Tlou, 1995, p. 153) Robinson (Harvard) DDNR Gaborone, November 24, / 17

7 Synergies Main Concepts Institutions and Growth Economic Institutions Inclusive Extractive Political Inclusive # Institutions Extractive "! Robinson (Harvard) DDNR Gaborone, November 24, / 17

8 The Role of Democracy How does Democracy Fit in? Democracy is natural connected to inclusive political institutions. Speci c ways it might encourage economic growth? underpinning inclusive economic institutions - you cant have the Color Bar in South Africa after 1994! Politicians who have to appeal to a bigger audience are more likely to do so through public goods (rather than clientelism) Elections promote accountability which makes it more likely that politicians will serve the interests of society Robinson (Harvard) DDNR Gaborone, November 24, / 17

9 The Role of Democracy The Evidence (On Average) There are alternative arguments suggesting that democracy may not be good for growth Democracy can create populism and bad economic policies Authoritarian growth But what does the data say? In the last couple of years I have been looking at this in great detail (with my colleagues Daron Acemoglu, Suresh Naidu, Pascual Restrepo). We nd very robust evidence that on average democracy is good for economic development. If a country democratizes it s GDP per-capita increases by between 18 and 36%. How does it do this? Increasing investment Increasing Schooling Increasing the tax base of the state Reducing social con ict Robinson (Harvard) DDNR Gaborone, November 24, / 17

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12 The Role of Democracy The Evidence (Heterogeneous E ects) This evidence leaves open the issue that in some sorts of conditions or societies democracy might be bad for economic growth. Similarly, they allow that in some types of societies or conditions authoritarianism could be good (or at least consistent with) economic growth. In Why Nations Fail we discuss what we call extractive growth and when it is possible which it obviously is (South Korea, Taiwan,..) but make two points Only possible in certain societies and circumstances - South Korea had a long history of state centralization and bureaucratization, a national identity, external threats to its sovereignty. It is unsustainable. Robinson (Harvard) DDNR Gaborone, November 24, / 17

13 The Role of Democracy The Role of Natural Resources The simple idea that natural resources wealth ought to be an unmitigated boost to the development of a society has been challenged recently (the resource curse ). The evidence overwhelmingly shows that the impact of natural resources is conditional on the institutional environment. Resource discoveries in countries with strong/good institutions stimulate economic growth, discoveries in countries with weak/bad institutions retard economic growth. Robinson (Harvard) DDNR Gaborone, November 24, / 17

14 Source: Karl O. Moene, Halvor Mehlum and Ragnar Torvik (2006) Institutions and the Resource Curse, Economic Journal, 1-20.

15 The Role of Democracy The Feedback from Resources to Institutions? A di erent version of this argument has proposed that natural resource discoveries can corrode institutions. Logically possible (Angola versus Mozambique) but the evidence does not suggest that on average this is very important quantitatively. Robinson (Harvard) DDNR Gaborone, November 24, / 17

16 Source: Steven Haber and Victor Menaldo (2011) Do Natural Resources Fuel Authoritarianism? American Political Science Review, 105(1), 1-26.

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19 The Role of Democracy Improving Institutions A Focus on Natural Resources In Why Nations Fail we discuss how societies in the past have moved from extractive to inclusive. This often takes the form of intense con ict over institutions and large coordinated shifts (think of the end of Apartheid South Africa) The institutional quality index used by Moene, Mehlum and Torvik is an average of ve indexes based on data from Political Risk Services: a rule of law index, a bureaucratic quality index, a corruption in government index, a risk of expropriation index, and a government repudiation of contracts index. But we don t need to shift a whole society to improve how part of it works. More speci c institutional changes with respect to the extraction and allocation of natural resources may help. Robinson (Harvard) DDNR Gaborone, November 24, / 17

20 The Role of Democracy Improving Institutions in the Resource Sector Doing things in a more focused way is likely to be much more politically incentive compatible e.g. Cameroon pipeline. There have been a number of important innovations such as the Extractive Industries Transparency Initiative (EITI). The main point of this is to get governments to publish adequate accounts of their oil receipts and to create mechanisms by which society and voters can become informed about this. Global Witness has driven a campaign called Publish What you Pay which puts pressure on extractive industries to reveal how much they transfer to governments. Revenue Watch Institute promotes the use of natural resource wealth for the public good. The Natural Resource Charter launched in 2009 by academics and civil society has developed 12 precepts that a country should follow if its natural resource wealth is to be used for the common good Robinson (Harvard) DDNR Gaborone, November 24, / 17

21 The Role of Democracy Seretse Khama would have approved There is one thing that one cannot quell, and it is the natural aspirations of peoples to take part in the a airs that concern them... to assist the Government in administration, and that means active participation rather than in an only advisory capacity.. I do not mean Africa people only. I mean every person who lives in the Bechuanaland Protectorate. (Parsons, Henderson and Tlou, 1995, p. 169) Robinson (Harvard) DDNR Gaborone, November 24, / 17

22 The Role of Democracy A Modest Proposal I think these are all important But one nding from interesting research is that the domestic private sector has an important role in making natural resource wealth promote development history of natural resource extraction in the United States research by Jones-Luong and Weinthal on Azerbaijan, Kazakhstan, the Russian Federation, Turkmenistan, and Uzbekistan. Precept 10 of the Natural Resource Charter does mention the private sector but it is not about getting the private sector involved in the resource economy, just about trying to make sure that resource wealth helps to strengthen the domestic private sector more generally. Important to develop the human capital and capacity of the domestic private sector. Robinson (Harvard) DDNR Gaborone, November 24, / 17

23 The Role of Democracy Democracy, Development and Natural Resources I have argued that democracy is an important part of the inclusive political institutions a country needs to prosper. It is not the only part - the capacity of the state is also critical and an important question is whether in some cases democracy in societies with weak states leads to state building (South Sudan?) So there is no contradiction between democracy and development. Inclusive political institutions also lead natural resource wealth to promote development. What is important to discuss is practical ways to improve institutions with respect to resources in societies which more generally lack important elements of inclusive institutions. Robinson (Harvard) DDNR Gaborone, November 24, / 17

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