Abstract
This paper attempts to understand how price volatility affects the political transition of a resource-rich nation. Two states reflect price volatility: ‘high prices’ and ‘low prices’. We argue that whether or not political transition (i.e., a switch from one regime to another) will take place in a particular state depends critically on the kind of goods a country produces. If the main economic activity in a country is the extraction of “point-source” resources such as oil that demands capital-intensive production, the opportunity cost of switching the existing regime does not alter if the price of the resource changes but the benefit becomes more lucrative. Therefore, the incumbent group is most vulnerable during ‘high prices’. If the main economic activity of the nations is the production of “diffused resources” such as coffee that requires labor, prices do affect the opportunity cost. Nations concentrating in these commodities face acute political crisis during downturns.
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Notes
We thank an anonymous reviewer for suggesting this argument.
This phenomenon of “petro-populism”, where the incumbent government relies on excessive use of natural resource revenues to buy political support, is used to describe the regime and policy of Venezuela’s Hugo Chávez ( sembrar el petróleo—to sow the oil), Iran’s Mahmoud Ahmadinejad election promise (“Put the oil money on everyone’s dinner table”) and the economic policy of Russia’s Vladimir Putin as a “Petro-Czar”. See Matsen et al. (2012) for further discussion.
Democracy is a compromise between the poor and the rich that can be attained without cost. The rich do not suffer from the asset redistributions caused by a revolution and the poor benefits from increased taxation on the rich without incurring the cost of revolution. Therefore, when there is a potential threat of revolution, this compromise is an option for the rich to alleviate the threat.
For a further description of the distinction between fully consolidated and semi-consolidated democracies, see Acemoglu and Robinson (2009, Ch. 7).
\(\widehat{\tau }^{r}\) is the tax rate that maximizes the payoff of the rich after the coup.
See Gause (2013) for a helpful discussion on the monarchial longevity of the Gulf Arab states in the wake of the Arab Spring revolt.
In fact, it is the high inequality in the Latin America that has helped the region to experience democracy in periods of high oil rents. As Latin American countries are far less dependent on natural resources compared with many states in the Middle East, the pressure on the rich for the redistribution of non-resource income may have tipped the balance in favor of the democratizing effect of natural resource rents. See Sinnott et al. (2010, p. 35–36) for further discussion.
Colombia and Costa Rica were democracies while the rest were autocracies. In Cameroon and Colombia, the prevalent governments were more prudent in public spending than those in Costa Rica and Cote d’Ivoire. In Kenya, the proceeds accrued mostly to private producers but the government revenue boomed as well and public consumption increased more than private consumption.
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Acknowledgments
We are grateful to two anonymous referees for their valuable suggestions. We thank Megan Foster for her help with proofreading. The views expressed here are authors’ own and do not necessarily reflect those of the affiliated institutions.
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Mahmud, A.S., Basher, S.A. Price volatility and the political economy of resource-rich nations. Econ Gov 15, 253–279 (2014). https://doi.org/10.1007/s10101-014-0144-7
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DOI: https://doi.org/10.1007/s10101-014-0144-7