Rents and Revolution

Political power and resource rents go hand in hand. Rents and corruption go hand in hand. Rents and political instability go hand in hand. Really? It depends, according to CESifo researchers Kjetil Bjorvatn and Mohammad Reza Farzanegan. And, interestingly, corruption does not play much of a role in how stable political power in resource-rich places is.

At first sight, high resource rents would seem to increase political instability by fuelling separatist tendencies in resource-rich regions, funding rebel groups and weakening state institutions. But then again, some resource-rich regions have proved remarkably stable, such as Russia or Saudi Arabia. So, where is the link, and how does it operate?

Unlike other researchers who have focused on the type of government, and who have found that political stability is less sensitive to resource rents in democratic places, our researchers analyse the strength of government as a key determinant of the impact of resource rents on political stability. They demonstrate, in their latest CESifo Working Paper, that resource rents promote political stability when the incumbent is sufficiently powerful, and that the opposite occurs when the incumbent is less strong.

They tested their hypothesis using panel data covering more than 120 countries from to 1984 to 2009, and based their political stability index on the internal conflicts index of the International Country Risk Guide published by the Political Risk Services Group.

The lack of power dominance index was defined as the probability that two randomly picked members of parliament from governing parties belong to different parties: a higher score means that the government consists of a large number of small parties, lacking a dominant strong party and, therefore, is weaker. Their hypothesis was that a weaker incumbent in the ruling system increases the destructive competition among factions to capture the rich rents of the state.

After putting their model through the data, they find that, as the hypothesis stated, the impact of rents on political stability depends on the distribution of political power: the higher the degree of political factionalism, the lower the stability effect of rents.

To test the robustness of their findings, they added such control variables as income per capita, inflation, secondary school enrolment rate, and population growth, as well as quality of institutions as measured by the rule of law, and corruption.

Adding these control variables did not change the direction or statistical significance of the rent-power interaction. The impact of income and education on stability is positive, but not generally significant. Higher inflation and increasing population growth contribute to destabilizing the political system, being statistically significant but with a magnitude close to zero. The association between rents and stability is, interestingly, independent of the level of corruption in a country. The rule of law, in contrast, is highly conducive to a higher degree of political stability.

In sum, resource wealth is an important stabilizing factor in countries with a dominating elite (Putin’s Russia?), while it can have the opposite effect in countries with weaker governments (Sudan, Congo). The rule of law, in turn, reduces the destabilising effect of resource rents, but does not sever the interdependence between resource wealth and political strength.

Other CESifo Working Papers by Kjetil Bjorvatn
Other CESifo Working Papers by Mohammad Reza Farzanegan

This text is the responsibility of the writer and does not necessarily represent the opinion of the authors of the paper featured.