Essays in the Political Economy of Natural Resource Booms

I study the political effects of resource booms on the behavior of politicians, citizens and government and discuss why the existing literature provide unsatisfactory answers to understand the complex nature of resource booms. In the first chapter, I explore how resource booms affect the incentives of politicians and how this is related to the contested issue of the impact of natural resources on living standards. Then, in the second chapter, I analyze how resource booms can affect the citizens’ beliefs about the performance of democracy and its implications in terms of quality of the democratic regime. Finally, in the third chapter, I study how resource booms affect the performance of local government in terms of delivering public goods in an efficient manner. Together, these chapters offer a complete understanding of some of the most relevant issues highlighted by the theoretical and empirical literatures of the so-called resource curse. Are resource booms beneficial or detrimental for citizens? What is the role of politicians’ incentives in this regard? In the first chapter “The Political Effects of Resource Booms: Political Outcomes, Clientelism and Public Goods Provision in Peru” I exploit variation in natural resource rents and mineral production among Peruvian municipalities to analyze the impact of resource booms on local politicians’ behavior and citizens’ well-being. Although this topic has recently attracted the attention of several scholars, the existing empirical evidence remains inconclusive regarding whether resource booms are beneficial or detrimental to citizens via their effects on public good provision and welfare outcomes. I argue that, despite the fact that many of the existing theoretical models allow for the possibility of non-monotonic responses, the empirical literature has mostly approached this phenomena using linear models, failing to correctly understand the nature of resource booms. Exploiting the recent extraordinary increase in mineral prices along with a set of rules for the distribution of natural resource rents in Peru, I show that the effects of resource booms in reelection outcomes, political competition, and public goods provision are function of the size of the rents in a non-monotonic fashion. For municipalities that experienced a modest increase in rents, the evidence suggests that the boom is associated with increases in public good provision and living standards, whereas the opposite occurs for the case of extremely rich municipalities in terms of mining rents. These results are robust to endogenous production responses and are consistent with a simple model of electoral competition in a resource rich economy. In the second chapter “Resource Booms and Political Support: Evidence from Peru”, I use the same identification strategy as in Chapter 1 in order to study how resource booms can affect the performance of democracy in resource-rich areas. I motivate this chapter by noticing that resource abundance has been usually associated with poor democratic performance. Particularly, some scholars suggest that in resource-rich countries democracy faces constraints to consolidate and survive. Interestingly, current theoretical explanations emphasize the role of politicians and elites in this regard implicitly assuming that citizens are always pro-democracy. However, historical and empirical evidence suggest that, in countries where democracy is new or unconsolidated, citizens are critical about its performance and willing to replace it with an authoritarian regime if they perceive this regime is better for delivering the policy outcomes they care about. In this chapter, I study this issue exploiting sub-national exogenous variation across mineral-rich local governments in Peru related to the allocation of mineral resource rents during a recent boom in mineral prices. Using a difference in difference approach, I estimate a non-monotonic effect of natural resource rents on the perception about the effectiveness of democracy. For modest increases in rents a positive impact on citizens’ support for democracy is observed whereas the opposite occurs in districts that experienced large transfers. These results are consistent with a model on citizen’s learning about the effectiveness of democracy during a resource boom. Finally, in the third chapter “Natural Resource Windfalls and Efficiency of Local Government Expenditures: Evidence from Peru” I analyze the role of natural resource windfalls in explaining the efficiency of public expenditures. Using a rich dataset of expenditures and public good provision for 1,836 municipalities in Peru for period 2001-2010, I estimate a non-monotonic relationship between the efficiency of public good provision and the level of natural resource transfers. Local governments that were extremely favored by the boom of mineral prices were more efficient in using fiscal windfalls whereas those benefited with modest transfers were more inefficient. These results can be explained by the increase in political competition associated with the boom, as it was found in Chapter 1. However, the fact that increases in efficiency were related to reductions in public good provision casts doubts about the beneficial effects of political competition in promoting efficiency. These chapters provide different and more complex views than the existing literature. They emphasize the existence of non-monotonic patterns in the relationship between resource booms and political and economic outcomes that were not previously addressed empirically exploiting subnational variation to uncover causality. This approach allows us to understand the previously inconsistent findings in the literature with respect to the lack of impacts on living standards despite the large increase in rents experienced by resource-rich areas.

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