Will the resource curse stifle democracy in Libya?

(note to self)

Just a week ago, the betting markets still gave Gaddafi a 40% chance of remaining in charge till the end of the year but now the markets have given him up for a lost cause. The Arab Spring can hence boast another regime change, and this time one that is quite complete: there is almost no existing government bureaucracy that remains in place after the change because there was no Libyan government bureaucracy in the first place.

It is also a victory for French and English pride: as I predicted 4 months ago, the European countries caved in to their own need to keep face once they started interfering and they thus armed and trained the rebels, whilst NATO acted as the rebels’ air force. They said they wouldn’t arm the rebels at the time but it was obviously more important to win than to stick to that promise. And it must be said, the victory has been well-managed so far with few reprisals. It is a good day for international justice.

What next for Libya? If you read the constitution that the Transitional Council has put up, you get to read a carbon copy of the constitutions of Western nation states. If nation building was hence only about laws, the Libyans are going to be just like us. With a GDP per capita of around 20% of that of the US (which is high but still down from 100% in 1980!), an urbanisation rate close to 80% and a relatively large tertiary student base, no government debt worth talking about, and more revenues than running expenses, you would think that if any Arab country could pull off a modern democracy it would be Libya.

Libya will be a good test of the political-economic theory of the ‘natural resource curse’ which holds that a country with weak institutions burdened with a lot of money flowing in for no effort is going to end up very corrupt and un-democratic. There are many variations to this theory (for an example paper of my own on this issue, see here), but the essential story is that the rents created by the resource lead to a political system oriented solely around fighting over those rents, leading to exclusion of losing groups and of the non-resource sector. Under the curse, it is too hard to develop a vibrant manufacturing or export-oriented service sector when the natural resource rents make the exchange rate high and gives the politicians too little incentives to provide public goods oriented towards the non-resource sector. Having to fend on its own and surrounded by rent-seeking politicians looking to tax anything visible, the modern sector dies in childbirth and the country remains poorly educated and un-versed in the ways of the modern economy, merely living off the resource rents while they last.

There are two scenarios for Libya, one in which it overcomes this curse and one where it once again succumbs to it.

The first scenario is that Libya can skip the century or so it normally takes for good democratic habits to become ingrained and immediately mimic a country like Norway. The way to do that would be to actively reduce the degree to which the resource rent affects the exchange rate too much. A national fund that buys up overseas assets and that re-invests any dividends in increases in the fund is one way to do this. The government can otherwise invest in the kind of things needed to get modern sectors up and running, including a more developed education infrastructure, independent competition regulation, modern tax codes, etc.

The second scenario is that the many different groups that make up the transitional government, before and after elections, fight over the spoils and all demand their group gets a share. If no group trusts the other groups and there is insufficient national identity to trust anyone calling themselves ‘non-partisan’, then things like a national future fund cannot be set up and maintained as each group in power would simply raid the fund immediately for its own benefits. There might be then some prestige projects (like ‘broadband for all’) that a national government engages in, but every check and balance in the system gets manned by individuals foremost identifying with their group. The oil contracts are of course the main things over which the groups would fight, and deal-makers on the side of the oil companies will look for long-standing political connections to safeguard their own interests.

The essential question is whether Libya has the centre-group it would need for the first scenario. It would have to be a centre-group not associated primarily with a particular city, not encumbered by the demands of their family and communal structure for jobs and influence, and not identified with any particular grouping.

Such a group does not exist in Libya: land-holdings are still primarily based on kin-ship, i.e. family and community ties. Cities have strong independent histories and are made up of patchworks of overlapping tribe-like communities. Even if you have the odd individual who himself really wants Libya to become like Norway, the reality of the situation is that such a person would only have political support from his community and would be expected to reciprocate. If he doesn’t, he is out.

So, my prediction on the eve of its introduction is that Libyan democracy will fail. There will probably be an election in which some coalition of interests will win, after which there will be a gradual sifting-out of alliance members who are not needed to hang on to power. More and more of the best jobs and transfers will go to a smaller in-group defined by family, ethnicity, and, most-importantly, region. That group will subvert the democratic process such that Libya becomes a kind of small Egypt with oil, a mini-Russia at best. The internal divisions in Libya are not strong enough to expect blood-shed of the type you see in Nigeria, but true democracy is going to have to wait in Libya. In 20 years time much of the current tribal and ethnic structure should be destroyed by economic forces that make land irrelevant and that will replace most of the other tribal economic aspects with purely monetary aspects (greatly aided by the internet). With any luck, Libyan oil has run out by then.

Is there a way in which truly far-sighted decision makers could avert the resource curse? What the Libyans should realise today rather than tomorrow is that their oil fields are their curse. They should immediately outsource the running of their oil fields to some international organisation that pre-commits to hoarding most of the oil wealth generated from these fields for Libyans in the future. It won’t happen though: it goes against human nature for the victorious Libyans to recognise what they themselves will become if they don’t remove the temptation, and there is no international organisation that has the ability to credibly pre-commit to doing the right thing by the Libyans such a long time into the future.

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David Walker
12 years ago

A great, depressing post, Paul. Countries with strong institutions (Australia, Canada, Norway, Sweden) generally resist the curse; countries like Libya generally succumb to it.

Getting Libyans to understand the dangers of the resource curse is certainly one of the biggest changes facing that nation now. Like you I will unhappily bet that the new ruling group will deal with it badly.

The poor country that managed resource endowments best has of course been Botswana. It’s the great outlier of African development. It also shows how much an undeveloped, resource-rich nation needs in order to succeed after gaining independence.

Botswana inherited strong British institutions. It also had the good fortune to have as its first leader the magnificent Seretse Khama, who recognised the importance of the institutions he was inheriting and set about strengthening them. Importantly, Khama built a deep pool of good democrats, leaders and administrators, so that Botswana’s success continued after his death. (In a just world, Khama would be even more celebrated than Nelson Mandela; instead, hardly anyone outside southern Africa knows of him.)

South Africa, too, managed to preserve British institutions and to build a leadership group within the ANC – under remarkably adverse conditions – that was capable of taking over government and running a resource economy with some measure of efficiency.

If all this talk of “British institutions” sounds very Queen-And-Country, it isn’t supposed to be. The weight of evidence just seems to suggest that “British institutions” are a very useful governance technology, if you can get past the pith-hat imagery.

But Libya has neither the right institutions nor an obvious leadership group. There is nothing in its history to suggest a Khama or Mandela will emerge.

For what it’s worth, the ABC’s Mark Colvin has written brilliantly about the more general problem of post-revolutionary leadership:

The illusion at the beginning of a revolution is that everyone wants the same thing.

It’s easy to sustain because the immediate goal – bringing down a tyrant – is shared.

It’s after that that it starts to splinter.

Out of chaos come forth leaders: but revolution means that they, too, are always in danger.

In the French Revolution, Danton was no angel, but a saint compared to Robespierre, who sent him to the guillotine. The Revolution consumed itself and eventually Robespierre himself lost his head. Only the arrival of a dictator, Napoleon, ended the process.

In Russia, the liberal Alexander Kerensky was no match for the sheer ruthlessness of Lenin, and died in exile.

The pragmatic Abolhassan Banisadr, who I mentioned earlier, proved too moderate for the religious hardliners and was ousted within 18 months.

I don’t give much for Libya’s chances over the next 25 years.

Libya’s one hope is that it is close to Europe. Proximity to good examples matters, as countries like Czechoslovakia demonstrate. If we can get enough traffic back and forth across the Mediterranean – and ideally from countries other than Italy, which currently suffers a governance curse of its own – then the country might be able to learn fast enough to avoid the descent into chaos.

Peter Patton
Peter Patton
12 years ago

A crucial factor in avoiding the ‘resources curse’ is universal suffrage. Australia could have been headed down the root if the squatters had been able to hold off franchise expansion in early Australia. We could have ended up going down Argentin’s road. Fortunately, the squatters hadn’t enough time before they could be defeated at the ballot box. I am not so optimistic for Libya.

David Walker
12 years ago

In my comments above I also underplayed the importance of good pre-colonial institutions that foster tolerance and commercial exchange. Botswana seems to have had these too, although I know less than I would like about them. British colonialism didn’t wipe out these indigenous African institutions; rather it seems to have at least to some extent worked with them and allowed them to survive.

For more on Botswana, you could do worse than to start with the writings of Scott Beaulier. He emphasises the great policy choices made by Khama and his successors in adapting and improving the institutions they were given, and describes the British role in Botswana as “benign neglect” rather than strong institutional influence.

Libya’s pre-colonial, pre-Gaddafi institutions don’t seem to have been very strong at all, though I am open to correction and would love to find I am wrong.

Richard Tsukamasa Green

You preempt me Paul, but you do it better than I would have. I am not optimitistic.

That said, the NTC isn’t coming in on as blank a slate as it seems. So much of the leadership came defected from the Qaddafi government and were ministers and technocrats. This happened even when victory was far from assured, as did the decisions by so many diplomatic missions, including that in Australia and at the UN to declare their separation from the Qaddafi regime. This suggests two things. One is that a greater proportion than expected are more genuinely idealistic rather than cynical power seekers. Secondly is that they are already tied to existing institutions (in my broader definition that includes norms) in Libya.

So how good are those institutions? Not great obviously, but also better than Sub Saharan Africa. As you point out there is little debt, a budget surplus and a strong body of educated youth. Would we expect this if the existing institutions were thoroughly kleptocratic? The budget would be terrible and future revenues borrowed against and nobody would bother with a tertiary education when theft and machine sycophancy did not require it. Qaddafi may have been a thug and a mismanager, but what he is leaving behind is far better than the Belgians or Mobutu left behind in the Congo. It may even be better than what the Soviets left in Russia (the Russian mafia was largely built on existing networks of corruption). This bodes better than you would usually think.

David – All the outliers have a common factor, namely that their institutions predate the resource rents. This is especially telling in Botswana which was only nominally British to stop the Germans claiming it. The actual British presence was minor because it wasn’t worth it, and the Botwanans built something better. If the diamonds had been found before independence, the British legacy would probably end up quite a bit worse. Likewise New South Wales benefited from the fact that decent institutions and meritocratic elements were the only way of keeping the colony alive without costly subsidies (which belied the entire point of a penal colony instead of a prison at home). Hence the propensity to emancipate convicts to make them farmers or architects or magistrates. By the time wool provided rents the egalitarian norms were strong enough to prevent the establishment of the Bunyip aristocracy and allow the suffrage Peter cites. Unlike Peter I think this is an outcome rather than a cause. After all, it’s worth noting that the first parliamentary body, the NSW legislative council, was an attempt by the emerging oligarchy to contain governors who were being too egalitarian.

That and I should note that whilst I believe that there is interaction between institutions and the resource curse, the empirical evidence is still dodgy.

Peter Patton
Peter Patton
12 years ago

The “resources curse” is a pretty dated idea. At root, it is also racist.

David Walker
12 years ago

Peter, I’m not quite irely entclear as to how the resource curse is racist, especially if the Argentinians succumb to it while post-colonial Botswana defeats it. I note in passing that Marcia Langton seems to find it a useful term. Care to enlighten me?

Mike Pepperday
Mike Pepperday
12 years ago

Paul said “a country with weak institutions burdened with a lot of money flowing in for no effort is going to end up very corrupt and un-democratic” and Richard said the converse: that if strong institutions predate the resource rents the country might maintain a democracy.

Peter suggested that that strong institution would be universal suffrage. I would add that it would need proportional representation and, also, if Libya has the deep regional cleavages which all accounts indicate, then a federal system would be needed. In order for the states to enforce their autonomy against the centre, a federation needs an independent constitutional court. That won’t occur so I agree: Libya has no chance.

I have an observation and a question about the resource curse. The observation is that it has a fractal quality, that not only do countries fail to benefit from their minerals but so do shires and towns. Australia right now is doing well but how are the localities doing? Farmers don’t want gas being mined. FIFO does nothing for localities. If you took a poll of the locals I should think it rare to find them happy about it – if the poll be restricted to those who lived there before the mine came.

My question is economics. On Q&A on Monday night there was talk about keeping Australian manufacturing going despite the high exchange rate. Somehow it should be protected without tariff protection. But the resource curse actually does not strike where there are resources; it only strikes where resources are exported. Do any countries take action to inhibit resource export? Until the 1960s Australia did not allow iron export – does anyone claim we suffered, or are suffering, from that prohibition?

Have the economic consequences been worked out of, say, a 50% tax on exported minerals (i.e., the exporter has to hand over 50 cents of every dollar earned through export)? My amateur thinking is that it would mean only deposits that were twice as rich would be exported. Fewer would be employed digging up minerals. But mining is not really such a big employer and maybe they would be absorbed in manufacture which would be encouraged because the price of the raw mineral within the country would be half the international price. If such manufactures were exported, could that be interpreted as a form of protection or other violation of free trade?

It strikes me that if PNG did this, it would have a fighting chance. It has a lot of minerals but at the rate they are going they’ll be ripped out (whether under incompetent democracy or under a military junta is immaterial) and PNG will be left like Nauru. A hefty levy on mineral exports would encourage local manufacture with all its cultural and infrastructure consequences.

For the sake of argument, what if we had a 90% tax? Wouldn’t that merely mean we’d export minerals pretty much as most developed countries do? Would it also mean that domestically minerals would be 10% of the world price? If Australia (or Australia and Canada) did this, wouldn’t this raise the international price of minerals with beneficial consequences for developing countries in danger of the resource curse?

Paul Frijters
Paul Frijters
12 years ago

Hi Mike,

There are two different sorts of export restrictions I have seen. One is the outright export tax and export restriction. These were common in the Soviet Union, though for other reasons than we are talking about here (the reason was that the price under which trade happened was too low). Export taxes were also not uncommon historically because they were relatively easy to collect. You dont see that much of them anymore. The second kind of restriction is countries choosing not to dig up their resources as quickly as they can. The Saudis have done this with oil several times, the Dutch are dong it now (they are trying to replace a lot of Dutch gas by Russian gas), and I would hazard the guess that the Norwegians are also under-producing.
The optimal way to do this is the way I suggest, i.e. to use the money you get from the exports (taxed or nationally exploited, doesnt really make a difference) to buy up long-run foreign assets. You are then effectively replacing the stuff in the ground by an income stream in the far future.

As to particulars, no-one has a really good idea how much you should tax this, but its not hard to work out reasonable numbers once you start applying rules of thumb such as that you want to limit the resource sector’s flow contribution to GDP to, say, 5%.