Natural resources and the “rentier state”

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Markets and democracy

Faced with the risk of high taxes imposed by a democratic majority, a wealthy minority has two options to protect itself: it can invest in repression and authoritarian rule, or it can take its assets elsewhere. If wealth is mobile, capital holders can credibly threaten to leave if taxes become too high under democracy. However, if wealth is immobile (as in the case of land or other natural resources) and/or its control depends heavily on state regulation, democracy becomes potentially much more threatening and asset holders are more likely to support authoritarian regimes.

At the same time, regimes that draw heavily on rents from extractive industries do not rely on a fiscal system that taxes the general population and are in a better position to provide side payments and subsidies – for example, payments to less well-off regions or disadvantaged groups – financed by natural resources. They therefore face less pressure to be accountable to the taxpaying population through democratic institutions.¹

1. See Mahdavy (1970) and Beblawi and Luciani (1987). A related argument is that resource-rich economies tend to have worse political and economic institutions – in the sense that the executive is not held accountable and property rights are insufficiently enforced – because the improvement of these institutions would restrict the ability of powerful elites to syphon off resource revenues. See Tornell and Lane (1999), Sonin (2003) and EBRD (2009). To the extent that democracies lead to greater public accountability, this is another reason why natural resource wealth might hinder democracy. [back]

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