Natural Resources and Persistent Political Institutions

Mimeo by Dana Andersen: Significant attention has been given to the negative relationship between natural resources and growth– the so-called “resource curse.” The recent literature points to institutions as the key variable in determining if natural resources will ultimately be a curse, treating institutions as exogenous. In this paper, I develop a model that examines the effect of natural resources and entrepreneurs on persistence of both de facto and de jure political institutions. Towards this end, I develop a two-sector model (natural resources and manufacturing), where entrepreneurs choose to specialize in one of the two sectors. If entrepreneur choose to specialize in natural resources, they invest in de facto political power in order to ascertain greater natural resource rents. De facto and de jure political institutions co-evolve as an equilibrium outcome of entrepreneurial specialization and investment in political power. This results in state dependence, or persistence, of political institutions. One necessary condition for overcoming persistence is strong democratic de jure political institutions. However, political institutions may persist despite strong democratic de jure political institutions due to the distribution of rents in the natural resource and manufacturing sectors.