The Political Transfer Problem Faisal Z. AhmedEric Werker University of ChicagoHarvard Business School IPES Conference November 14, 2008

Fraction of Muslim countries experiencing non-internationalized internal conflict (at least 25 battle deaths per year) Motivation A rise in internal conflict in the Muslim world

Main Question Why has conflict gone up in the Muslim world? Faltering economy Faltering economy Change from a traditional to modern society Change from a traditional to modern society Exclusionary states sidelined Islamists Exclusionary states sidelined Islamists

An overlooked explanation Poor Muslim countries received largesse from Gulf oil states during the oil crises Poor Muslim countries received largesse from Gulf oil states during the oil crises Autocratic, they used the funds to buy off or repress opposition and delay reform Autocratic, they used the funds to buy off or repress opposition and delay reform When the money dried up, the “fueled” opposition expressed its discontent When the money dried up, the “fueled” opposition expressed its discontent This discontent often took the form of internal conflict This discontent often took the form of internal conflict

The aid windfall… Foreign aid receipts by Muslim and non-Muslim countries, non-oil producers

… is driven by global oil markets Oil price movements and the aid windfall to Muslim countries, non-oil producers

… and the windfall is large Foreign aid across Muslim and non-Muslim non-oil producers, by period Aid (% GDP) Non- Muslim non-oil produce rs Muslim non-oil produce rsDifferenceT-statistic Double DifferenceT-statistic Before: [1.32] No. of obs During: [2.44]**6.66[2.43]** No. of obs After: [1.34]-5.10[2.42]** No. of obs Post 2000: [1.14]-0.02[0.82] No. of obs32676 T-statistics in brackets, clustered by country. * significant at 10%; ** significant at 5%; *** significant at 1%.

Methodological approach Test the hypothesis that a temporary aid windfall to autocratic nations can lead to more internal conflict Test the hypothesis that a temporary aid windfall to autocratic nations can lead to more internal conflict Examine the aid windfall of Gulf aid to poor Muslim countries that coincided with high oil prices and compare with non-Muslim countries Examine the aid windfall of Gulf aid to poor Muslim countries that coincided with high oil prices and compare with non-Muslim countries Argue that this is a relatively clean natural experimental setting that is robust to alternative explanations Argue that this is a relatively clean natural experimental setting that is robust to alternative explanations

Our model: Political Transfer Problem Basic: Resource windfall creates upward pressure on political competition over rents Basic: Resource windfall creates upward pressure on political competition over rents Analog: Economic transfer problem, where financial transfer creates upward pressure on real exchange rate (i.e., Dutch disease) Analog: Economic transfer problem, where financial transfer creates upward pressure on real exchange rate (i.e., Dutch disease) Democracies are better able to handle internal competition/tension. Autocracies more likely to export excess competition Democracies are better able to handle internal competition/tension. Autocracies more likely to export excess competition Excess windfall is exported in the form of aid. Recipient may face political problems. After aid dries up, conflict ensues Excess windfall is exported in the form of aid. Recipient may face political problems. After aid dries up, conflict ensues

Testing the hypothesis Difference in differences: Difference in differences: –Compare Muslim countries with non-Muslim countries, and high oil-price periods with low oil-price periods Dependent variable: differential in internal conflict between Muslim and non-Muslim countries Dependent variable: differential in internal conflict between Muslim and non-Muslim countries Independent variable: differential in foreign aid between Muslim and non-Muslim countries Independent variable: differential in foreign aid between Muslim and non-Muslim countries –Reduced-form independent variable: global price of oil

Data Sources: Sources: –British Petroleum, PRIO (conflicts), WDI (aid), POLITY IV and Banks (political controls) Sample period: Sample period: Sample excludes: Sample excludes: –GDP per capita> $10,000 (high income) –Population< 500,000 –Oil producers Treatment group: Poor Muslim non-oil producers (20) Treatment group: Poor Muslim non-oil producers (20) –Afghanistan, Albania, Bangladesh, Comoros, Djibouti, Eritrea, Guinea, Jordan, Kyrgyz Republic, Lebanon, Mali, Mauritania, Morocco, Niger, Pakistan, Senegal, Somalia, Sudan, Tajikstan, Turkey Control Group: Poor non-Muslim non-oil producers (67) Control Group: Poor non-Muslim non-oil producers (67)

Unpacking the dependent variable Fraction of non-oil-producing countries experiencing non-internationalized internal conflict (at least 25 battle deaths per year), by Muslim versus non-Muslim

The reduced-form approach Oil price movements and the Muslim/non-Muslim conflict differential, non-oil producers (at least 25 battle deaths per year)

The aid windfall and instability Non-internationalized internal conflict (at least 25 battle deaths) across Muslim and non-Muslim non-oil producers, by period Internal Conflict, At least 25 battle deaths Non- Muslim non-oil producer s Muslim non-oil producer sDifferenceT-statistic Double DifferenceT-statistic Before: [0.61] No. of obs During: [0.11]0.05[0.60] No. of obs After: [1.86]*0.15[1.76]* No. of obs Post 2000: [0.73]-0.10[1.68]* No. of obs34399 T-statistics in brackets, clustered by country. * significant at 10%; ** significant at 5%; *** significant at 1%.

The aid windfall and major instability Non-internationalized internal conflict (at least 1000 battle deaths) across Muslim and non-Muslim non-oil producers, by period Internal Conflict, At least 1,000 battle deaths Non- Muslim non-oil producer s Muslim non-oil producer sDifferenceT-statistic Double DifferenceT-statistic Before: [0.48] No. of obs During: [1.88]*-0.09[1.79]* No. of obs After: [1.09]0.13[2.27]** No. of obs Post 2000: [0.36]-0.054[1.28] No. of obs34399 T-statistics in brackets, clustered by country. * significant at 10%; ** significant at 5%; *** significant at 1%.

Alternative explanations End of Cold War had differential impact in Muslim countries End of Cold War had differential impact in Muslim countries –Cold War conflicts did not discriminate on basis of religion. Findings are robust when we drop internationalized conflicts (in Lebanon & Morocco) High oil prices did not only mean more foreign aid, but also more powerful regional hegemons High oil prices did not only mean more foreign aid, but also more powerful regional hegemons –Khomeini in Iran, Qaddafi in Libya, and Wahhabi hard-liners in Saudi Arabia were exporting politics at the same time. –We argue external influences of extremism may be overstated, but are harder to discount completely. Our findings are robust when we control for number of assassinations (proxy for extremism).

Summary Model of political transfer problem (associated with unearned income) Model of political transfer problem (associated with unearned income) Test the hypothesis that a temporary foreign aid windfall can lead to domestic conflict down the road in autocracies Test the hypothesis that a temporary foreign aid windfall can lead to domestic conflict down the road in autocracies Utilize natural experiment setting of petro-aid from the Gulf to poor Muslim countries and a difference-in- differences methodology Utilize natural experiment setting of petro-aid from the Gulf to poor Muslim countries and a difference-in- differences methodology Implications for today: Implications for today: –Predicts a reduction in domestic instability in the Muslim world –a false lull in storm unless new windfalls are accompanied by meaningful political change