Corruption and the Curse: The Dictator’s Choice Mare Sarr (University of Cape Town) Tim Swanson (The Graduate Institute - Geneva) [earlier work with Chris Meissner (UCDavis) and Erwin Bulte (Wag.)]

Introducing – The Dictator Model Dictator model is meant to demonstrate that autocratic resource rich states have very different economic/investment paths that may be optimal The dictator’s choice of optimal path is determined by external parameters, not personal preferences or poor information  Corruption of dictators is partly local initial conditions and partly external interventions

Local Conditions - “Autocratic Resource-Rich Regime”: A dictator controls all of the state’s resources (stock Z of natural resources and stock K of productive capital). And the dictator allocates production (plus any additional liquidity) to consumption, investment, debt.

External Interventions External interventions may take the form of either: i)Lending (liquidity in return for debt) ii)Acquisitions (liquidity in return for shares) iii)Liquidity (in return for nothing – Aid)

Interventions “Unstructured Lending” Period-based Lending Constraint: Financial institutions liquidate a given amount of the resource stock each period

Interventions: “Unstructured Liquidity” Aggregate L Constraint: Lending to state continues so long as future flows from resource stocks are adequate to cover future interest repayments on aggregate lending

Interventions Other (non-lending) interventions: ii) Transfer of “shares” of stocks, leaves stock constraint: iii) Other liquidity might be made available without changes in debt or transfers.

The Dictators Choice: “Dictator’s Choice” – how to maximise own welfare subject to productive capacity of economy (y) based on stocks (Z, K) and choosing between consumption, investment and debt repayments: Either: 1) Liquidate as much as possible (by loans, transfers) and “loot” resource wealth immediately. OR 2) Stay and invest liquidity in economy to generate i) flow of consumption from economy; ii) subject to risk of coup in the interim.

Dictator’s Choice of Departure Compares return from investment in economy (f(k)-rd) to departure and living off of investments forever (r) Compares riskless return from departure to riskiness of staying and facing coup (1-p(k)) (overstaying results in return of zero)

Dictator’s Choice as Recursive Problem:

The Dictator’s Choice – given liquidity value w o

Dynamic Path for Dictators’ Choices (consider case of lending liquidity):

Figure: varying the “liquidity parameter”

Impact of parameters on dictator’s choice of departure?  Region 3: Low θz  V(loot) is low relative to V(stay)  Region 1: Hi θz  V (loot) is high relative to V (stay)  Region 2: Intermediate θz  V (loot) varies with k Stay for a few periods and then loot

Simulation of Growth Paths: With and without hi liquidity Parameterise Model: opt k=25, opt f(k)=12.5 Run Model with low, then high liquidity Observe endogenous instability & impact on investment and growth

Simulation of a Dictator driven Economy - Low Liquidity

Simulation of a Dictator driven Economy – High Liquidity Case 2 “High liquidity”

Consider Lending First – Lending & Instability Relation Notes: Columns 2 and 4 leave out regional dummies in the growth regression

Growth Model Results – Instability and Growth

Investigating Aid as Liquidity

Aid and Instability Relationship

Aid-sourced instability and Growth

Aid, Instability and Growth Aid has the expected effect of unstructured liquidity provided to autocracies with NR stocks But This does not apply to certain categories of Aid humanitarian or multi-sectoral (usu. environmental)  Structuring of Aid (?)

Impact of Structure on Instability (T6)

Both Loans and Grants-Induced Instability Impact Growth Negatively

Attraction of Aid – by Category (T7)

Aid, Resources and Instability

Aid, Resources and Growth

Attraction of Aid – by structure (T8)

Aid, Resources, and Instability

Impact of Aid on Growth

Aiding the Looting of Nations Liquidity can have the effect of inducing looting in poorly structure countries Three factors: -Presence of NR stocks (interaction of NR*Aid) -Failure to structure aid (only works for certain categories of aid)