1. Political and Economic Development in the Face of Revolutionary Threats Bruce Bueno de Mesquita Alastair Smith NYU

2. What should the Western World do to improve the welfare of the world’s poor? Sachs– Give more aid –Past failures due to too small donations Easterley – Aid giving problematic –“big plan” mentality of donors undermines the benefits Our Answer –Aid gives leaders the resources to solve societal problems …. –But incentives to do the opposite

3. Selectorate Model Selectorate politics –Office seeking leaders use private (z) and public (g) goods to reward supporters –Leader needs to maintain the support of W supporters from a pool of S potential supporters –Large W induces public goods focus –Small W induces private goods focus, loyalty norm and easy leader survival

4. Basic Selectorate Intuition R resources Equilibrium policies Coalition size shapes public/private ratio Incumbency Constraint: –Incumbent provides each period Incumbency Advantage

5. Two Aid Related Projects 1: Aid-for-Policy deals –Leader A buys policy concession from leader B in exchange for resources (a.k.a. AID) –Leaders only accept deals that improve their survival –Size of required aid deal increases in W B –Competing effects: Poor Small W receive little aid, but High probability of aid –Donors are rich, Large W systems 2: Effects of Aid on Political and Economic Development

6. Innovations Structure of the economy –Productivity depends upon public goods Public goods = productive economic activity-Φ(g) –Free Resources Oil, natural resources, AID Government revenues without “Economic Consent” –Total Resources: Endogenous Institutional Change –Revolutions Desire to increase coalition size Revolutionary success ρ(g) increases with public goods –Elsewhere also model Coups

7. Aid Absent a Revolutionary Threat Two conditions Large coalition: steeper slope, larger intercept Small coalition

8. Institutional Preferences Coalition Size, W Welfare High R Low R Coalition Citizens

9. Effects of Aid (or other free resource) Political Use of Free Resources, R –Large W – Aid funds public goods Aid improves economy and societal welfare –Small W – Leader diverts aid Aid improves wealth of leader and insiders –As R increases – revolution becomes more attractive to obtain the public goods it could fund

10. Revolutionary Threat Expected value of revolution, Δ Probability of success, ρ(g) Cost of rebelling, k

11. Policy Response to Revolution Rebel(g) Public goods, g Low R High R Policies absent revolution Contract g Expand g Expand Public Goods: Easier to rebel but less desire to do so Contract Public Goods: Fewer means to coordinate g solves Rebel(g)=0, z the solves Select(g,z)=0 FOC not binding

12. Contraction vs. Expansion Expansion of g –Increase economy –Reduce private goods (attractive if W relatively large) –Small R, relatively large W Contraction of g –Contract economy –Need extra private goods (hard without Free resources) –Small W, large R

13. Policy Response Contractionary response to revolutionary threat Expansionary response to revolutionary threat Large W Small W

14. Endogenous Institutional Choice Rebellions by outsiders to increase W Coups by a subset of W (to reduce W/S) Leader’s institutional changes –Rationalize Institutions with the Policies!

15. Conclusion Multiple threats to leader survival Free resources affects –Which threats are binding constraints on policy –Best policy response Foreign Aid –Resources to finance public goods production In large W Aid promotes public goods In small W Aid rewards leader and coalition Increases revolutionary threat which encourages public goods suppression

18. Credible Revolutionary Threat: Mass>0 W<1 Incredible Revolutionary Threat: Mass<0 W<1 Credible Revolutionary Threat: Mass>0, Democracy- Autocracy<1 Incredible Revolutionary Threat: Mass<0, Democracy- Autocracy<1 Coordination Goods(t0) 0.495 (0.030) 0.0000.489 (0.066) 0.000 0.395 (0.034) 0.000 0.376 (0.072) 0.000 W or Polity -0.089 (0.080) 0.267-0.175 (0.130) 0.179 0.239 (0.061) 0.000 0.078 (0.100) 0.432 OIL (exports as % of GDP) -0.009 (0.002) 0.000-0.012 (0.004) 0.002 -0.006 (0.001) 0.000 -0.011 (0.003) 0.000 W*OIL0.012 (0.003) 0.0020.010 (0.009) 0.288 0.006 (0.002) 0.017 0.011 (0.006) 0.061 AID (% of GDP) -0.105 (0.061) 0.084-0.002 (0.105) 0.984 -0.082 (0.047) 0.081 -0.063 (0.087) 0.472 W*AID0.124 (0.110) 0.2590.009 (0.178) 0.960 0.133 (0.087) 0.125 0.121 (0.136) 0.375 Ln(GDP) per capita 0.041 (0.016) 0.0120.092 (0.026) 0.001 0.047 (0.015) 0.002 0.086 (0.025) 0.001 Ln(Population)0.017 (0.011) 0.1230.039 (0.018) 0.033 0.013 (0.011) 0.216 0.030 (0.017) 0.090 Year-0.002 (0.002) 0.2310.000 (0.004) 0.946 -0.006 (0.002) 0.008 -0.003 (0.004) 0.482 Constant4.781 (4.163) 0.251-1.301 (7.199) 0.857 10.743 (4.153) 0.010 4.383 (7.146) 0.540 N, F, R-Squared848, 59.56, 0.39345, 14.82, 0.27 861, 73.64, 0.44362, 17.47, 0.31 p(Free Resources) = 0 F = 3.51, p = 0.061F = 0.02, p = 0.895 F = 3.51, p = 0.061 F = 0.71, p = 0.400 p(Free Resources + Interactions) = 0 F = 0.09, p = 0.764F = 0.00, p = 0.964 F =0.56, p = 0.455 F = 0.39, p = 0.532 Coordination Good(t+5)

19. Dependent Variable: W(t+5) or Democracy-Autocracy(t+5) Credible Revolutionary Threat: Mass>0 W<1 Ordered Logit Incredible Revolutionary Threat: Mass<0 W<1 Ordered Logit Credible Revolutionary Threat: Mass>0, Democracy- Autocracy<1 Incredible Revolutionary Threat: Mass<0, Democracy- Autocracy<1 Winning Coalition W(t0) 2.413 (0.186) 0.000 2.090 (0.264) 0.000 Polity Democracy- Autocracy 0.677 (0.023) 0.000 0.653 (0.035) 0.000 OIL (exports as % of GDP) -0.032 (0.005) 0.000 -0.011 (0.008) 0.188 -0.004 (0.001) 0.000 -0.004 (0.001) 0.001 W*OIL0.046 (0.010) 0.000 0.004 (0.020) 0.828 0.006 (0.001) 0.000 0.003 (0.002) 0.184 AID (% of GDP)-0.237 (0.145) 0.102 -0.027 (0.227) 0.906 -0.041 (0.020) 0.047 -0.019 (0.035) 0.589 W*AID0.319 (0.264) 0.226 0.035 (0.388) 0.927 0.057 (0.038) 0.132 0.023 (0.535) 0.670 Ln(GDP) per capita0.221 (0.038) 0.000 0.323 (0.055) 0.000 0.023 (0.006) 0.000 0.049 (0.009) 0.000 Ln(Population)0.089 (0.026) 0.001 0.058 (0.036) 0.113 0.015 (0.004) 0.001 0.011 (0.006) 0.101 Year0.029 (0.003) 0.000 0.028 (0.005) 0.000 0.006 (0.001) 0.000 0.005 (0.001) 0.000 ConstantNA -11.158 (1.142) 0.000 -10.140 (1.650) 0.000 N, Χ 2, Pseudo R 2 or N, F, R 2 1297, 737.68, 0.20606, 264.01, 0.171287, 355.58, 0.69620, 139.72, 0.65 p(Free Resources) = 0 Χ 2 = 3.41, p = 0.065 Χ 2 = 0.03, p = 0.871 F = 4.78, p = 0.029F = 0.42, p = 0.518 p(Free Resources + Interactions) = 0 Χ 2 = 0.31, p = 0.575 Χ 2 = 0.00, p = 0.992 F = 0.36, p = 0.548F = 0.07, p = 0.794 Cell entries are Coefficient (Standard Error) and probability (2-tailed).

20. Table 3: Out of Sample test: Changes in Governance, Free Resources, and Revolutionary Threats for nations with high free resources Governance Improved Governance Unchanged Governance Declined Growing Revolutionary Threat (Mass > 0) 11114 Declining Revolutionary Threat (Mass < 0)* 10134