1. The Repression Effect Faisal Z. Ahmed University of Chicago November 14 th, 2009 1

2. Repression in Somalia  1960-69: Nascent democracy.  1969: General Barre comes to power.  1977-78: Rule becomes increasingly oppressive after failed irredentist drive into Ethiopia. Repression sustained by aid.  Mid-1980s: Aid starts to dry up. Barre struggles to hold onto power.  1990: Barre ousted from power.  1990- present: Civil war, failed state. 2 External financing allowed Barre to delay political reform and prolonged his dictorial rule in such a fashion that “foreign aid provided the glue that held the system together in spite of internal waste and corruption.” (Adam, 1999, 175) 1969-1990: Aid to Somalia averaged 35 percent of its annual GDP. o In 1977, Barre switches sides in the Cold War. Starts to receive some aid from US, Italy, Britain, and Germany. 1974: Somalia gains membership in Arab league. Starts to receive Arab aid.

3. Outline 3  How does a shock to unearned government income affect political accountability?  Model: Public goods setup  Link unearned income to government accountability (e.g., North, 1991; Tilly, 1992; resource curse literature)  Given optimal level of public goods provision, government chooses to become more repressive.  Aid extends the life of a regime.  Repression effect (through tax rate).  Empirics: Aid flows are endogenous with political regime  Reverse causality will bias the results.  Use natural experiment of oil-price driven Gulf aid to poor Muslim aid recipients.  Repression effect is temporary.

4. Model: Setup  Household optimization: Max U(c,p,g) = αlog(c)+(1-α)log(p+g) Subject to: c+p = (1-t)y  Household’s optimal provision of public services: p* = (1- α)(1-t)y- αg  Government problem: Provides public (g) and private (s) goods.  It must provide some public goods to stay in power, but wants to keep as much for itself as possible.  Government maximization problem: Max Φ(g,s,U) = βlog(s)+(1-β)U(c,p,g) s.t. ty+ω = s+g  Tax rate is related to government accountability: t=(1-R), where 0≤R≤1. R is measure of government accountability (i.e., repression) 4

5. Model: Equilibrium 5  Solution strategy:  Stackelberg game  Assume households cannot coordinate to play Nash bargaining with government.  Government moves first.  Equilibrium:  Public goods provision: g*= (t- β)y+ω(1- β)  Some aid is spent on g*.  Political survival: s*=β(y+ω)  Does not depend on tax-rate, but increasing in revenue base (y) and unearned income (ω)  Repression effect:  Effect is stronger in poorer countries.

6. Natural experiment 6  OPEC aid flows to Muslim countries tracks the price of oil.  Price of oil is unrelated to conditions in aid recipients (exogenous variation).

7. Econometric strategy 7  Nature of OPEC aid:  Non-trivial: 1.5% of OPEC GDP, constitutes (at least) 13.5% of all aid since 1973. Largely untied aid.  Directed to Muslim countries and tracks the oil price.  2SLS setup:  First Stage: AID it =  +  *MUSLIM i *p(oil) t + γ*X it +  *D i +  *D t +  it  Second Stage:POLITICS it =a + b*AID it + c*X it + d*D i + f*D t + u it X = { RGDP growth, RGDP per capita, economic structure, population, conflict}  Sample:  1960-2004  Non-oil producing, poor aid recipients.  20 Muslim countries (treatment), Approx. 80 countries (control)  Data source: WDI, Polity IV, Arthur Banks.

8. Dependent variables  DURABLE: Is there a 3-point change (in any direction) of the regime’s POLITY score?  No change => Increase durable by 1 unit  A change => Set durable to zero  REPRESSION: Indicator for competitiveness of participation  Extent to which alternate preferences for policy and leadership can be pursued in the political arena.  1 = if “repressive” or “suppressive”  0= if otherwise  POWER: Indicator for the extent of institutionalized constraints on the decision-making powers of the chief executive(s).  1 = if values 1 or 2 (greatest executive control)  0 = if otherwise 8

9. First stage  $10 increase in price of oil raises aid by 0.80 percentage points of GDP 9

10. Political survival 10

11. Short-run repression effect 11

12. Robustness checks  Alternate specification: Relationship may not be linear.  Repression effect robust to using a IV-probit model.  Concurrent flows: Charitable contributions, workers remittances.  Controlling for workers remittances does not affect direction and magnitude of repression effect.  Exclusion restriction:  Exporting of “politics” from wealthy oil producers (Saudi Arabia, Iran, Libya).  Repression effect may be in response to group-fighting (over aid) and/or revolutionary threat.  Repression effect is robust to controlling for assassinations and attempted overthrow in the past two years. 12

13. Conclusion  Largely untied foreign aid to Muslim countries extends the life of the incumbent regime and contributes to a temporary repression effect.  What happens when aid dries up?  Somalia provides a clue. Post Barre, internal conflict broke out.  Ahmed & Werker (in progress) provide evidence of this.  Policy implications:  Oil prices have fallen recently (from very high levels). We might expect some instability in the future.  Oil-driven aid may be a manifestation of ‘exporting’ the resource curse.  Results suggest that untied aid can worsen the welfare of citizens. Case for more tied aid.