The source of self-restraint? How domestic politics and international markets shape natural resource policy in the developing world




Goes Aragão Santana, Iasmin

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Suppose a country discovers oil or copper in its subsoil and decides to sell these resources in international markets. What should it do with the unexpected profits? It can use a portion of this money to invest in human capital and public goods. It can pay external debt obligations or set money aside in a rainy day fund. It can redistribute resource revenues at the subnational level to reduce regional disparities. But if history serves as a guide, most political leaders in resource-rich countries will use their newfound wealth for electoral or personal gain. For example, they will cut taxes, increase personnel spending, and distribute excludable goods like food or medicine, even if these isolated allocation decisions worsen public service provision in the long run.

Under what conditions do political leaders create formal institutions that promote sustainable development through natural resource revenue, instead of spending this revenue immediately to maximize political support? This is the question my project seeks to answer. I argue that the choice to institutionalize the distribution of extractive revenues is influenced by two factors: political competition and sovereign borrowing.

First, I posit that political leaders are more likely to restrict their own discretion over the extractive sector at moderate levels of political competition. When political uncertainty is low and rulers are safe in their seats, they can adopt long-run developmental strategies, rather than use public funds for short-term political survival. Under these circumstances, the marginal benefit of using resource revenue to win additional votes is negligible. Still, rulers must face some political competition: there must be a credible opposition citizens can turn to if the incumbent produces bad policy. This middling range of competition, coupled with high public approval, provides space to implement long term-policy while generating enough short-term incentives to do so.

Second, I investigate how IMF lending influences natural resource governance; after all, many resource-rich nations in the developing world still need loans to mitigate their capital scarcity. While most IMF agreements mandate policy reforms in exchange for financial support, compliance with these reforms is often mixed at best. Given these expectations, I investigate how and when borrowing governments go against their political interests and comply with IMF conditions requiring natural resource policy reform. I argue that borrowers are more likely to promote these reforms when they are under an IMF agreement, particularly if the agreement includes conditions that highlight the salience of fiscal reforms. However, the effectiveness of these conditions is highly dependent on context: reforms are more likely when the IMF can credibly threaten to suspend loan payments.

Third, I examine the role of global capital markets in shaping a country's natural resource policy, arguing that competition for private capital flows reduces policymakers' autonomy to allocate natural resource revenue. In contexts of low creditworthiness and high risk of sovereign default, natural resource policy can provide additional information that allows creditors to distinguish between good borrowers'' and bad borrowers,'' thus shaping how much access to credit a country will have in times of need. As a result, policymakers seeking to attract foreign capital commit to greater fiscal discipline by restricting their own discretion over the allocation of natural resources -- even if this mitigates their ability to manipulate resource rents for political gain and is not associated with an immediate reduction in risk premiums.

I test these three main arguments using novel data on natural resource policy for 87 countries between 1854 and 2019. My statistical models leverage variation in the content of these policies across countries and over time. I also employ qualitative evidence obtained from case studies and IMF staff reports to illustrate the proposed mechanisms. Results support the existence of a the curvilinear relationship between political competition and policy passage. They also largely corroborate the positive relationship between policy passage and sovereign borrowing. These findings have important implications for the management of natural resource revenue. I identify the circumstances under which capital-scarce leaders are willing to overcome their political self-interest, instead adopting policies that -- at least on paper -- are more efficient in the long run.



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