WASHINGTON, 28 April 2005 — It’s easy to want democracy for the Middle East. But what sort of democracy? Should American foreign policy focus on promoting elections, or on checks and balances? Should the crucial question be, how power is achieved? Or is it how power is exercised?
Paul Collier and Anke Hoeffler, two economists at Oxford University, address these questions in a new paper on oil-rich democracies. Their answer, rooted in statistical analysis of oil states’ performance since 1970 under various types of political systems, is that the tendency to focus on elections is correct in most societies but misguided in oil states. In a country such as Iraq, the United States and its allies should care at least as much about the quality of Iraq’s judiciary and media as about the quality of its voting.
Until the 1990s the research consensus held that voting was bad for economic growth, a finding that fitted with the idea that dictators are better at imposing necessary austerity. In the past decade or so, researchers have generally found that elections are more or less growth-neutral. But by taking countries with natural resources out of the sample, Collier and Hoeffler show that ordinary, resource-poor nations grow faster if they have elections.
In oil states, however, the opposite holds true — at least if elections are held in the absence of checks and balances. In countries where natural-resource profits come to a fifth of GDP, the switch from autocracy to electoral competition lowers the annual growth rate by a hefty 2.1 percentage points. Unless there are checks and balances, elections cause oil-rich countries to invest less than they should — and to invest badly. As a result they fail to create the public infrastructure that makes growth possible.
Why might elections promote growth in most countries but cause underinvestment in oil states? In ordinary countries, where the state has limited cash at its disposal, the most efficient way to attract votes is to provide public goods: low inflation, rule of law, infrastructure that’s carefully chosen to benefit the whole society. So elections promote pro-growth policies. In petro-states, by contrast, the simplest way to attract votes is to buy them. Politicians can do that by subsidizing food or handing out government jobs in exchange for loyalty, bribes that promote consumption at the expense of investment. Or they can blow money on projects whose real purpose is to generate kickbacks.
A good example is Nigeria, which has yo-yoed between military dictatorships and corrupt democracies. In 1978 a new elected government came to power and canceled a $120 million dam contract that had been awarded by the outgoing military dictatorship. A new contract was awarded, but this time it was so padded with kickbacks that it cost an astonishing $600 million. Politicians had spent a fortune getting elected and now needed repayment.
Nigeria’s more recent transition to democracy, in 1999, at first seemed little better — a fact more recently underlined by the anti-corruption drive launched by the democratic president. By the simple expedient of requiring competitive bidding for government contracts, and by checking bid prices against prices for comparable projects posted on the Internet, Nigeria has cut the cost of public-works projects by 40 percent, saving about $2 billion since 2003.
So oil-rich societies need to couple elections with checks on elected authorities, as Nigeria is now attempting. This isn’t true of ordinary countries; Collier and Hoeffler find that checks and balances in resource-poor countries tend to reduce growth, perhaps because they create gridlock in place of necessary public action. But in oil-rich societies a freedom of information act, an independent public prosecutor, and some separation of power over the public purse are essential to counteract incentives for corruption.
The political class in any nation has few incentives to create checks on its own freedom to govern, and elections, which take place only occasionally and attract lots of healthy international attention, are easier to get right than the boring details of competitive tendering.
