Political and Economic Development in the Face of Revolutionary Threats

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 WB • 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 High R Welfare Coalition Low R Citizens Coalition Size, W

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 Policies absent revolution Rebel(g) Low R Contract g Expand g High R Public goods, 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 Expansionary response to revolutionary threat Large W Small W Contractionary response to revolutionary threat

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. Coordination Good(t+5)

19. Dependent Variable: W(t+5) or Democracy-Autocracy(t+5) 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