1 Not to be used or attributed without permission, 1 INTERNATIONAL POLICY CONFERENCE “COMPETITIVENESS & DIVERSIFICATION: STRATEGIC CHALLENGES IN A PETROLEUM- RICH ECONOMY” If Diversification is Good, Why don’t Countries Diversify More? The Political Economy of Diversification in Resource Rich Countries Arne Wiig 14 – 15 March 2011, Accra, Ghana

If diversification is good, why don’t countries diversify more? The political economy of diversification in resource rich countries Arne Wiig Senior Researcher Chr. Michelsen Institute COMPETITIVENESS AND DIVERSIFICATION: STRATEGIC CHALLENGES IN A PETROLEUM-RICH COUNTRY Accra, Ghana March 2011

Plan Motivation – Diversification and the resource curse: Focus – Some empirics on diversification Does diversification improve the chances of democracy Are there political constraints to diversification Conclusion 3

Motivation: Diversification, competiveness, regional integration and economic growth; Ec. Commission for Africa 2007, Hammouda et al 2006ab Diversification and risk reduction – Oil/mineral income temporary – Volatility of prices Point of departure: How can diversification counteract the resource curse? 4

The resource curse (in a nutshell) The phenomenon: – Certain natural resources impair development prospects of countries The problem: – Natural resource rents generate: Patronage: The use of public resources to shore up political power Rent-seeking: The socially costly pursuit of rents The solution: – Impartiality enhancing institutions: E.g. democracy, rule of law See for instance Kolstad and Wiig 2009 The intractability of the problem: – Partiality permitting institutions often in the interest of those who have the power to block institutional reform 5

Our focus: Diversification and democracy Oxfam 2009:3 “oil wealth tends to erode democratic accountability. Ghana’s challenge will be to ensure the right institutions and transparent policies are in place before oil production starts” 1.Desirability: Does diversification increase the chances for democracy in a country? 2.Possibility: To what extent is diversification possible, in the event that it is desirable ? 6

Concentration of exports. SSA Measurement: Inequality of export shares. Herfindahl index Source: UNCTAD Patterns Ghana stable and typical for SSA SSA increased concentration Neighboring countries BF, Benin, CI and Togo have a more diversified industrial structure Major petroleum exporters are more concentrated 7

Concentration of exports and democracy. SSA 2009 Are less diversified countries less democratic? If so: Does diversification drives democracy or does the lack of democracy inhibit diversification? 8 Democracy Diversification ?

Does diversification improve the chances of democracy (1) Income: Lipset 1959 ” the more well-to do a nation, the greater the chances it will sustain democracy” – Higher income, more education, greater receptivity to political tolerance norms, richer set of civil society organisations, larger middle class Industrialization (away from agrarian society) and urbanization 9

Does diversification improve the chances of democracy (2) Source of income: Ross Oil Three mechanisms – Modernization – Rentier effect – Repression 10

Does diversification improve the chances of democracy (3) Source of income (physical capital, human capital and land): Acemoglu and Robinson 2006 Model and mechanisms – Two groups (the elite and the mass) – Three strategies Concessions (but problems of credibility) Repression Transfer power – Elite of land owners more averse to democracy: Land is immobile compared to human and physical capital (can easily be taxed after democracy) Social repression is less costly for land owners Natural resources less mobile (easier to tax). Diversification into more mobile industries such as manufacturing and services 11

Does diversification improve the chances of democracy (4) Conclusion from theories: Pattern of industrial activity (oil) – not diversification per se that matters for democracy 12

Does diversification improve the chances of democracy (5). Empirical findings Recent studies: Acemoglu et al Origin of democracy is related to historical factors – not to modernization (general income ) – But does not test conditional effects (e.g. pattern of industrial activity) The source of income matters (oil) – Barro 1999 – Ross 2001 – Tsui, 2010 – Aslaksen 2010 Lack of studies on whether diversification has spurred democracy 13

Political constraints to diversification (1) Resource dependence is the outcome of strategic decisions by incumbent elites to limit the extent to which political opponents can challenge their power. Mobutu- Zaire. Dunning The fear of losing political power (Acemoglu and Robinson 2006 ) may undermine diversification efforts or alternatively: – Diversification into industries that shore up political power of the elite? – Diversification as a patronage tool (cf Wiig and Kolstad, 2010 on CSR and patronage) 14

Political constraints to diversification (2) Empirical findings Few empirical studies: Imbs and Wacziarg (2003); Carrère et al forthcoming. But do not control for political factors: Cuberes and Jerzmanowski (2009): higher barriers for entry into the production of new goods or services in non-democratic countries De-Waldemar and Starosta (2009) find a significantly negative effect of rent-seeking (‘weak institutions’) on diversification 15

Conclusion Can diversification prevent a negative effect of oil on democracy in Ghana? – Theory: – It depends: The pattern of industrial activity matters rather than diversification per se – Empirical evidence: Missing Can the relatively good democratic records in Ghana make it possible to diversify? – Theory: Yes, possibly less resistance – Empirical evidence: Missing 16

Thank you! 17