Explaining Differences in Outcomes of Governance in Countries Rich in Mineral Resources

Some observers have challenged this negative policy outlook by pointing to mineral-rich countries that have performed relatively well. Commonly singled out are Botswana, Chile, Indonesia, Malaysia, the United Arab Emirates and mineral-rich OECD countries. Of the latter some had been heavily depended on resource extraction in the past and over time have successfully diversified into a broader range of economic activities.

These cases suggest that a negative association between resource exploitation and outcomes is at least not always automatic. Although the statistical evidence for systematic variation in outcomes across differently endowed countries has been compelling, caution is advised in concluding that poor outcomes are inevitable. Statistical correlations have not proven beyond any doubt the causal explanations put forth, prompting calls for further investigations. In particular, unidentified third variables could have affected the relationship between the dependent and the resource-related independent variables.

The finding that institutions matter should not come as a surprise. There has been growing interest more generally in understanding the role of institutions in economic development economists have moved away from assuming a world free of institutions and have joined other social scientists in acknowledging that a country institutional development is strongly associated with its level of economic and social development.

But the emphasis on institutions is not unproblematic. The theoretical propositions on which it has been built have largely been developed on the basis of qualitative research representing at least three different strands of social science theory. Not least, these works have also focused on different levels of social analysis, each of which has defined the purpose of institutions in different ways. Thus, when quantitative studies have tested for an assumed independent impact of institutions on outcomes, their findings have remained inconclusive in explaining just why and which institutions matter and also how they change. This gap has been filled by competing narratives that have posed a serious challenge to those who seek and provide policy advice.

The agency-focused perspective has stressed that institutions place constrains on individual behavior. Based on the assumption that the underlying cause for poor outcomes is the unconstrained rational self-maximizing behavior of political and public office holders, proponents have considered institutions a device that can successfully undermine such behavior. Good institutions are thought to intercept an otherwise negative relationship by ensuring that resource policies and resource revenue management are conducted to serve the public rather than particular private interests. What good institutions really are and how countries can acquire them is left to preconceived interpretations. But without a clear view on what the quality of institutions as an aggregate indicator really means, it is also not clear what is proposed if countries are advised to improve the quality of theirs.

This vagueness is apparent in the range of indicators that have been used to measure institutional quality.

Researchers have often relied on proxies that were neither designed to capture the proposed attribute, nor to be used for comparative research purposes. Furthermore, assessments of what constitutes institutional quality may reflect the particular concerns of particular interest groups. For example, indicators often rely on subjective expert interpretations of country risk components that impinge on international business operations. The obvious advantage of such proxies is that they provide time series reaching back as far as the early 1980s. Other indicators, such as the World Bank governance indicators, have only been compiled since the mid-1990.

Colonial administrations have either set up institutions that encouraged investments or devised them so as to serve the purpose of extracting and transferring resources to the mother country. Which of the strategies they pursued and where has been linked to whether or not European settled in great numbers in the respective overseas territories. In locations where European settlers faced tropical diseases against which they had not developed immunity, colonial administrators were more likely to design extractive institutions that left a negative institutional legacy. Where settler mortality was low and therefore settler immigration was high, institutions have in turn been more likely to encourage investments in a wider range of economic activities. Not least the immigrants themselves would have demanded more equitable economic and social opportunities similar to those that they had already been accustomed to at home.

The argument of institutional legacy could not only explain why mineral-rich developed countries such as Australia or Canada have done well. It has also helped to explain the positive outcome of diamond-rich Botswana. Scientists have attributed this country ability to pursue sound macroeconomic and fiscal policies to the survival of favorable precolonial institutions. These, they argue, have helped the post-independence political elite to legitimize policies that have supported the protection of private property. The country benefited apparently from a general neglect during the colonial era which allowed it to retain traditional institutions that have granted broad-based participation to local political leaders. At the same time these institutions have also safeguarded against the potential abuse of central government powers serving private elite objectives. Precolonial institutions have undermined the emergence of distributional conflicts by supporting elites accountability to and concern for the well-being of the general public.

The use of proxies measuring the quality of institutions as an independent variable has contributed to highlighting differences in outcomes across mineral-rich countries. But it has not generated conclusive implications for policy advice.

The agency-focused perspective has proposed that if countries were to improve the quality of their institutions they could counter negative outcomes. But this proposition does not provide a compelling solution. It leaves unanswered how positive institutional change is brought about and what measures could be undertaken to support it. This includes the absence of references to the transformative role of social policy.

More work still needs to be done to shed light on how differences in outcomes observed across mineral-rich countries have come about. Deeper insights into these differences are important for assessing the opportunities and risks that mineral-rich countries are facing in the current commodity boom period.

Rosser has reviewed comparative studies on mineral-rich countries and has noted that a number of studies have pointed towards the importance of political and social conditions placed in historical contexts. But despite this consensus these comparative studies fail to agree which factors are most important and which combinations of factors matter in which contexts.They have also not addressed the problem of how to support positive changes to the institutions that currently govern mineral rents and revenues.

For example, one of these studies explains variance in outcomes across oil rich countries by pointing to political regime types as the explanatory institution. Relatively successful oil countries have been found to feature two stylized political regime types; ‘mature democracies’ and ‘reformist autocracies’. These regime types would appear to allow oil countries to attain a relatively stable macro-economy and a long term perspective on public policy decision making. They also tend to be governed by a dominant policy coalition that favors fiscal stabilization as opposed to high levels of potentially ineffective public spending.

Unfortunately, this interesting observation does not explore how oil-rich countries may move from one regime type to another. To guide the potential role of transformative social policy it requires a better understanding how some mineral-rich countries have apparently come to solve or avert the distributional conflicts that underlie the characterized features of the less well performing regime types (i.e. ‘fractional democracies’, ‘paternalistic autocracies’ and ‘predatory autocracies’). Moreover, it should also be considered whether conventional economic and social policy advice is neutral or supportive of positive transitions between regime types.

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