Economic Foundation of Dictatorship in Resource Exporting Economies

This paper explains the lack of democratization in resource exporting countries using a two period resource extraction model. There are two classes of agents: elite who own capital and natural resources and citizens who own labor. The elite announce, in the rst period, their plans for resource extraction and investment in the economy. Citizens, in the second period, decide whether to conduct a revolution against elite to capture their share of rents from un-extracted resources. Government policies are designed to ensure that the elite remain in power and that citizens do not have the incentive to revolt. These policies subsidize extraction and investment during the rst period. The extraction subsidy reduces the benet of revolution while the investment subsidy increases its cost. On the other hand, policies in the democracy case are not constrained by the revolution threat and represent the median voter preferences. The resource is over extracted in the non-democratic case compared to the democratic case. Also, investment in the non-resource sector is lower. The important nding of the model is that extraction path goes against price signals; rst period extraction increases with the increase of the resource price in the second period. Non-Democratic institution is the rational choice of the elite even with the costly policies to prevent a revolution.