Is Natural Resource Wealth Compatible with Good Governance?

This paper analyzes the effects of natural resource wealth on the economic and political environment of a country. A dynamic game-theoretic model is used to highlight the policy choice of the government vis-a`-vis the opposition. The government utilizes both economic and other policy tools to further its own interests. These policies include repression, co-option of the opposition (by way of sharing the natural resource wealth), taxation, the level of commitment to expanding the resource base through further exploration, and extraction of existing resources. The opposition is in the private sector and chooses how much of its wealth to save and invest and on whether or not to accept what is offered to it by the government and, if not, to start a civil war. In contrast to other political economy models that involve such phenomena as repression and civil wars and which view the political game as one between the government and the marginalized peasantry, this model views the game as between the government and another e´ lite group. The model is used to explain several quite different political outcomes observed in countries endowed with natural resources. These include repressive regimes, democratic regimes, benevolent autocracies/' sham democracies’, instability and civil war. The analysis shows how these outcomes depend on technology driving the process that converts income into consumption, the likelihood of finding additional natural resource wealth through exploration, the size of the private sector and other factors. The model is also illustrated empirically by comparing the governance and other characteristics of countries with different levels of natural resource wealth.