We discuss political economy mechanisms which can explain the resource curse, in which anincrease in the size of resource rents causes a decrease in the economy's total value added.We identify a number of channels through which resource rents will alter the incentives of apolitical leader. Some of these induce greater investment by the leader in assets that favourgrowth (infrastructure, rule of law, etc.), others lead to a potentially catastrophic drop in suchactivities. As a result, the effect of resource abundance can be highly non-monotonic. Weargue that it is critical to understand how resources affect the leader's "survival function", i.e.the reduced-form probability of retaining power. We also briefly survey decentralisedmechanisms, in which rents induce a reallocation of labour by private agents, crowding outproductive activity more than proportionately. We argue that these mechanisms cannot befully understood without simultaneously studying leader behaviour.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0913.
Find related papers by JEL classification: O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy
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