Working Paper 184 - Does Oil Wealth Affect Democracy in Africa?
Description This paper empirically investigates the effects of oil wealth on democracy in Africa. This is because democracy provides a check on governmental power and limits the potential of public officials to amass personal wealth and to carry out unpopular policies. This is why democracy promotion has been at the top of the US and West European foreign policy agenda since the end of the Cold War. Recently rising coups d’états attempts and oil discoveries in some African countries, high energy prices and the North African and Middle East situation characterized by revolutions have made the question of the link between oil wealth and democracy timelier than ever. The study also adds to the literature on the “natural resource curse” phenomenon. One of the natural “resource curse” arguments in the literature is that oil-rich countries tend to adopt less democratic ways of governance. It is also argued that there are three mechanisms that ties oil wealth to authoritarianism: a “rentier effect” (‘taxation effect” and “spending effect”, through which governments use low tax rates and high spending to dampen pressures for democracy; a “repression effect”, by which governments build up their internal security forces; and a “modernization effect”, in which the failure of the population to undergo certain social changes renders them less likely to push for democracy. More recently, others have suggested alternative mechanisms, including corruption, asset specificity, and international factors. Thus, while empirical support for the “oil-hurts-democracy” thesis has been mixed, not much has been done on the specific African case. This study tries to fill that gap and proffer some policy guidance to governments, politicians, development partners and other stakeholders. We present important stylized facts on trend oil wealth and democratic development in African counties. Africa’s oil reserves have maintained an upward trend, rising from 53.4 trillion barrels in 1980 to over 130 trillion barrels in 2012. Also, while most African countries legalized opposition parties and held competitive, multiparty elections, which, though, have often not met the minimal democratic criteria of freeness and fairness: they have therefore been "pseudo-democracies" or “virtual democracies”, with North Africa being mired in the trap of liberalized autocracy. Thus, in a cross-country panel data, covering 52 African countries between 1955 and 2008, we estimate the effects of oil wealth on democracy in Africa. We estimate the relationship both in a pooled cross-sectional and time-series and fixed effect settings, including robustness checks with different data sets. We find that oil wealth is statistically associated with a lower likelihood of democratization when we estimate the relationship in a pooled cross-sectional and time-series setting. In addition, when estimated using fixed effects, the strong negative statistical association continues to hold. Indeed, this result is robust to the source of oil wealth data, the choice and treatment of the variables set, and sample selection. Our results also show other interesting and important results. The cross-country confirms the “Lipset/Aristotle/modernization hypothesis” (that prosperity stimulates democracy) is a strong empirical regularity. Also, the propensity for democracy rises with population size, population density, ethnic fractionalization, having British legal origin or colonial heritage, and having a supportive institutional environment in the form of maintenance of the rule of law. However, apart from oil wealth, democracy tends to fall with linguistic fractionalization and rough (mountainous) terrain. Consistent with the data, North Africa consistently fails to favor democratic development. Three measures to avoid the political resource curse and promote democracy include promoting high levels of transparency, ensuring that the political system has a centralized system of financial authority and control, and the legislation of a ‘fiscal constitution’ that imposes ceilings (and perhaps also floors) on public spending from resource revenues. Other measures are: promoting and maintaining effective rule of law, deepening macroeconomic and structural reforms and increasing investments to raise national income, and implementing greater economic and political inclusion, especially in North Africa.