10 Aug 2012  Working Papers

Unobserved State Fragility and the Political Transfer Problem

Executive Summary — This paper describes how the dynamics of unobserved state fragility may generate negative consequences for other countries. Ahmed and Werker argue for the theoretical possibility that autocrats experiencing a windfall in unearned income may find it optimal to donate some of the windfall away in order to make the state less attractive a prize to a potential insurgent. Additionally, recipients of the aid may themselves become more repressive with high aid and fall into conflict with lower levels of aid. These joint phenomena make up what the authors term the political transfer problem. The largest windfall in unearned income of the 20th century, the period from 1973-85 during which oil prices were at all-time highs, produced political dynamics consistent with this model. Key concepts include:

  • Aid windfalls may lead to higher conflict in recipient countries.
  • The political transfer problem may have occurred at least once in recent history, on a massive scale. The 1973 oil embargo produced a dozen years of sky-high oil prices, filling the coffers of the producer states. At the same time, autocracies such as Saudi Arabia initiated generous foreign aid programs while simultaneously increasing the level of repression-measured by a reduction in the constraints on the executive and in political rights.
  • Recipients of the petro aid windfall experienced higher repression during the oil price shock, and-once the aid began to fall, following the collapse in oil prices in the mid-1980s-a substantial increase in civil war.
  • The model and empirical evidence provide a backdrop to understand some of the emerging dynamics underlying political upheaval in the Middle East and North Africa this current decade.

 

Author Abstract

Autocrats experiencing a windfall in unearned income may find it optimal to donate to other countries some of the windfall in order to make the state a less attractive prize to potential insurgents. We put forward a model that makes that prediction, as well as the additional predictions that the recipients of the aid may themselves become more repressive with high levels of aid and experience conflict with medium levels of aid. We call these joint phenomena the political transfer problem, and argue that the largest windfall of the 20th century, the period from 1973-85 during which oil prices were at all-time highs, produced long-run political dynamics consistent with the model. In particular, major oil exporters have been politically repressive, generous with foreign aid when oil prices are high, and free of civil war; in contrast, the recipients of petro aid were relatively repressive (and peaceful) during the period of high oil prices, but subject to civil war when oil prices fell and aid was reduced. Surprisingly, the political transfer problem did not seem to materialize when oil prices again began to creep up in the 21st century; this nonexistence of the problem can be explained by the model against the backdrop of evolving geopolitics and economics.

Paper Information