The political transfer problem: How cross-border financial windfalls affect democracy and civil war

Faisal Z. Ahmed, Daniel Schwab, Eric Werker

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

Following a rise in the price of oil in the 1970s, a number of developing countries received a significant boost in foreign transfers as oil producers could not absorb all of their new rents domestically. When those transfers ended, some recipients of these transfers eventually democratized as part of the ”Third Wave” while others languished as violent autocracies. This raises a puzzle: how can declines in external transfers foster democratization in some cases, but heighten political violence in others? We develop a formal model to reconcile this tension and demonstrate that autocratic incumbents can become more repressive with higher levels of transfers and either experience civil conflict or democratize at lower levels of transfers. We characterize these dynamics as a ”political transfer problem” and then use case studies and econometric evidence to argue that the largest windfall of the 20th century, the period from 1973–85 during which oil prices were at all-time highs, and its aftermath, produced political dynamics consistent with our model.

Original languageEnglish (US)
Pages (from-to)313-339
Number of pages27
JournalJournal of Comparative Economics
Volume49
Issue number2
DOIs
StatePublished - Jun 2021

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Civil war
  • Democracy
  • Foreign transfers
  • Formal model
  • Political economy
  • Resource curse

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