corruption and the curse: the dictator’s choice
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Corruption and the Curse: The Dictator’s Choice. Mare Sarr (University of Cape Town) Tim Swanson (The Graduate Institute - Geneva) [earlier work with Chris Meissner (UCDavis) and Erwin Bulte (Wag.)]. Introducing – The Dictator Model. - PowerPoint PPT PresentationTRANSCRIPT
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Corruption and the Curse:The Dictator’s Choice
Mare Sarr (University of Cape Town)
Tim Swanson (The Graduate Institute - Geneva)
[earlier work with Chris Meissner (UCDavis) and Erwin Bulte (Wag.)]
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Introducing – The Dictator Model
Dictator model is meant to demonstrate that autocratic resource rich states have very different economic/investment paths that may be optimal
The dictator’s choice of optimal path is determined by external parameters, not personal preferences or poor information
Corruption of dictators is partly local initial conditions and partly external interventions
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Local Conditions - “Autocratic Resource-Rich Regime”: A dictator controls all of the state’s resources (stock Z
of natural resources and stock K of productive capital).
And the dictator allocates production (plus any additional liquidity) to consumption, investment, debt.
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External Interventions
External interventions may take the form of either: i)Lending (liquidity in return for debt)
ii)Acquisitions (liquidity in return for shares)
iii)Liquidity (in return for nothing – Aid)
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Interventions
“Unstructured Lending”
Period-based Lending Constraint: Financial institutions liquidate a given amount of the resource stock each period
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Interventions:
“Unstructured Liquidity” Aggregate L Constraint:
Lending to state continues so long as future flows from resource stocks are adequate to cover future interest repayments on aggregate lending
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Interventions
Other (non-lending) interventions:
ii) Transfer of “shares” of stocks, leaves stock constraint:
iii) Other liquidity might be made available without changes in debt or transfers.
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The Dictators Choice:“Dictator’s Choice” – how to maximise own welfare subject
to productive capacity of economy (y) based on stocks (Z, K) and choosing between consumption, investment and debt repayments:
Either:1) Liquidate as much as possible (by loans, transfers) and
“loot” resource wealth immediately. OR2) Stay and invest liquidity in economy to generate
i) flow of consumption from economy; ii) subject to risk of coup in the interim.
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Dictator’s Choice of Departure
Compares return from investment in economy (f(k)-rd) to departure and living off of investments forever (r)
Compares riskless return from departure to riskiness of staying and facing coup (1-p(k)) (overstaying results in return of zero)
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Dictator’s Choice as Recursive Problem:
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The Dictator’s Choice – given liquidity value wo
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Dynamic Path for Dictators’ Choices (consider case of lending liquidity):
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Figure: varying the “liquidity parameter”
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Impact of parameters on dictator’s choice of departure?
Region 3: Low θz V(loot) is low relative to V(stay)
Region 1:Hi θz V (loot) is high relative to V (stay)
Region 2: Intermediate θz V (loot) varies with k Stay for a few periods and then loot
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Simulation of Growth Paths:With and without hi liquidity
Parameterise Model: opt k=25, opt f(k)=12.5
Run Model with low, then high liquidity
Observe endogenous instability & impact on investment and growth
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Simulation of a Dictator driven Economy - Low Liquidity
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Simulation of a Dictator driven Economy – High Liquidity
Case 2 “High liquidity”
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Consider Lending First – Lending & Instability Relation
Notes: Columns 2 and 4 leave out regional dummies in the growth regression
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Growth Model Results – Instability and Growth
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Investigating Aid as Liquidity
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Aid and Instability Relationship
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Aid-sourced instability and Growth
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Aid, Instability and Growth
Aid has the expected effect of unstructured liquidity provided to autocracies with NR stocksBut This does not apply to certain categories of Aid humanitarian or multi-sectoral (usu. environmental) Structuring of Aid (?)
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Impact of Structure on Instability (T6)
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Both Loans and Grants-Induced Instability Impact Growth Negatively
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Attraction of Aid – by Category (T7)
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Aid, Resources and Instability
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Aid, Resources and Growth
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Attraction of Aid – by structure (T8)
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Aid, Resources, and Instability
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Impact of Aid on Growth
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Aiding the Looting of Nations
Liquidity can have the effect of inducing looting in poorly structure countries
Three factors:-Presence of NR stocks (interaction of NR*Aid)-Failure to structure aid (only works for certain categories of aid)
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