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
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
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.
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)
Interventions
“Unstructured Lending”
Period-based Lending Constraint:
Financial institutions liquidate a given amount
of the resource stock each period
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
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.
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. OR
2) Stay and invest liquidity in economy to generate
i) flow of consumption from economy;
ii) subject to risk of coup in the interim.
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)
Dictator’s Choice as Recursive
Problem:
The Dictator’s Choice –
given liquidity value wo
Dynamic Path for Dictators’ Choices
(consider case of lending liquidity):
Figure: varying the “liquidity
parameter”
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
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
Simulation of a Dictator driven
Economy - Low Liquidity
Simulation of a Dictator driven
Economy – High Liquidity
Case 2 “High liquidity”
Consider Lending First –
Lending & Instability Relation
Notes: Columns 2 and 4 leave out regional dummies in the growth regression
Growth Model Results – Instability
and Growth
Investigating Aid as Liquidity
Aid and Instability Relationship
Aid-sourced instability and Growth
Aid, Instability and Growth
Aid has the expected effect of unstructured liquidity
provided to autocracies with NR stocks
But
This does not apply to certain categories of Aid
humanitarian or multi-sectoral
(usu. environmental)
 Structuring of Aid (?)
Impact of Structure on Instability (T6)
Both Loans and Grants-Induced
Instability Impact Growth Negatively
Attraction of Aid – by Category (T7)
Aid, Resources and Instability
Aid, Resources and Growth
Attraction of Aid – by structure (T8)
Aid, Resources, and Instability
Impact of Aid on Growth
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)