The Political Transfer Problem

1. The Political Transfer Problem Faisal Z. Ahmed Eric Werker University of Chicago Harvard Business School IPES Conference November 14, 2008

2. MotivationA rise in internal conflict in the Muslim world Fraction of Muslim countries experiencing non-internationalized internal conflict (at least 25 battle deaths per year)

3. Main QuestionWhy has conflict gone up in the Muslim world? • Faltering economy • Change from a traditional to modern society • Exclusionary states sidelined Islamists

4. An overlooked explanation • Poor Muslim countries received largesse from Gulf oil states during the oil crises • Autocratic, they used the funds to buy off or repress opposition and delay reform • When the money dried up, the “fueled” opposition expressed its discontent • This discontent often took the form of internal conflict

5. The aid windfall… Foreign aid receipts by Muslim and non-Muslim countries, non-oil producers

6. … is driven by global oil markets Oil price movements and the aid windfall to Muslim countries, non-oil producers

7. … and the windfall is large Foreign aid across Muslim and non-Muslim non-oil producers, by period

8. Methodological approach • Test the hypothesis that a temporary aid windfall to autocratic nations can lead to more internal conflict • Examine the aid windfall of Gulf aid to poor Muslim countries that coincided with high oil prices and compare with non-Muslim countries • Argue that this is a relatively clean natural experimental setting that is robust to alternative explanations

9. Our model: Political Transfer Problem • Basic: Resource windfall creates upward pressure on political competition over rents • Analog: Economic transfer problem, where financial transfer creates upward pressure on real exchange rate (i.e., Dutch disease) • Democracies are better able to handle internal competition/tension. Autocracies more likely to export excess competition • Excess windfall is exported in the form of aid. Recipient may face political problems. After aid dries up, conflict ensues

10. Testing the hypothesis • Difference in differences: • Compare Muslim countries with non-Muslim countries, and high oil-price periods with low oil-price periods • Dependent variable: differential in internal conflict between Muslim and non-Muslim countries • Independent variable: differential in foreign aid between Muslim and non-Muslim countries • Reduced-form independent variable: global price of oil

11. Data • Sources: • British Petroleum, PRIO (conflicts), WDI (aid), POLITY IV and Banks (political controls) • Sample period: 1960-2004 • Sample excludes: • GDP per capita> $10,000 (high income) • Population< 500,000 • Oil producers • Treatment group: Poor Muslim non-oil producers (20) • Afghanistan, Albania, Bangladesh, Comoros, Djibouti, Eritrea, Guinea, Jordan, Kyrgyz Republic, Lebanon, Mali, Mauritania, Morocco, Niger, Pakistan, Senegal, Somalia, Sudan, Tajikstan, Turkey • Control Group: Poor non-Muslim non-oil producers (67)

12. Unpacking the dependent variable Fraction of non-oil-producing countries experiencing non-internationalized internal conflict (at least 25 battle deaths per year), by Muslim versus non-Muslim

13. The reduced-form approach Oil price movements and the Muslim/non-Muslim conflict differential, non-oil producers (at least 25 battle deaths per year)

14. The aid windfall and instability Non-internationalized internal conflict (at least 25 battle deaths) across Muslim and non-Muslim non-oil producers, by period

15. The aid windfall and major instability Non-internationalized internal conflict (at least 1000 battle deaths) across Muslim and non-Muslim non-oil producers, by period

16. Alternative explanations • End of Cold War had differential impact in Muslim countries • Cold War conflicts did not discriminate on basis of religion. Findings are robust when we drop internationalized conflicts (in Lebanon & Morocco) • High oil prices did not only mean more foreign aid, but also more powerful regional hegemons • Khomeini in Iran, Qaddafi in Libya, and Wahhabi hard-liners in Saudi Arabia were exporting politics at the same time. • We argue external influences of extremism may be overstated, but are harder to discount completely. Our findings are robust when we control for number of assassinations (proxy for extremism).

17. Summary • Model of political transfer problem (associated with unearned income) • Test the hypothesis that a temporary foreign aid windfall can lead to domestic conflict down the road in autocracies • Utilize natural experiment setting of petro-aid from the Gulf to poor Muslim countries and a difference-in-differences methodology • Implications for today: • Predicts a reduction in domestic instability in the Muslim world • a false lull in storm unless new windfalls are accompanied by meaningful political change