A new GLO Discussion Paper predicts that in the presence of natural resources and rent seeking, ethnic diversity increases concentration of political power, reduces income per capita and increases income inequality.

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GLO Discussion Paper No. 611, 2020

Ethnic Diversity, Concentration of Political Power and the Curse of Natural Resources – Download PDF
by Wadho, Waqar & Hussain, Sadia

GLO Fellow Waqar Wadho

Author Abstract: The empirical evidence suggests that the resource rich countries tend to have poor economic performance and higher rent seeking. In this paper, we develop a general equilibrium model explaining why natural resources turn out to be a curse in an economy divided into two classes: elite and workers. Our model explains the resource curse in a setup in which governing elite expropriate rents from natural resources which reduces the productive use of these resources. The expected costs and benefits of such rent seeking activities depend on the degree of ethnic polarization which affects the concentration of political power, and on the quality of institutions which constraints rent seeking. The model predicts that in the presence of natural resources and rent seeking, ethnic diversity increases concentration of political power, reduces income per capita and increases income inequality. Moreover, the impact will be higher in economies that depend more on natural resources.

GLO Discussion Papers are research and policy papers of the GLO Network which are widely circulated to encourage discussion. Provided in cooperation with EconStor, a service of the ZBW – Leibniz Information Centre for Economics, GLO Discussion Papers are among others listed in RePEc (see IDEAS,  EconPapers). Complete list of all GLO DPs – downloadable for free.

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