Political economy of non-renewable resource ownership and control, The

Abstract

A large body of literature finds a negative relationship between natural resource abundance and economic efficiency. With few notable exceptions, this literature does not account for variations in the ownership and control of the resources. Through an analytical interpretation of results from a game-theoretic political economy model, this study examines how economic rents, the opportunity cost of firms, potential cost or market access advantages of the private sector and time preferences of politicians combine to affect a politician’s preferences for ownership and control of a non-renewable resource. I find that the resulting choice of ownership type, public or private, is context-specific and that no generalisations can be made: among other factors politicians will consider the size of the resource, expected price paths, whether the private sector has a cost or market access advantage over the state when making its decision, prices and the degree to which the government holds a non-controlling equity stake in the firm. With respect to the efficiency of public versus private ownership, I find that either model can be efficient and that the result is driven mainly by: (i) the differences in time preferences between politicians, the private sector and the social optimum; and (ii) the degree to which the private sector holds a non-appropriable competitive advantage over the government. The model provides a rich and nuanced interpretation of the incentives governments face in making ownership decisions over non-renewable resources. The results act as a reminder to advisers to take into consideration country specifics when making recommendations to governments about which forms of ownership and control lead to a more efficient outcome. Results are corroborated by observations in empirical literature and the model’s explanatory power is highlighted through a range of country case studies.