Z.1
One implication of the model presented in this paper is that the optimal response to windfalls
based on smoothing via a stabilisation fund would not be compatible with electoral incentives.
Given that a condition for the success of such a fund is the possibility of isolating its management
from the incumbent’s discretion, the alternation of parties in office and the potential electoral
value of the resources of the fund, generates a credibility problem. If a centralised decision is
not possible because of a problem of the type who guards the guardian, then what is left is a
self-policing solution. This would imply dealing with the two cases of co-operation presented
earlier: building up during good times, and resist temptation to deplete the stock during bad
times. Although, as was shown in this paper, tacit co-operation in maintaining a stock of
reserves is possible its emergence will be undermined when the incumbent faces drastic
fluctuation in current revenues.
5. Final remarks
The basic question addressed in this paper is whether an internal solution exists for the
preservation of democracy and the promotion of long-term growth, or if it would require a
centralised solution to guarantee formal agreements between both parties. It has been shown
that, for appropriate values of the probability of re-election and the discount factor, it is possible
to rely on reciprocity to sustain an early-stopping equilibrium. However, co-operation is
undermined by low values of re-election probability out of current revenues and party myopia.
In those circumstances the self-policing solution might not be viable and an institutional response
would be necessary. For instance, this can take the form of delegating the incumbent's authority
to an independent agency responsible for stabilising the level of reserves, or the imposition of
constitutional restrictions on external borrowing.
Regarding the empirical relevance of this game, despite the use of restrictive assumptions it
sheds some light to understand the apparent paradox of some mineral-rich democracies (such
as the recent Venezuelan experience) where the enjoyment of considerable external resources
was followed by a long period of economic stagnation, a deterioration of the political stability,
and the surge of the threat of dictatorship.
Finally a comment on dictators. By introducing the dictator as a source of enforcement the
paper gives him a positive role in a democracy. However, the paper does not deal with the