16
Depending on how resource rents affect the leader’s probability of survival, they can
induce a self-interested leader to invest more or less in assets that favour growth such as rule
of law or infrastructure, so the effects of resources on economic performance can be highly
non-monotonic (Caselli and Cunningham, 2009). On the one hand, the ‘busy’ leader faces
budget and time constraints. Hence, if a resource boom raises the value of staying in office, he
shifts from productive towards unproductive activities and patronage, contributing to a
resource curse. On the other hand, the ‘strategic’ leader uses the windfall to keep citizens
happy and stay longer in power, so the windfall becomes a blessing. A ‘fatalistic’ leader
realizes that a windfall boosts chances of rebellion and thus is more short-sighted and puts
less effort into developing the non-resource economy and more into inefficient self-
preservation. However, if the leader responds by offering better and more outside
opportunities to rebel groups, the windfall may become a blessing.
A natural resource bonanza encourages productive entrepreneurs to shift to rent
seeking. With an aggregate demand externality (and a constant tax rate and no external trade),
this lowers income by more than the extra income from the resource revenues and thus lowers
welfare (Torvik, 2002). It helps to make a difference between countries with production-
friendly institutions and others with rent grabbing-friendly institutions (Mehlum et al.,
2006ab). Suppose there is a fixed supply of people that can direct their talent to either rent
seeking or productive entrepreneurship. Both are thus competing activities. If there are more
productive entrepreneurs, demand in the economy and profits of each entrepreneur increase
provided there are demand complementarities in production (Murphy et. al., 1989). In contrast,
if a greater fraction of talented people is rent seeker (political insider, bureaucrat, oligarch,
war lord, etc.), the gain per rent seeker declines. One can then distinguish two outcomes
following a resource bonanza. If institutions are strong and encourage productive
entrepreneurship, profits of entrepreneurs increase. This means that in equilibrium less people
engage in rent seeking and more in productive activities (see outcome A" in fig. 3). The rent
of the resource bonanza is more than dissipated. Examples of resource rich countries with
strong institutions are Australia, Canada, US, New Zealand, Iceland and Norway, and also
Botswana (Acemoglu et al., 2003). However, if institutions are weak, the legal system
dysfunctions and transparency is low, rent seeking has a higher return and unfair take-overs,
shady dealings, corruption, crime, etc. pay off. A natural resource bonanza thus elicits more
rent seekers and there will be less productive entrepreneurs. In equilibrium profits fall and as
a result the economy is worse off (see outcome A' in fig. 3). Weak institutions may explain
poor performance of oil-rich states such as Angola, Nigeria, Sudan and Venezuela, diamond-
rich Sierra Leone, Liberia and Congo, and drug states Columbia and Afghanistan. There
institutions are often destroyed by civil wars over control of resources. Dependency on oil and
other resources hinders democracy and quality of governance (e.g., Ross, 1999). Also, timber