The Repression Effect

Faisal Z. AhmedUniversity of ChicagoNovember 14th, 2009

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Repression in Somalia 1960-69: Nascent democracy. 1969: General Barre comes to power. 1977-78: Rule becomes increasingly oppressive

after failed irredentist drive into Ethiopia. Repression sustained by aid.

Mid-1980s: Aid starts to dry up. Barre struggles to hold onto power.

1990: Barre ousted from power. 1990- present: Civil war, failed state.

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External financing allowed Barre to delay political reform and prolonged his dictorial rule in such a fashion that “foreign aid provided the glue that held the system together in spite of internal waste and corruption.” (Adam, 1999, 175)

1969-1990: Aid to Somalia averaged 35 percent of its annual GDP.o In 1977, Barre switches sides in the Cold War. Starts to receive some aid from US, Italy, Britain,

and Germany.

1974: Somalia gains membership in Arab league. Starts to receive Arab aid.

Outline

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How does a shock to unearned government income affect political accountability?

Model: Public goods setup Link unearned income to government accountability (e.g., North, 1991; Tilly, 1992;

resource curse literature) Given optimal level of public goods provision, government chooses to become more

repressive. Aid extends the life of a regime. Repression effect (through tax rate).

Empirics: Aid flows are endogenous with political regime Reverse causality will bias the results. Use natural experiment of oil-price driven Gulf aid to poor Muslim aid recipients. Repression effect is temporary.

Model: Setup Household optimization:

Max U(c,p,g) = αlog(c)+(1-α)log(p+g)

Subject to: c+p = (1-t)y

Household’s optimal provision of public services:

p* = (1- α)(1-t)y- αg

Government problem: Provides public (g) and private (s) goods. It must provide some public goods to stay in power, but wants to keep as much

for itself as possible.

Government maximization problem:

Max Φ(g,s,U) = βlog(s)+(1-β)U(c,p,g) s.t. ty+ω = s+g

Tax rate is related to government accountability: t=(1-R), where 0≤R≤1. R is measure of government accountability (i.e., repression)

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Model: Equilibrium

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Solution strategy: Stackelberg game

Assume households cannot coordinate to play Nash bargaining with government. Government moves first.

Equilibrium: Public goods provision: g*= (t- β)y+ω(1- β)

Some aid is spent on g*.

Political survival: s*=β(y+ω) Does not depend on tax-rate, but increasing in revenue base (y) and unearned

income (ω)

Repression effect: Effect is stronger in poorer countries.

0)1(

yR

Natural experiment

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OPEC aid flows to Muslim countries tracks the price of oil. Price of oil is unrelated to conditions in aid recipients (exogenous

variation).

0

5

10

15

20

25

1970 1975 1980 1985 1990 1995 2000

US

$ B

illi

ons

0

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50

60

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90

2002

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$

Oil aid(left scale)

Oil price(right scale)

Econometric strategy

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Nature of OPEC aid: Non-trivial: 1.5% of OPEC GDP, constitutes (at least) 13.5% of all aid since 1973.

Largely untied aid. Directed to Muslim countries and tracks the oil price.

2SLS setup: First Stage: AIDit = +*MUSLIMi*p(oil)t + *Xγ it + *Di+*Dt + it Second Stage: POLITICSit =a + b*AIDit + c*Xit + d*Di+ f*Dt + uit

X = { RGDP growth, RGDP per capita, economic structure, population, conflict}

Sample: 1960-2004 Non-oil producing, poor aid recipients. 20 Muslim countries (treatment), Approx. 80 countries (control)

Data source: WDI, Polity IV, Arthur Banks.

Dependent variables DURABLE: Is there a 3-point change (in any direction) of the regime’s POLITY

score? No change => Increase durable by 1 unit A change => Set durable to zero

REPRESSION: Indicator for competitiveness of participation Extent to which alternate preferences for policy and leadership can be pursued in the

political arena. 1 = if “repressive” or “suppressive” 0= if otherwise

POWER: Indicator for the extent of institutionalized constraints on the decision-making powers of the chief executive(s).

1 = if values 1 or 2 (greatest executive control) 0 = if otherwise

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First stage $10 increase in price of

oil raises aid by 0.80

percentage points of GDP

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Foreign aid (% GDP)

Muslim*p(oil) 0.083[0.015]***[0.020]***

Fraction rural in 1972 * p(oil) -0.016[0.033][0.042]

GDP per capita growth (annual %) 0.043[0.034][0.032]

ln(GDP per capita, constant 1995 US$) -10.464[0.722]***[0.880]***

ln(population) -8.141[2.206]***[2.575]***

War occurring -0.907[0.425]**[0.473]*

Constant 209.088[40.814]***[44.549]***

Observations 2451R-squared 0.71

F-stat on instrument: Huber-White standard error 28.62F-stat on instrument: Newey-West standard error 17.55

* significant at 10%; ** significant at 5%; *** significant at 1%

Regression includes country and year fixed effects (not shown).Under each coefficient, first bracket reports Huber-White standard errors. Second bracket reports Newey-West standard errors allowing upto 1-period autocorrelation.

Political survival

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Method of estimation OLS 2SLS 2SLS 2SLS 2SLS 2SLS

Foreign aid (% GDP) 0.198 0.507[0.040]*** [0.194]***[0.049]*** [0.253]**

1 year lagged foreign aid (% GDP) 0.516[0.192]***[0.253]**

2 year lagged foreign aid (% GDP) 0.528[0.189]***[0.250]**

5 year lagged foreign aid (% GDP) 0.407[0.200]**

[0.264]10 year lagged foreign aid (% GDP) 0.152

[0.249][0.308]

Dependent variable: DURABLE

Short-run repression effect

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REPRESSION POWER

OLSAid (% GDP) 0.001 -0.001

[0.001] [0.001][0.002] [0.002]

No. observations 2451 23502SLS

Aid (% GDP) 0.033 0.045[0.014]** [0.016]***[0.017]* [0.021]**

No. observations 2451 23502SLS

1 year lagged aid (% GDP) 0.024 0.045[0.013]* [0.016]***[0.016] [0.021]**

No. observations 2428 23282SLS

2 years lagged aid (% GDP) 0.018 0.04[0.012] [0.015]***[0.015] [0.019]**

No. observations 2360 22642SLS

5 years lagged aid (% GDP) 0.007 0.017[0.010] [0.010]*[0.013] [0.012]

No. observations 2143 20522SLS

10 years lagged aid (% GDP) -0.018 -0.011[0.010]* [0.011][0.012] [0.014]

No. observations 1756 1676

Coefficient on foreign aid and lagged foreign aid (% GDP) for each linear probability model (LPM) reported on the row. Dependent variable listed on each column.

Dependent variable

Under each coefficient, top bracket reports Huber-White standard error. Bottom bracket reports Newey-West standard error allowing upto 1-period autocorrelation.

* significant at 10%; ** significant at 5%; *** significant at 1%

Each regression controls for: Fraction rural in 1972*p(oil), GDP per capita growth (% annual), ln(GDP per capita, 1995 US$), ln(population), and the incidence of internal conflict. All regressions include country and year fixed effects.

Effect of aid on probability of political repression.

Robustness checks Alternate specification: Relationship may not be linear.

Repression effect robust to using a IV-probit model.

Concurrent flows: Charitable contributions, workers remittances. Controlling for workers remittances does not affect direction and magnitude

of repression effect.

Exclusion restriction: Exporting of “politics” from wealthy oil producers (Saudi Arabia, Iran, Libya). Repression effect may be in response to group-fighting (over aid) and/or

revolutionary threat. Repression effect is robust to controlling for assassinations and attempted

overthrow in the past two years.

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Conclusion Largely untied foreign aid to Muslim countries extends the life of the incumbent

regime and contributes to a temporary repression effect.

What happens when aid dries up? Somalia provides a clue. Post Barre, internal conflict broke out. Ahmed & Werker (in progress) provide evidence of this.

Policy implications: Oil prices have fallen recently (from very high levels). We might expect some

instability in the future.

Oil-driven aid may be a manifestation of ‘exporting’ the resource curse.

Results suggest that untied aid can worsen the welfare of citizens. Case for more tied aid.