Power-sharing institutions can mitigate violent contests for natural resource rents

Democratic institutions play a significant role in shaping whether windfalls of natural resources are managed and shared peacefully or whether their spoils are associated with violent contests. Governing institutions that practice rules-based power-sharing may facilitate the peaceful distribution of natural resource rents. Unfortunately, rather than bringing economic development, resource wealth is often associated with instability, civil conflict and political violence. These mechanisms may be even more pronounced in multi-ethnic societies.

Do cohesive institutions produce a more stable and peaceful sharing of resource wealth? Based on the example of Nigeria, we present empirical evidence which shows how democratic elections that produce cohesive institutions and broad-based power sharing may be key to more sustainable governance of natural resource wealth.

Nigeria’s federalist governing structure is unique to study this question

The majority of Nigeria's government revenues comes from oil production – as illustrated in Figure 1. This revenue is distributed across the three tiers of government according to a specific allocation formula. Not surprisingly, these resource revenue allocations are a significant point of political friction. Although these funds are designated for public administration and the delivery of public goods, such as healthcare and education, there are numerous accounts suggesting that local political elites capture and misappropriate public funds. Given often volatile oil revenue shocks, the political economic mechanisms present in government institutions are crucial to understanding how the resource curse may or may not unfold at the local level.

We study two unique data sets to explore local government councils – that preside over the shared resource wealth – over time under two separate institutional regimes: elected local governments and appointed local governments (Fetzer and Kyburz 2024). As we show, appointments are frequently biased and partisan, suggesting the potential for systematic exclusion of opposition or other minority groups from the management and oversight of resource revenues. This can lead to grievances among constituencies, which may subsequently help to mobilise individuals to participate in contesting the local governments and its allocated funds.

How do local democratic institutions influence the contest for resource revenues? What role does the representation of ethnic groups play in enhancing the cohesiveness of government institutions? And why do cohesive institutions reduce the antagonism in resource allocation processes? The de-facto variations in local democratic institutions in Nigeria offer intriguing insights. According to the Nigerian Constitution of 1999, local government councils should be elected by the citizens, yet in many cases, they are appointed by state governors (see Figure 1b). This variation enables us to examine the effects of different power-sharing arrangements at the local government level on political violence, using monthly tax revenue allocations as an exogenously determined measure for contested resources.

Figure 1: (a) Brent oil price and statutory allocations of the LGAs; (b) Share of elected local governments over time across Nigeria

Notes: Panel (a) Monthly variation in overall revenue allocations made to local governments (right scale), and monthly prices of Brent Crude oil (left scale). Panel (b): Share of months with an elected local government for each local government area in the period 1999 to 2014. Panel B: Monthly time series variation in the share of local government areas with an elected government council over time.

Untangling the interplay between democratic institutions, resource wealth and political violence

The political and economic structure of Nigeria allows us to explore three important questions: Does resource wealth incite conflict? Do elected local governments foster peace? Do variations in the cohesiveness of local government institutions account for these effects, and if so, why? Here are our findings:

1. Large windfalls of politically controlled natural resource revenues spur violence

We examine the distribution of oil revenues across Nigeria's three government levels. The revenues show a strong correlation with global oil prices, as depicted in Figure 1(a). We identify a significant and economically sizeable relationship between resource profits and the occurrence of political violence, aligning with a theoretical forecast by Besley and Persson (2011). These effects are primarily driven by positive shifts in the value of resource rents. The resulting low-level conflict is highly institutionalised, characterised by government suppression and militias using targeted violence, rather than open rebellions involving riots or protests.

2. Elected local governments are successful in discouraging violence, while appointed governments use force to deter contestants

Examining the unique variation in whether local governments are elected or appointed, we discover that the presence of an elected local government consistently reduces the link between resource rents and the occurrence of political conflict. Instead of concentrating on any single election which could be susceptible to violence directly influencing its result, we compare successive periods during which local governments are elected (as opposed to being appointed) and investigate the systematic relationship between fluctuations in resource rents and violence across these periods.

Our approach to identification effectively addresses numerous potential endogeneity issues, yielding precise results that align with the main theoretical forecasts in Besley and Persson's work. We also employ individual-level microdata to corroborate our findings, demonstrating that the fear of political violence, actual victimisation, and even involvement in conflict generally adhere to the pattern indicated by the aggregate data.

3. Elected local governments (versus appointed ones) achieve a higher degree of cohesiveness, which explains why less violence is used to contest rents

We develop a measure of non-cohesiveness using data from the Demographic and Health Surveys (DHS), which reflects the degree to which the ethnic composition of a local government area corresponds with the ethnicity of the state governor. We present substantial anecdotal evidence indicating that when local governments are appointed, these appointments are skewed towards the ethnicity of the state governor. We confirm this measure using individual-level microdata. Our third sets of findings emphasises that the more cohesive the institutions produced by elections (compared to appointments), the weaker the relationship between resource rents and political violence. In essence, resource rents incite conflicts, but only when local governments are appointed and therefore ethnically aligned with the state governor, and not when they are elected. Local elections appear to enhance the representation of political factions at the local government level, contributing to a more peaceful resolution of contests for resources.

In Figure 2, we show evidence of the non-linear impacts of resource shocks. Panel (a) illustrates that under an appointed local government, negative shifts in resource profits are linked with reduced conflict, while positive shifts in resource profits incite conflict. Panel (b) builds the figure using the subset of data when local councils are elected: although negative shifts continue to have a weak association with less conflict, positive revenue shifts are not associated with conflict. This outcome implies that with elected local governments, disputes over distribution that arise with positive revenue shifts are settled non-violently.

Figure 2: Positive and negative resource allocation shocks under elected and appointed regimes

Notes: The figure presents results from bootstrapped lowess regressions on the residuals of the dependent variable, after having demeaned the data by LGA and state-by-time fixed effects. The method first computes lowess regressions from 1000 bootstrapped samples of the demeaned data. It then calculates density estimates of the predictions from the lowess regressions for several hundred cuts along the y-axis and distributes a specified color proportional to that density estimate. The resulting figure displays the uncertainty in the regressions visually. The median value of the bootstrapped lowess predictions is indicated as a solid white line, while OLS regressions are indicated as a green line.

The question of whether scarce resources are distributed in a concordant and peaceful way or provoke coercion and violence is a significant focus of political economy research. This contributes to our comprehension of how a particular type of democratic institution – elected local governments – can influence and moderate factions’ negotiations peacefully. This understanding is especially pertinent to resource-rich countries, like Nigeria, where democratic oversight and a robust institutional structure are suggested to be vital in ensuring that these states are not plagued by their resource abundance.

References

Besley, T and T Persson (2011), The Logic of Political Violence, The Quarterly Journal of Economics, 126(3): 1411–1445.

Fetzer, T, and S Kyburz (2024), "Cohesive institutions and political violence", Review of Economics and Statistics, 106(1): 133-150.