On the Looting of Nations

The paper develops a dynamic discrete choice model of a self-interested and unchecked ruler making decisions regarding the development of a resource rich country.

We develop a dynamic discrete choice model of a self-interested and unchecked ruler making decisions regarding the development of a resource rich country. Resource wealth serves as collateral and facilitates the acquisition of loans. The ruler makes the recursive choice of either staying in power to live off the productivity of the country while facing the risk of being ousted, or looting the country's riches by liquefying the natural assets through external lending. We show that 1) unstructured lending from international credit markets can enhance the ruler's ability to liquefy assets, and create incentives to loot the country's wealth; and 2) an enhanced likelihood of looting reduces tenures (greater political instability), increases indebtedness, reduces investment, and diminishes growth. We test these predictions with the data and find strong empirical evidence that instability caused by unsound lending to unchecked rulers of resource rich countries may result in a negative shock to economic growth.