Price volatility and the political economy of resource-rich nations

Abstract

This paper attempts to understand how price volatility affects the political transition of a resource-rich nation. Two states reflect price volatility: 'high prices' and 'low prices'. We argue that whether or not political transition (i.e., a switch from one regime to another) will take place in a particular state depends critically on the kind of goods a country produces.If the main economic activity in a country is the extraction of "point-source" resources such as oil that demands capital-intensive production, the opportunity cost of switching the existing regime does not alter if the price of the resource changes but the benefit becomes more lucrative. Therefore, the incumbent group is most vulnerable during 'high prices'.If the main economic activity of the nations is the production of "diffused resources" that requires labor such as coffee, prices do affect the opportunity cost. Nations concentrating in these commodities, face acute political crisis during downturns. JEL Codes: O13.Keywords: Price volatility; Natural resources; Political systems. * We are grateful to two anonymous referees for their valuable suggestions. We thank Megan Foster for her help with proofreading. The views expressed here are authors' own and do not necessarily reflect those of the affiliated institutions.

Decreasing minerals׳ revenue risk by diversification of mineral production in mineral rich countries

“…Common features of commodity-producing countries are the enormous price swings that lead to equally enormous swings in export revenues, leading to boom-and-bust cycles that tend to persist for several years at a time (Mahmud and Basher, 2014). Export earnings from mineral products tend to be volatile, especially in the case of minerals and metals whose prices are determined in the international markets.…”