Rent, Ethnicity, Ideology and Political Incentives: Explaining Rent Cycling in Algeria, Nigeria and Indonesia*

Recent research suggests weak institutions are a leading cause of the underperformance of high-rent developing economies. But in low-income economies, institutions reflect political incentives rather than mould them so this paper focuses on how political incentives are shaped. The paper draws upon rent cycling theory, which basically posits that: (i) high rent diverts government incentives from wealth creation into patronage distribution that causes growth to collapse; (ii) recovery from a collapse is protracted due to the inertia of rent cycling; and (iii) the negative effects of high rent are amplified when rent is concentrated on governments or associated with ethnic diversity. This paper uses case studies to trace rent cycling, which statistical studies treat as a black box. It employs Indonesia’s success rent cycling since 1967 as a counter-factual to help explain Nigerian and Algerian failure. Viewed from the perspective of rent cycling theory, initial prospects were: least propitious for Nigeria due to expanding oil reserves and high ethnicity; more favourable for Algeria, which combined lower ethnicity with expanding reserves; and equivocal in Indonesia where ethnic diversity countered the wealth creating incentive conferred by depleting oil reserves. The paper attributes Indonesia’s success to the incentives from resource depletion overriding those from ethnic dissent. In contrast, Nigeria deployed its expanding oil rent to appease ethnic elites at the cost of macro policy cohesion. But contrary to rent cycling theory, Algeria initially espoused wealth creation. Its subsequent growth collapse resulted from an ideology-driven state-led industrialization strategy, which boosted unemployment, debt and social tension. Market repression is the root cause of the rent curse and statist credos do just that, so rent cycling theory should incorporate ideology. The paper also identifies from the case studies four necessary policies for effective rent deployment and proposes a dual track strategy to overcome rent seeking inertia and revive distorted economies.