Following up with some resource curse literature that understands the problem as incentive misalignment:
On how state revenue sources shape institutional development and incentives, Karl (1997) writes,
“Thus the fate of oil-exporting countries must be understood in a context in which economies shape institutions and, in turn, are shaped by them. Specific modes of economic development, adapted in a concrete institutional setting, gradually transform political and social institutions in a manner that subsequently encourages or discourages productive outcomes. Because the causal arrow between economic development and institutional change constantly runs in both directions, the accumulated outcomes give form to divergent long-run national trajectories. Viewed in this vein, economic effects like the Dutch Disease become outcomes of particular institutional arrangements and not simply causes of economic decline. This deeper explanation is revealed in the relentless interaction between a mode of economic development and the political and social institutions it fosters.
[...]
How are frameworks for decision-making created and reproduced in late-developing countries? I argue that determining the “structuring principle” for these countries—that is, the appropriate starting point for identifying how ranges of choice are constructed—should begin with their leading sector. This means examining the export dependence that molds their economies, societies, and state institutional capacities, and that, in turn, is either reinforced or transformed by them. My effort to understand this set of interactions begins with differentiating the asset specificity, tax structure, and other features inherent in the exploitation of one particular commodity, petroleum. It terminates by examining the state, where the impact of particular economic models and
A central corollary of this argument is that countries dependent on the same export activity are likely to display significant similarities in the capacity of their states to guide development. In other words, countries dependent on mining should share certain properties of “stateness,” especially their framework for decision-making and range of choice, even though their actual institutions are quite different in virtually all other respects. This should be true unless significant state building has occurred prior to the introduction of the export activity.
The specific mechanism for the creation of this institutional sameness lies in the origin of state revenues. It matters whether a state relies on taxes from extractive activities, agricultural production, foreign aid, remittances, or international borrowing because these different sources of revenues, whatever their relative economic merits or social import, have a powerful (and quite different) impact on the state’s institutional development and its abilities to employ personnel, subsidize social and economic programs, create new organizations, and direct the activities of private interests. Simply stated, the revenues a state collects, how it collects them, and the uses to which it puts them define its nature. Thus it should not be surprising that states dependent on the same revenue source resemble each other in specific ways (and consequently so do the decisions made by their leaders).”
I’d note that Karl’s argument has nearly 5,000 citations and is one of the most common (if not the dominant) explanations of the resource curse.
From Cooper (2002) Chapter 7:
“Oil can turn a gatekeeper state into a caricature of itself. Unlike agriculture, which involves vast numbers of people in the production and marketing of exports, oil requires little labor, and much of it from foreigners. It also entails relationships between the few global firms capable of extracting it and the state rulers who collect the rents. It defines a spigot economy: whoever controls access to the tap, collects the rent.”
On the importance of taxing citizens to state development, Centeno (1997) notes:
“The key to the relationship between war and state making in Western Europe is what Finer (1975) calls the “extraction-coercion” cycle. [...] For the “extraction-coercion cycle” to begin, the relevant states must not have alternative sources of financing while the domestic economy must be capable of sustaining the new fiscal and bureaucratic growth. Conflict-induced extraction will only occur if easier options are not available. Even then, the relevant societies might not be able to produce enough surplus to make the effort productive. Thus, for example, the availability of Latin American silver and the willingness of bankers to risk massive sums freed the Spanish Hapsburgs from imposing greater fiscal control over their provinces as a means to pay for their wars. Conversely, the relative scarcity of such external supports drove the expansion of the early English state.”
On how non-taxation revenue inhibited state development in Latin America, and therefore did not follow Tilley’s pattern of “war making states”, Centeno (1997) argues:
“As in the European cases, war produced immediate deficits, but with one prominent exception, the Latin American states did not respond to these with increased extractions, at least not in the form of domestic taxes. [...] If they could not borrow on international markets (as was the case from roughly 1830 to 1870), Latin American states could sell access to a commodity. Guano allowed Peru to become what Shane Hunt (1973) has called a “rentier state.” The availability of guano revenues retarded the development of the state by allowing it to exist without the remotest contact with the society on which it rested and without having to institute a more efficient administrative machine. Guano did allow the removal of the regressive contribucion (in 1855), but it also permitted the state to avoid modernizing its fiscal structure while borrowing large amounts of money. A contemporary British observer (Markham 1883, p. 37; my emphasis) noted that “a wise government would have treated this source of revenues as temporary and extraordinary. The Peruvians looked upon it as if it was permanent, abolishing other taxes, and recklessly increasing expenditure.” Much like the guano bonanza in the Peruvian case, the conquest of nitrate territories allowed the Chilean state to expand without having to “penetrate” its society and confront the rampant inequality (Loveman 1979, p. 169; Sater 1986, p. 227). By 1900, nitrate and iodine were accounting for 50% of Chilean revenues and 14% of GDP (Mamalakis 1977, pp. 19–21; Sater 1986, p. 275).”
Happy to cite some more of the literature if it’s helpful.
Good to see your work on this! I’ll avoid jumping in on weighing this relative to other problems as it’s not the core of your post.
Rudolf and I are proponents of alignment to the user, which seems very similar to your second suggestion. Do you think there’s a difference in the approach you outline vs the one we do? I’m considering doing a larger write-up on this approach, so your feedback would be helpful.