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Journal of African Economies 2008 17(Supplement 1):72-109; doi:10.1093/jae/ejm033
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© The author 2008. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Windfall Gains, Political Economy and Economic Development

Carl-Johan Dalgaarda and Ola Olssonb,*

a Department of Economics, University of Copenhagen, Copenhagen, Denmark
b Department of Economics, Göteborg University, Göteborg, Sweden

* Corresponding author: Ola Olsson, Department of Economics, Göteborg University, Göteborg, Sweden. E-mail: ola.olsson{at}economics.gu.se

Natural resource rents and foreign aid have the character of windfall gains that affect economic outcomes both directly and indirectly. Several studies have shown that the indirect effect typically works via institutions like corruption. In this article, we offer a theoretical framework for a joint analysis of how natural resources and aid potentially affect total output in society through rent-seeking activities. We survey the existing evidence on both direct and indirect effects of windfalls and provide some new empirical evidence of the association between aid/natural resources and institutions in a large cross-section of countries. Our results suggest that whereas more aid means less corruption, natural resource rents is positively correlated with corruption, although both relationships are non-linear.

JEL classification: O17, O43, P16


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