Democracy, Development, and the International Political Economy: Political Institutions and Investment Financing Strategies in Sub-Saharan Africa

During the first three decades of independence in sub-Saharan Africa, virtually all its democracies quickly fell to be replaced with dictatorships. When the Cold War ended in the late 1980s, multiple democracies that endured for decades emerged in sub-Saharan Africa for the first time, an achievement that defies the empirical regularity that democracies rarely endure in low-income countries. I argue that this historical phenomenon is a result of changes in the international political economy, which interacts with structural factors such as natural resource endowments to affect the decisions of political actors in Africa regarding both political regime type and economic policy. I argue that conditions favoring the emergence of stable democracies in Africa are a fall in financial inflows to the public sector, which undermines dictatorship, sufficient financial flows to the private sector, which enables economic growth, and low dependence on location-specific assets such as natural resources, so that economic benefits are more likely to be dispersed among the population. The pattern of financial flows is the result of a strategic interaction between foreign finance, who make decisions in response to exogenous factors (such as resource endowments) and the choices of African rulers, and the African rulers, who make those choices based on the expected response of foreign finance.;In the theoretical chapter of the dissertation I present the formal model of my argument in multiple steps. I then test the empirical implications derived from the formal model in four empirical chapters using data for 38 countries in sub-Saharan Africa during the years 1970--2002. In Chapter 5, I use a dynamic probit analysis to test the assumption in the proposed government utility function that financial inflows to the public sector are more important relative to flows to the private sector for dictatorships compared to democratic governments, unless the economy is heavily dependent on natural resource production (including extraction of oil and mineral reserves). I find that authoritarian regimes are more likely to transition to democracy when net flows to the public sector are low or negative, and that democratic regimes are more likely to fail when net flows to the private sector are low or negative, conditional on the share of natural resource production in the economy. The fall of the Soviet Union, which indicates a fall in aid flows for former Soviet clients, is a significant predictor of democratization for those countries.;In Chapters 6 and 7, I test predictions regarding the proposed utility function for foreign finance. I use an ordinary least squares analysis with panel corrected standard errors to estimate the effects of government decisions, including political regime type and economic development strategy, as well as relevant covariates, to predict net flows of foreign direct investment (FDI), portfolio equity, debt from private investors to the public and private sector, and overseas development aid from bilateral and multilateral official donors. I find that external factors and exogenous domestic factors such as population size, income level, and natural resource reserves tend to be more important than the government decisions under examination. Among the latter category, the strongest result is that a transition from statist to capitalist economic development strategy in countries with small natural resource endowments tends to increase net FDI inflows.;In Chapter 8, I test predictions from the sequential game between the government and foreign finance. I first test the predictions economic development strategy transition, holding political regime type, using conditional logit. I then test predictions regarding the joint decision by governments regarding political regime type and economic development strategy using multinomial probit. In general, the pattern of outcomes tends to fit the equilibria predicted by the formal model. However, the analysis suggests that past events, such as low the accumulation of public debt and low financial inflows in the recent past, are more important than indicators of potential FDI inflows. Although these findings are not conclusive, they suggest that equilibrium outcomes are the result of natural selection rather than optimizing decisions by rational, forward-looking government leaders.;While the questions studied here warrant further research, tentative conclusions include the following. An increase in the availability of funds from private and public sources for government in Africa facilitated the adoption of statist economic policies in the 1970s and the survival of authoritarian regimes. The accumulation of public debt and decreased availability of loans for the public sector in the 1980s pushed governments to abandon statist for capitalist economic policies (the role of donor conditionality is less clear); when dictatorships fell, they were replaced by democracies that also fell soon after. The fall of the Soviet Union and the resulting reduction in funding for numerous African governments contributed to a wave of new democracies, some that survived but others that failed. Democracies most likely to survive were those that attracted at least a minimal level of financial flows to the private sector and were not heavily dependent upon natural resource extraction.