A Global Perspective: Political Systems and the Unequal Burden of Natural Resource Dependence

Econovis Team

This paper delves into the complex interconnectedness of political regimes, natural resource dependence, and global trade in fuels and mining products. We employ a data-driven approach, utilizing the EIU's Democracy Index to categorize economies based on their political regime, and drawing upon economic and trade data from prominent institutions like the World Bank, WTO, IMF, and UNCTAD.

Our analysis reveals several key trends:

• Authoritarian regimes exhibit a greater reliance on natural resource rents, particularly oil, compared to democracies. This dependence significantly influences their economies and export structures.
• Democracies, excluding specific resource-rich nations, hold a dominant position in global trade but face challenges due to their reliance on imported fuels and mining products. This dependence creates trade deficits and vulnerabilities to price fluctuations.
• Rising global energy and mineral prices disproportionately benefit authoritarian regimes, strengthening their financial position and potentially exacerbating internal issues like corruption and oppression.
• The shift towards renewable energy can bolster democratic resilience and influence by reducing their reliance on resources controlled by authoritarian regimes.

This comprehensive exploration aims to shed light on the complex relationship between political systems, natural resource dependence, and global trade. The findings highlight the potential of the energy transition to empower democracies and reshape the global power dynamics.

Democracy Index

The Economist Intelligence Unit’s Democracy Index offers a comprehensive overview of the state of democracy across 165 independent states. This index is structured around five key categories: electoral process and pluralism, functioning of government, political participation, political culture, and civil liberties. Based on various indicators within these categories, each country is categorized into one of four regime types: "full democracy," "flawed democracy," "hybrid regime," or "authoritarian regime."

Political regimes’ share of world economy and population

Democracies (full and flawed) represent 70% of the world's economy, while authoritarian and hybrid regimes account for 30%. According to the EIU’s Democracy Index, only 8% of the global population, contributing to 27% of GDP (21% based on GDP PPP), resides in full democracies. In flawed democracies, which house 38% of the world's population, the GDP shares are 43% (39% based on GDP PPP). Authoritarian regimes, encompassing 39% of the world's population, make up 24% of GDP (31% based on GDP PPP).

Nearly all of the population in advanced economies (AEs) resides in democratic nations. As per the EIU’s Democracy Index and IMF country classification, 57% of the AE population, contributing to 47% GDP, resides in full democracies and excluding Hong Kong, the remaining AEs are classified as flawed democracies.
Conversely, 63% of the population in emerging markets and developing countries (EMDEs) resides in authoritarian and hybrid regimes. Within EMDEs, 45% of the population lives under authoritarian regimes, which contribute 58% to their GDP, while 37% reside in flawed democracies, contributing to 29% of GDP and 18% reside in hybrid regimes, contributing to 13% of GDP. Notably, only three small countries, with a combined population share of 0.15% in EMDEs, are classified as full democracies.

Natural resources rents

Authoritarian regimes, when compared to democracies, tend to rely more significantly on revenue generated from natural resources rents (encompass oil, natural gas, coal, and forest rents).

According to the World Bank data, total natural resource rents contributed 2.8% to the global GDP in 2021. This contribution varied among different types of political systems: for economies categorized as full democracies, it was 1.4%; for flawed democracies, 1.8%; for hybrid regimes, 3.4%; and for authoritarian regimes, 6.7%.

It is noteworthy that the contribution of total natural resource rents to GDP for economies classified as full democracy, excluding Australia, Canada, and Norway, was only 0.2% in 2021. Conversely, for authoritarian regime economies, excluding China, it stood at 18.2%.

Most authoritarian regimes derive significant benefits from natural resource rents. In 2021, 38 nations, representing 64% of the population and 83% of the GDP of authoritarian regimes (excluding China), had total natural resource rents contributing from 5% to 60% to their GDP. The cumulative contribution of total natural resource rents to the GDP of these nations was 21.3%.

Oil rent

Oil rent serve as the economic backbone for approximately one-third of authoritarian regimes that comprise around two-thirds of the world's total oil rent. All major petro-rentier states, defined as those with an oil rents to GDP ratio exceeding 5%, except Norway, fall under authoritarian regimes. In 2021, the contribution of oil rent to the GDP of authoritarian regimes, excluding China, was 11.9%, whereas for democracies (both full and flawed), it was less than 0.5%.

Fuels and mining products Trade

Economies in democracies, both flawed and full, excluding four countries rich in fuel and mineral resources (Australia, Canada, Norway, and the United States), accounted for around 40% of the world economy and population, and more than half of world trade. In 2022, these economies' share of world exports and imports of fuels and mining products was 37% and 61%, respectively. Authoritarian regimes, excluding China, accounted for 21% of the world's population and 7% of its GDP, yet they exported 33% and imported 5% of world fuels and mining products. Exports of fuels and mining products from democracies, excluding the four resource-rich countries is primarily due to processed fossil fuels and minerals.

The trade of fuels and mining products significantly impacts economies through trade surplus or deficit, thereby affecting the balance of payments. Democracies, excluding the four aforementioned resource-rich countries, experienced a trade deficit of around $1.4 trillion in 2022, equivalent to 3.4% of their GDP. Conversely, authoritarian regimes, excluding China, enjoyed a trade surplus of the same magnitude, amounting to 18.2% of their GDP in the same year.

According to the 2023 UNCTAD State of Commodity Dependence report, authoritarian regimes account for 56% of the total number of countries in the world with a high dependence on commodity exports, and 85% for energy commodities specifically. The majority of nations with a high dependence on commodity exports are authoritarian regimes. 61% of the total GDP of authoritarian regimes is generated by countries heavily reliant on natural resource exports.

Conclusion

Several democracies, notably Australia, Canada, Norway, and to some extent the United States, have benefited from rising fossil fuel prices. Conversely, many authoritarian regimes have significantly strengthened their positions with the increase in fossil fuel and mineral prices, as they gain additional revenue from natural resource rents. These rents, which often come in the form of foreign currency, provide a substantial influx of revenue, bolstering authoritarian regimes and leading to increased oppression, resource depletion, extravagance, and corruption.

On the other hand, the rise in energy and mineral resource prices imposes pressure on natural resource-deficient countries, particularly those with democratic systems. For instance, in India, the largest developing democracy, fossil fuels imports accounted for 37.8% of total imports and 10.6% of GDP in 2022, highlighting the significant economic strain caused by reliance on imported fuels.

The energy transition towards renewables not only offers environmental benefits but also has the potential to enhance the resilience, autonomy, and global influence of democracies, while reducing their reliance on energy sources from authoritarian regimes.