1. Economic Diversification: A Way to Increase
State Capacity and Promote a Peaceful
Democratization Process
University of Kent, Canterbury
School of Politics and International Relations
MA in International Conflict Analysis
Dina Patel

2. 1
Abstract
Natural resource wealth often proves problematic for states in the developing world. This paper offers
a solution to reducing the fragility of developing states, especially those with resource wealth. It
further explains that when a state diversifies its economy, it creates the environment for economic
actors who become veto players in the state’s decision making process. A more diverse economy with
the rise of industries including telecommunications, heavy industry, and manufacturing enables the
rise of the middle class. The combined effect of an increase in the number of veto player from
economic backgrounds and the rise of the middle class, both of which are accountable to economic
diversification, lead to an increase in state capacity. Utilising a mixed methods, nested analysis the
paper demonstrates a positive inverse relationship between economic diversification and state fragility
with two case studies of Chad and Nigeria to test the internal validity. Economic diversification
through the increase of veto players and the rise of the middle class produces the appropriate
atmosphere for a more peaceful democratisation process.

3. 2
Introduction
Angola is a resource rich state with large petroleum reserves, and other resources such as
diamonds. The Angolan Civil War lasted for 27 years, partially because of the low
opportunity cost for conflict which enabled UNITA to carry on fighting, after Cold War
superpower support ended (Soremekun, 1983, pp. 79-110). After the end of the conflict in
2002, Angola has struggled to rebuild the state, and has grown increasingly dependent on
petroleum exports, especially to China. Furthermore, Angola continues to be extremely
fragile both political and economically and is not building appropriate state infrastructure.
The lack of economic diversification is proving to be problematic to the future growth of
Angola (United Nations Office of the Special Adviser on Africa and the NEPAD-OECD
Africa Investment Initiative, 2010).
The paradox is that oil rich developing states whose soils provide them with large variety of
natural resources and a comparative advantage for economic development, fail to do so. The
presence of hydrocarbons is a mixed blessing to a developing country. With the wealth, often
comes an over reliance on resources, while in the throes of democratization. All of these
effects increase the level of instability in the states (Ross, 2001; Gates, et al., 2006). This in
turn, increases the risk of conflict in these states as see in Sierra Leone, the Philippines,
Democratic Republic of Congo, Colombia and others. Thus this conflict-proneness often
costs the states in question their comparative advantage in comparison with resource-poor
developing states (Alexeev & Conrad, 2009).
The research question for this paper is to demonstrate that economic diversification reduces
state fragility. The theoretical framework explains that as a state diversifies its economy, it
increases the number of economic veto players (Wiig & Kolstad, 2012; Acemoglu &
Robinson, 2006a; Przeworski, et al., 2000). This changes the decision making process to
include the veto players, whilst the diversification of the economy enables the growth of the
middle class (Fearon, 1995; Lipset, 1959). The two effects in combination to economic
diversification create a strong pacific effect for the state.
The main argument this paper presents is that an increase in economic diversification will
reduce state fragility. The rational is that if a state has broad, stable patterns of economic
growth, it would insulate its economy from external price shocks that occur in the petroleum
industry (Collier & Goderis, 2007). The stable economic growth in place of high levels of
economic growth would result in more veto players in decision making processes, increasing
the opportunity cost for conflict, and therefore making it less likely (Acemoglu & Robinson,
2006a; Przeworski, et al., 2000). The increased number of veto players would come from
various economic sectors such as telecommunications, heavy industry, manufacturing and
services (Acemoglu & Robinson, 2008). This is a departure from usual veto players of these
countries, typically coming from the military, the oil industry or land owners (Mansfield, et
al., 2008). The number and variety of veto players is how the opportunity cost of conflict is
increased past an advantageous point (Fearon, 1995).
With the increased number of veto players coming from sectors of the economy that are
intensive in human capital creates the necessary conditions for the rise of the middle class,
bringing with it a disinterest in conflict, further decreasing its probability. The middle class
becomes a catalyst to the development of a democratic state. As the middle class grows in
size and wealth it usually develops an in interest in rights and civil liberties, but not through
violence because it has more at stake than low income citizens (Lipset, 1959; Angeles, 2008).

4. 3
The combination of the increase in the number of veto players in addition to the rise of the
middle class are critical developments in creating a peaceful society, and economic
diversification creates the parameters for this to occur.
The result of this research is through a mixed methods and nested analysis, demonstrating a
positive inverse correlation between an increase in economic diversification and a reduction
in the state fragility. This enables anocracies to transition into democracies more peacefully,
as a result of the increase in economic veto players and the middle class, both of which have
an interest in democratic tendencies and a high opportunity cost for conflict.
The overall contribution of this research demonstrates a way for states to reduce their
fragility, in order to become more developed states, particularly if they are oil rich.
Diversifying away from natural resources enables the state to develop a variety of other
industries. Furthermore, this research demonstrates states in the developing world with higher
levels of economic diversification are safer places for future investments for large
corporations and foreign direct investment than ones that are not attempting to diversify.
This paper will expand its argument through several chapters. The Literature Review
explores the main arguments and gaps in four bodies of literature- the resource curse,
economic diversification, the state structure argument and democratization in order to obtain
a depth and breadth of the relevant literature. The Theoretical Framework explains the
connections between economic diversification and the subsequent effects on the increased
number of veto players and the rise of the middle class. Subsequently the Research Design
elaborates on the mixed methods and the nested analysis chosen in this paper. The
penultimate chapter will finally look at Case Studies to test the internal validity of the
statistical analysis, using the cases of Nigeria and Chad.
In the end this paper demonstrates a different way for resource rich states to use their
comparative advantage and become more developed states through economic diversification
as a means to reduce state fragility.

5. 4
Bibliography for introduction:
Acemoglu, D. & Robinson, J., 2006a. Economic backwardness in political perspective.
American Political Science Review, 100(1), pp. 115-131.
Acemoglu, D. & Robinson, J., 2006. Economic Origins of Dictatorship and Democracy.
Cambridge: Cambridge University Press.
Acemoglu, D. & Robinson, J., 2008. The Persistence and Change of Insistutions in the
Americas. Southern Economic Journal, 75(2), pp. 282-299.
Alexeev, M. & Conrad, R., 2009. The Elusive Curse of Oil. Review of Economics and
Statistics, 91(3), pp. 586-598.
Angeles, L., 2008. Democratization as a Cost-Saving Device. Glasglow, Business School of
Economics at the University of Glasglow.
Aslaksen, S., 2010. Oil and democracy: More than a cross-country correlation?. Journal of
Peace Research, Volume 47, pp. 58-88.
Azam, J.-P., Collier, P. & Hoeffler, A., 2001. International Policies on Civil Conflict: an
Economic Perspective, Oxford: Oxford University Press.
Barro, R. J., 1999. Determinants of Democacy. Journal of Political Economy, 107(6), pp.
158-183.
Bearce, D. H. & Laks Hutnick, J. A., 2011. Toward an Alternative Explanation for the
Resource Curse: Natural Resources, Immigration and Democratization. Comparative Political
Studies, Volume 44, pp. 689-719.
Cabrales, A. & Hauk, E., 2011. The Quality of Political Institutions and the Curse of Natural
Resources. The Economic Journal, pp. 58-88.
Carrère, C., Strauss-Kahn§, V. & Cadot, O., 2009. Trade Diversification, Income and
Growth: What do we Know. Clermont-Ferrand, CERDI.
CIA , 2011. Angola. [Online]
Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/ao.html
[Accessed 31 March 2011].
Cimoil, M. & Rovira, S., 2008. Elites and structural inertia in Latin America: an introductory
note on the political economy of development. Journal of Economic Issues, 42(2), pp. 327-
347.
Collier, P., 2007. The Bottom Billion: Why the Poorest Countries are Failing and What Can
Be Done About It. Oxford: Oxford University Press.

6. 5
Collier, P. & Goderis, B., 2007. Commodity Prices, Growth, and the Natural Resource Curse:
Reconciling a Conundrum. CSAE WPS/2007-15, pp. 1-41.
Crescenzi, M. J. & Enterline, A. J., 1999. Ripples from the Waves? A Systemic, Time-Series
Analysis of Democracy, Democratization, and Interstate War. Journal of Peace Research,
36(1), pp. 75-94.
CSP INSCR, 2011. Polity IV: Regime Authority Characteristics and Transitions Datasets.
[Online]
Available at: http://www.systemicpeace.org/inscr/inscr.htm
[Accessed 17 Janary 2012].
CSP INSRC, 2011. PITF State Failure Problem Set 1955-2010: Adverse Regime Changes.
[Online]
Available at: http://www.systemicpeace.org/inscr/inscr.htm
[Accessed 17 January 2012].
Cuaresma, J. C., Oberhofer, H. & Raschky, P., 2010. Oil and the Duration of Dictatorships.
Discussion Paper for the Economics department at Moash University, pp. 1-27.
Cuberes, D. & Jerzmanowski, M., 2009. Democracy, Diversification and Growth Reversals.
Economic Journal, Volume 119, pp. 1270-1302.
Cunningham, D., 2010. Blocking Resolution: How External States can Prolong Civil Wars.
Journal of Peace Research, March, 47(2), pp. 115-127 .
Cunningham, D. E., Gleditsch, K. S. & Salehyan, I., 2009. It Takes Two: A Dyadic Analysis
of Civil War Duration and Outcome. Jounral of Conflict Resolution, 53(4), pp. 570-597.
De Tocqueville, A., 1840. Democracy in America. 3rd ed. Cambridge: Sever and Francis.
Dunning, T., 2005. Resource Dependence, Economic Performance, and Political Stability.
Journal of Conflict Resolution, 49(4), pp. 451-482.
Farrell, D., Gersch, U. A. & Stephenson, E., 2006. The Value of China's Emerging Middle
Class, New York: The McKinsey Quarterly.
Fearon, J. D., 1995. Rationalist Explanations of War. International Organization, pp. 379-
414.
Fearon, J. D., 1999. Electoral Accountablity and the Control of Politicians: Selecting Good
Types versus Sanctioning Poor Performance. In: A. Prezeworski, S. C. Stokes & B. Manin,
eds. Democracy, Accountablity and Representation. Cambridge: Cambridge University Press,
pp. 55-97.

7. 6
Fearon, J. D., 2004. Why Do Some Civil Wars Last So Much Longer than Others?. Journal of
Peace Research, pp. 275-301.
Fjelde, H., 2009. Buying Peace? Oil Wealth, Corruption and Civil War, 1985-1999. Journal
of Peace Research, Volume 46, pp. 199-219.
Gartzke, E., 2007. The Capitalist Peace.. American Journal of Political Science, 51(1), pp.
166-191.
Gates, S., Harvard, H., Jones, M. P. & Harvard, S., 2007. Democratic Waves? Global
Patterns of Democratization 1800-2000. Center for the Study of Civil War PRIO, pp. 1-34.
Gates, S. H. H., P., J. M. & Harvard, S., 2006. Institutional Inconsistency and Political
Instability: Polity Duration, 1800-2000. American Journal of Political Science, 50(4), pp.
893-908.
Gleditsch, N. P. & Hegre, H., 1997. Peace and Democracy: Three Levels of Analysis. Journal
of Conflict Resolution, 41(2), pp. 283-310.
Gurr, T. R., 1970. Why Men Rebel. Princeton, N.J.: Princeton University Press.
Gurses, M., 2009. State-sponsored development, oil and democratization. Democratization,
16(3), pp. 508-529.
Haber, S. & Menaldo, V., 2011. Do Natural Resources Fuel Authoritarianism? A Reappraisal
of the Resource Curse. American Political Science Review, 105(1), pp. 1-26.
Hewitt, J. J., Wilkenfeld, Gurr, T. R. & Heldt, B., 2012. Peace and Conflict 2012 Executive
Summary, College Park, Maryland: Center for International Development and Conflict
Management.
Hummels, D. & Klenow, P., 2005. The Variety and Quality of a Nation's Exports. African
Economic Review, 95(3), pp. 704-723.
Humphreys, M., 2005. Natural Resources, Conflict, and Conflict Resolution: Uncovering the
Mechanisms. The Journal of Conflict Resolution, 49(4), pp. 508-537.
Joerges, B., 1988. Large Technical Systems: Concepts and Issues. In: The Development of
Large Technical Systems. s.l.:Campus Verlag, pp. 9-36.
Kastner, S. L. & Rector, C., 2003. International Regimes, Domestic Veto-Players, and
Capital Controls Policy Stability. International Studies Quarterly, Volume 47, pp. 1-22.
Kubicek, R., 1999. British Expansion, Empire and Technological Change. In: The Oxford
History of the British Empire Volume III: The Nineteenth Century. Oxford: Oxford
University Press, pp. 247-269.
Lipset, S. M., 1959. Some Social Requisites of Democracy: Economic Development and
Political Legitimacy. American Political Science Review, 53(1), pp. 69-105.

8. 7
Lujala, P., R⊘d, J. K. & Thieme, N., 2007. Fighting Over Oil: Introducing a New Dataset.
Conflict Management and Peace Science, 24(3), pp. 239-256.
Mamdani, M., 2001. When Victims Become Killers. Princeton N.J.: Princeton University
Press.
Mansfield, E. D., Milner, H. V. & Pevehouse, J. C., 2008. Democracy, Veto Players and the
Depth of Regional Integration. The World Economy, pp. 67-96.
Marshall, M. G. & Cole, B. R., 2011. Global Report 2011: Conflict, Governance, and State
Fragility, Vienna, Virginia: Center for Systemic Peace.
Melvern, L., 2000. A People Betrayed: the Role of the West in Rwanda's Genocide. 2nd ed.
London: Zed Books.
Mitchell, S. M., Gates, S. & Hegre, H., 1999. Evolution in Democracy-War Dynamics.
Journal of Confict Resolution, 43(6), pp. 771-792.
Morus, I. R., 2000. 'The Nervous System of Britain': Space, Time and the Electric Telegraph
in the Victorian Age. British Journal for the History of Science, pp. 455-75.
Newfarmer, B. P. & Walkenhorst, R., 2009. Avenues for Export Diversification: Issues for
Low-Income Countries. Munich, MPRA Paper No. 22758.
Oskarsson, S. & Ottosen, E., 2010. Does Oil Still Hinder Democracy. Journal of
Development Studies, 46(6), pp. 1067-1083.
Przeworski, A., Alvarez, M. E., Cheibub, J. A. & Limongi, F., 2000. Democracy and
Development: Political Insistutions and Well-Being in the World, 1950-1990. Cambridge:
Cambridge University Press.
Ramsay, K. W., 2011. Revisiting the Resource Curse:Natural Disasters, the Price of Oil, and
Democracy. International Organization, Volume 65, pp. 507-529.
Redvers, L., 2012. Living in the World's Most Expensive City. [Online]
Available at: http://www.bbc.co.uk/news/business-16815605
[Accessed 5 June 2012].
Ross, M., 2001. Does Oil Hinder Democracy. World Politics, pp. 325-361.
Ross, M., 2004. What Do We Know about Natural Resources and Civil War?. Journal of
Peace Research, 41(3), pp. 337-356.
Rudra, R. & Jensen, N. M., 2011. Globalization and the Politics of Natural Resources.
Comparative Political Studies, 44(6), pp. 639-661.
Sherif, M., 1958. Superordinate Goals in the Reduction of Intergroup Conflict. American
Journal of Sociology, 63(4), pp. 349-356.

9. 8
Starosta de Waldemar, F., 2010. How Costly is Rent-Seeking to Diversification: an empirical
approach. Paris, Centre d'Economie de la Sorbonne.
Stewart, F. & Brown, G., 2007. Motivations for Conflict. In: Leashing the Dogs of War:
Conflict Management in a Divided World. Washington D.C.: United States Institute of Peace,
pp. 219-241.
Thies, C. G., 2010. Of rulers, rebels, and revenue: State capacity, civil war onset, and primary
commodities. Journal of Peace Research, 47(3), p. 321–332.
Tsui, K. J., 2010. Resource Curse, Political Entry and Deadweight Costs. Economics &
Politics, 22(3), pp. 471-497.
Unger, J., 2006. China's Conservative Middle Class. Far Eastern Economic Review, 169(3),
pp. 27-31.
United Nations Office of the Special Adviser on Africa and the NEPAD-OECD Africa
Investment Initiative, 2010. Economic Diversification in Africa: A Review of Selected
Countries, New York: OECD.
Wiig, A. & Kolstad, I., 2012. If diversification is good, why don't countries diversify more?
The political economy of diversification in resource-rich countries. Energy Policy, Volume
40, pp. 196-203.