The Politics of Corruption

Lecture: 11

Bogdan G. Popescu

bgpopescu@tec.mx

Tecnológico de Monterrey

Today

What happens when money arrives without being earned through taxation?

Explain how unearned revenue weakens accountability
Summarize one headline finding on aid, one on oil
Apply the windfall framework to Mexican oil and Pemex

Two literatures, one mechanism: oil and foreign aid.

I. The Fiscal Contract

Two governments, one budget

Both raise 100 billion pesos a year.

Government A collects it from millions of taxpayers
Government B sells oil to foreign buyers
A must persuade millions of people to keep paying
B needs far less from its own citizens

Same budget — but not the same bargaining position.

Photo: Lost Hills oil field, California. Arne Hückelheim, Wikimedia Commons, CC BY-SA 3.0.

Why taxation invites bargaining

Taxing people requires their records and their cooperation
Collection is cheaper when people believe it is fair
That gives citizens something they can withhold
Rulers who need the money have reason to bargain

Political scientists call that bargain the fiscal contract.

A tendency, not a law: plenty of states have taxed heavily and coercively.

Money that skips the bargain is a windfall. Economists call the surplus above production costs a rent.

Two paths to a government budget

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flowchart LR
  A["Taxes collected<br/>from citizens"] --> B["Citizens have<br/>something to withhold"]
  B --> C["Rulers have<br/>reason to bargain"]
  C --> D["Pressure to<br/>account"]
  E["Oil sales or<br/>donor transfers"] --> F["No one had to<br/>be persuaded"]
  F --> G["Less need<br/>to bargain"]
  G --> H["Room for<br/>discretion"]
  classDef earned fill:#4a7c6f,stroke:#1e293b,stroke-width:2px,color:#ffffff
  classDef unearned fill:#b44527,stroke:#1e293b,stroke-width:2px,color:#ffffff
  class A,B,C,D earned
  class E,F,G,H unearned

Author’s illustration of the fiscal-contract argument.

Does the pattern show up in the data?

Descriptive, not causal — but the direction is the one theory predicts.

Exercise 1 — Designing around a windfall

Your country has just discovered a gas field worth 20% of GDP per year for the next thirty years.

In pairs, agree on one answer to each:

One rule that keeps citizens asking where the money goes
Who enforces that rule when the government does not want it enforced?

5 minutes. Be ready to name your enforcer.

So what?

The mechanism is about how revenue arrives, not what it is
If it matters, aid should sometimes look like oil
That is a hypothesis, and it has been tested twice

We start with oil, because that literature is older and the outcome is stark: does oil block democracy?

II. Oil

Oil-rich, democracy-poor

“Some scholars suggest that the Middle East’s oil wealth helps explain its failure to democratize.”

— Ross (2001, p. 325)

Ross puts that claim on trial:

113 states, 1971–1997, pooled time-series cross-national data
Predictor: oil exports as a share of the economy
Outcome: standard cross-national democracy scores
Comparison: other minerals, and non-mineral commodities

The comparison is the clever part: if it is really oil, coffee should not do the same thing.

Three ways oil could block democracy

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flowchart LR
  O["Oil revenue flows<br/>straight to the state"] --> R["Rentier effect:<br/>low taxes, patronage"]
  O --> P["Repression effect:<br/>bigger security budget"]
  O --> M["Modernization effect:<br/>social change stalls"]
  R --> D["Pressure for<br/>democracy weakens"]
  P --> D
  M --> D
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  classDef out fill:#4a7c6f,stroke:#1e293b,stroke-width:2px,color:#ffffff
  class O src
  class R,P,M mech
  class D out

Author’s illustration of the three mechanisms in Ross (2001).

The mechanisms, unpacked

The rentier effect has three parts:

Taxation: governments tax little, so citizens demand little
Spending: patronage buys off groups that might organize
Group formation: money blocks independent associations from forming

And two further channels:

Repression: oil funds police, army, surveillance
Modernization: enclave growth skips the social changes democracy needs

What Ross finds

Oil exports are strongly associated with authoritarian rule
The effect is not confined to the Middle East
Other minerals do the same; other commodity exports do not
He reports at least limited support for all three mechanisms

Note what this rules out: the pattern is not confined to one region or one culture. What it rules in is much harder to pin down.

The pattern is still visible today

What this does not say

Oil is not destiny: Norway and Timor-Leste sit above the line
Haber and Menaldo (2011) find no curse using long historical series
Reverse causation is real: weak states may end up oil-dependent
Ross (2015) concludes petroleum makes authoritarian regimes more durable

One reasonable synthesis — not a verdict: oil rarely creates dictatorship, but it preserves whatever arrangement existed when the oil arrived.

So what?

The mechanism was never about geology — it was about unearned revenue
Aid also arrives from outside, without taxing anyone
But aid can be conditioned, monitored, switched off — oil cannot

So the parallel is partial. The question is whether aid leaves the same fingerprints anyway — and whether we can catch it leaving the country.

III. Aid

Aid is a windfall too

Aid arrives from abroad, granted by donors, not voted by citizens
In the 50 most aid-dependent countries, aid was 53.8% of spending
Svensson (2000): a windfall enlarges a common pool
Rival groups then spend more effort grabbing from it
So more revenue can mean fewer public goods

His escape hatch is a donor who can credibly commit to withhold aid — which is exactly what donors find hardest to do.

Aid as a share of central government expenditure, 1975-1995. Reported in Svensson (2000, p. 438), citing World Bank (1998).

How would you catch elite capture?

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flowchart LR
  A["World Bank pays out<br/>aid this quarter"] --> B(["Where do foreign<br/>deposits move?"])
  B --> C["Secrecy havens:<br/>Switzerland"]
  B --> D["Ordinary centres:<br/>Germany, Sweden"]
  C --> E["Deposits jump<br/>the same quarter"]
  D --> F["No change"]
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  class A,B q
  class C,E hit
  class D,F null

Author’s illustration of the research design in Andersen et al. (2022).

The headline result

Quarterly World Bank disbursements matched to Bank for International Settlements deposit data, 1990–2010.

Sample: the 22 countries where World Bank aid exceeds 2% of GDP
Aid worth 1% of GDP raises haven deposits by 3.4% that quarter
Deposits in non-havens do not move at all
Implied leakage at the sample average: about 7.5% of aid

The contrast between havens and non-havens is the whole argument: a cash-management story cannot explain why only Zurich moves.

Leakage rises with dependence

What a “haven” actually looks like

A five-storey white office building fronted by palm trees under a blue sky, with a sign reading Ugland House.

Ugland House, George Town, Cayman Islands — the registered address of thousands of companies.

Secrecy and asset protection are the product
Money moves to Zurich, not to Frankfurt
That asymmetry is what makes theft the plausible reading

Photo: Coolcaesar, Wikimedia Commons, CC BY 4.0.

Ruling out the alternatives

Could something else move aid and money at the same time?

Wars, disasters, crises: drop those episodes — result holds
Reverse causation: instrument with aid promised in advance — holds
Anticipation: no deposit trend in the quarters before payment
Firms managing cash: then why only secrecy jurisdictions?

The authors are careful: the data show where money goes, not who moved it.

The same logic inside one country

Brazil: federal transfers jump at fixed population cut-offs, so nearly identical towns get different budgets — a natural experiment.

Windfall transfers and municipal politics in Brazil
Outcome measured	Effect of 10% more transfers	Change vs. average
Corruption episodes detected	+12.0 points	+17%
Challengers holding a college degree	-3.0 points	-7%
Incumbent mayor re-elected	+4.1 points	+7%

Effects in percentage points, from a fuzzy regression discontinuity. Source: Brollo, Nannicini, Perotti & Tabellini (2013), AER 103(5).

In these municipalities, more money meant more stealing and weaker challengers — and the incumbent still did better.

Exercise 2 — What should donors do?

In the most aid-dependent countries, roughly 7.5% of a disbursement shows up offshore in the same quarter.

Pick one position and give your strongest reason:

Cut aid to the leakiest countries
Keep aid, add conditions — and say who verifies them
Change the channel — bypass the treasury entirely

5 minutes. Then name the cost your position imposes on the poor.

So what?

Oil and aid produce the same fingerprint through the same mechanism
Brollo shows it inside one democracy, town by town
This is not about corrupt countries — it is about revenue design

So let us take a case with a large state oil company, a low tax take, and a federal system: Mexico.

IV. Mexico

Pemex: the state’s fiscal machine

The upper floors of a tall modernist office tower in Mexico City bearing the PEMEX logo.

Created in 1938, when Mexico expropriated foreign oil firms
Oil taxes and royalties once supplied roughly a third of federal revenue
Taxes and duties took about 98.5% of Pemex profits, 1977–2019
Little was reinvested; the firm now owes over US$100 billion

Photo: Carlos Valenzuela, Wikimedia Commons, CC BY-SA 4.0. Figures: Tacuba (2022); CFR (2014).

When the windfall shrank

Mexico: the first half of a prediction

Mexico taxed little precisely because oil paid the bills
Lowest tax take in the OECD: 17.7% of GDP, average 33.9%
After 2014 oil rents collapsed and tax revenue rose
That is the first half of the windfall prediction

The second half is open. Nothing in that graph shows scrutiny improving, spending getting better, or corruption falling.

Does a state that must tax face harder questions about how it spends? That is the research question, not the finding.

Source: OECD, Revenue Statistics 2024 (2023 data); Mexico ranked 38th of 38.

When windfalls do less damage

The effect is moderated, not mechanical. Three conditions recur:

Sequence: the money arrives after accountability is entrenched
Rules: sovereign wealth funds, saving and spending rules
Visibility: published accounts and audits someone can act on

Norway had a parliament, courts, and a free press long before it had oil.

Which is why the same barrel is not the same political problem everywhere.

Takeaways

Less about the commodity than how revenue is obtained and accounted for
Windfalls corrode most when large, opaque, and discretionary
Institutions mediate the effect — nothing here is automatic
Aid and oil share one property: nobody had to be persuaded

Next session, we keep following the money — into organized crime.

References (1 of 3)

Andersen, J. J., Johannesen, N., Lassen, D. D., & Paltseva, E. (2017). Petro rents, political institutions, and hidden wealth: Evidence from offshore bank accounts. Journal of the European Economic Association, 15(4), 818–860.

Andersen, J. J., Johannesen, N., & Rijkers, B. (2022). Elite capture of foreign aid: Evidence from offshore bank accounts. Journal of Political Economy, 130(2), 388–425. https://doi.org/10.1086/717455

Brollo, F., Nannicini, T., Perotti, R., & Tabellini, G. (2013). The political resource curse. American Economic Review, 103(5), 1759–1796. https://doi.org/10.1257/aer.103.5.1759

Council on Foreign Relations. (2014, May 28). Mexico’s oil and taxes. https://www.cfr.org/articles/mexicos-oil-and-taxes

References (2 of 3)

Haber, S., & Menaldo, V. (2011). Do natural resources fuel authoritarianism? A reappraisal of the resource curse. American Political Science Review, 105(1), 1–26.

OECD. (2024). Revenue statistics 2024: Key findings for Mexico. OECD Publishing.

Ross, M. L. (2001). Does oil hinder democracy? World Politics, 53(3), 325–361.

Ross, M. L. (2015). What have we learned about the resource curse? Annual Review of Political Science, 18, 239–259.

References (3 of 3)

Svensson, J. (2000). Foreign aid and rent-seeking. Journal of International Economics, 51(2), 437–461. https://doi.org/10.1016/S0022-1996(99)00014-8

Tacuba, A. (2022). Pemex: Oil price and financial management in the context of elevated fiscal burden. Journal of Economics, Finance and Administrative Science, 27(53), 175–194. https://doi.org/10.1108/JEFAS-06-2021-0094

V-Dem Institute. (2026). Electoral democracy index [Data set]. Our World in Data. https://ourworldindata.org/grapher/electoral-democracy-index

World Bank. (2026). World development indicators [Data set]. https://databank.worldbank.org/source/world-development-indicators