Distributional Bargaining and the Speed of Structural Change in the Petroleum Exporting Labor Surplus Economies

Abstract

We embed the distributional bargaining concept in Sir Arthur Lewis’s labor surplus economy setting. In the petroleum-abundant labor surplus economies, distributional bargaining comes into its own, mainly over the subsidization of the large swaths of the population working in the sectors with substantial amounts of disguised unemployment. These are primarily the subsistence agriculture and the public sector. Based on the open-loop noncooperative differential game model, we derive three feasible bargaining equilibria, whereby only the antagonistic and the allocation modes are compatible with the setting of inferior institutional quality that dominates most natural-resource-dependent countries. We scrutinize both modes in the framework of the dual economy model and show that political bargaining in the allocation mode unambiguously protracts the process of economic modernization. The outcome of the antagonistic mode for the process of structural change depends on the magnitude of the labor cost increase in this phase. To assess the bargaining–modernization nexus empirically, we employ mostly pooled mean group (PMG) estimators for panel datasets spanning the years 1990–2016 for 21 oil-producing countries. For the system generalized method of moments (GMM) panel estimations, we employ a panel with 82 countries. We find that the revenues generated from exports of natural resources have a positive long-run impact on the economic modernization. Consistent with our theoretical model, the interaction of the authoritarian regime type with the natural resource wealth has a robust negative impact on the indicators of economic modernization.