The political transfer problem: How cross-border financial windfalls affect democracy and civil war

Following a rise in the price of oil in the 1970s, a number of developing countries received a significant boost in foreign transfers as oil producers could not absorb all of their new rents domestically. When those transfers ended, some recipients of these transfers eventually democratized as part of the ”Third Wave” while others languished as violent autocracies. This raises a puzzle: how can declines in external transfers foster democratization in some cases, but heighten political violence in others? We develop a formal model to reconcile this tension and demonstrate that autocratic incumbents can become more repressive with higher levels of transfers and either experience civil conflict or democratize at lower levels of transfers. We characterize these dynamics as a ”political transfer problem” and then use case studies and econometric evidence to argue that the largest windfall of the 20th century, the period from 1973–85 during which oil prices were at all-time highs, and its aftermath, produced political dynamics consistent with our model.