Is Development Path Dependent or Political

Poor management of earnings from valuable natural resources results in a syndrome known as Dutch Disease, characterised by real exchange rate appreciation, high labour costs, and structural imbalances in economic development. Often a product of rentier politics, Dutch Disease undermines long-term economic performance in resource dependent economies resulting in a ‘resource curse’. The conventional wisdom argues that institutions and state development at the time of a resource boom lock countries into divergent developmental trajectories. I argue that political coalitions lay the foundation for development of state and other institutions, and that changes in coalitions drive changes in policy responses to resource booms. Botswana's experience illustrates the argument. Botswana has not entirely avoided symptoms of Dutch Disease, but has kept them largely in check despite the fragility of state institutions when diamonds were discovered. A broad and stable political coalition during the first decades of independence encouraged adoption of pro-growth policies and institutions. Rather than lock the country into a persistent development trajectory, these institutions left room for changes in political coalitions. As political coalitions change, economic policies and performance are also likely to change.