Making Sense of White Elephants

I've been meaning to link to this paper for a long time, as it provides one answer to a question that has bothered me for ages: why it is that African leaders have such an affinity for white elephant projects that do nothing for the economy and end up being drains on the public purse? Is political power really so conducive to megalomania that it should drive so many rulers to irrational expenditures? James A. Robinson and Ragnar Torvik show that such policies do indeed have their own perverse rationality.

Underdevelopment is thought to be about lack of investment, and many political economy theories can account for this. Yet, there has been much investment in developing countries. The problem has been that investment growth has not led to output growth. We therefore need to explain not simply underinvestment, but also the missallocation of investment. The canonical example of this is the construction of white elephants—investment projects with negative social surplus. In this paper we propose a theory of white elephants. We argue that they are a particular type of inefficient redistribution, which are politically attractive when politicians find it difficult to make credible promises to supporters. We show that it is the very inefficiency of such projects that makes them politically appealing. This is so because it allows only some politicians to credibly promise to build them and thus enter into credible redistribution. The fact that not all politicians can credibly undertake such projects gives those who can a strategic advantage. Socially efficient projects do not have this feature since all politicians can commit to build them and they thus have a symmetric effect on political outcomes. We show that white elephants may be preferred to socially efficient projects if the political benefits are large compared to the surplus generated by efficient projects.

As students of African political history might expect, ethnic group rivalries are central to this story; build a Yamoussoukro or Gbadolite for your co-ethnics, and they'll do their damnedest to keep you in power so that the day never comes when these money-sinks have to be abandoned. Anyone who's ever wondered what Nigeria's rulers were thinking building an oil refinery in Kaduna, far away from the coastal regions where Nigeria's oil is to be found, now has the explanation.

Comments

[Frank McGahon]

It's not just Africa, the south of Italy is littered with such projects, hence the coinage: "cattedrali nel deserto".

[dof]

Same here in Belgium:

http://technical-services.met.wallonie.be/servlet/CollectionServlet?view=0&page_id=49

[João da Costa]

"Anyone who's ever wondered what Nigeria's rulers were thinking building an oil refinery in Kaduna, far away from the coastal regions where Nigeria's oil is to be found, now has the explanation."

I'm not so sure that this is a good example of irrationality.
Maybe people were thinking in putting some industrial activity (production) nearer to the consumers (in that region of the country) and creating some jobs for people nearby.
Anyway, if you look at the World as a whole you will also see the same pattern were something is extracted here (maybe this is the case of some of Botswana's diamond) but "industrialized" in a different place (in Israel for example; this is an hypothetical example)
I don't know, but surely as with most large scale industrial projects more than one factor was considered.
And surely politial motives belong also to the equation.

[Abiola Lapite]

"I'm not so sure that this is a good example of irrationality."

It's actually an *excellent* example. A pipeline from a coastal refinery northwards would have been much cheaper, and indeed, even with the building of the Kaduna refinery, such a pipeline still had to be built, so the net gain was negative. Furthermore, a coastal refinery would have had a much easier time exporting that refined oil.

It was pure madness to build a refinery hundreds of miles away from any coast and in a region with no oil of its own, and the only justification for it was that it was in the north from which the rulers who commissioned it came.

[captainblak]

The justification might be to keep the south in orbit. Building a coastal refinery is just one more way to make the south self-sufficient.

I am not sure I disagree with the North's political motivation.