How the resource curse works its anti-magic

Roughly the resource curse says that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources. A question often asked is, Why?

Now a new paper looks at how the resource curse can actually work. The paper is Do Oil Windfalls Improve Living Standards? Evidence from Brazil by Francesco Caselli and Guy Michaels, NBER Working Paper No. 15550, issued in December 2009. The abstract reads,

We use variation in oil output among Brazilian municipalities to investigate the effects of resource windfalls. We find muted effects of oil through market channels: offshore oil has no effect on municipal non-oil GDP or its composition, while onshore oil has only modest effects on non-oil GDP composition. However, oil abundance causes municipal revenues and reported spending on a range of budgetary items to increase, mainly as a result of royalties paid by Petrobras. Nevertheless, survey-based measures of social transfers, public good provision, infrastructure, and household income increase less (if at all) than one might expect given the increase in reported spending. To explain why oil windfalls contribute little to local living standards, we use data from the Brazilian media and federal police to document that very large oil output increases alleged instances of illegal activities associated with mayors.

Michael Giberson at the Knowledge Problem blog writes about the paper,

Most of the body of the paper is taken up with a discussion of data sources and the analysis by which they conclude that royalties paid by PetroBras to municipalities do increase municipal budgets, but seem to generate very little in the way of a broader increase in income or welfare.

From this comes the obvious question, What is happening to the oil revenues?

To partly address this question we put together a few pieces of tentative evidence. First, oil revenues increase the size of municipal workers’ houses (but not the size of other residents’ houses). Second, Brazil’s news agency is more likely to carry news items mentioning corruption and the mayor in municipalities with very high levels of oil output (on an absolute, though not per capita, basis). Third, federal police operations are more likely to occur in municipalities with very high levels of oil output (again in absolute terms). And finally, we document anecdotal evidence of scandals allegedly involving mayors in several of the largest oil producing municipalities, some involving large sums of money. To partly explain why senior municipal workers may have thought that they could “get away” with large-scale alleged theft in a country where local elections are held regularly, we note that a survey in the largest oil producing municipality found considerable ignorance among residents regarding the scale of the municipal oil windfall.