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Economics of Governance

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21-01-2021 | Original Paper

Oil bonanza and the composition of government expenditure

Authors: Keisuke Okada, Sovannroeun Samreth

Published in: Economics of Governance | Issue 1/2021

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Abstract

Government behavior can be affected by natural resource benefits. Benevolent government and political leaders may use them to improve the welfare of the people, whereas others may use them for their own interests. To examine the effects of oil bonanza on government behavior comprehensively, this study investigates how giant oilfield discoveries affect the size and composition of government expenditure using data from 168 countries between 1972 and 2008. We find weak evidence that giant oilfield discoveries increase total government expenditure significantly in the medium and long term, whereas their effects are more evident in the short term, especially when controlling for other factors affecting total government expenditure. We also obtain evidence that democracy plays a mediating role in these effects; if the democracy level in a country is consolidated, the size of total government spending does not increase even when discovering giant oilfields. Considering each category of government expenditure, giant oilfield discoveries increase expenditure on health and social protection significantly, whereas they decrease educational expenditure. Furthermore, giant oilfield discoveries decrease expenditure on economic affairs and defense and increase general public services and public order and safety. Finally, giant oilfield discoveries increase the net implicit gasoline subsidy in the long term. These findings enhance our understanding of the effects of oil bonanza on government behavior.

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See van der Ploeg (2011), Frankel (2012), and Venables (2016) for a detailed survey on the resource curse.

See Ross’ (2015) study that reviews toxic effects of natural resources on politics. He insists that the windfall of revenue from natural resources, specifically petroleum, negatively affects the quality of governance in a country.

See Shelton’s (2007) study that comprehensively investigates the determinants of government expenditure, although he does not consider the role of natural resources.

In Meltzer and Richard’s (1981) model, the consolidation of democracy can induce the government to implement a more distributive policy. On the contrary, democracy does not affect total government consumption, whereas it does increase and decrease specific government expenditure (Mulligan et al. 2004).

Oil reserves improve health outcomes during the 1960s and 1970s, that is, oil abundance lowers infant mortality and increases life expectancy (Cotet and Tsui 2013b). However, these results are not robust and these effects are insignificant over the period of 1960–2000.

Another strand of literature looks at the relationship between resource abundance and civil war. For instance, natural resource abundance significantly increases the duration and probability of civil wars occurring (Collier and Hoeffler 1998). Natural resource concentration plays a significant role in contributing to the incidence of civil wars (Morelli and Rohner 2015). When using geographical data on mining extraction in Africa, mining has a positive effect on conflict at the local level (Berman et al. 2017).

We note the following two points. First, we omit some categories of government expenditure such as “environmental protection,” “housing and community amenities,” and “recreation, culture, and religion,” partly because of data availability. Second, because we use government expenditure as a share of GDP, the level of GDP influences its ratio. When the level of GDP increases drastically, its ratio may decrease even if the level of a specific government expenditure increases.

More detailed explanation on the differences between GFSM 1986 and GFSM 2001 is provided in Wickens (2002).

Accounting bases have been changed gradually from a cash basis to an accrual basis in many countries. Therefore, this effect cannot be controlled for by year dummies, and we need a dummy for accounting with accrual basis following Seiferling (2013).

Note that this result contradicts that in Cockx and Francken’s (2014) study, which insist that natural resource dependence decreases health spending.

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Title: Oil bonanza and the composition of government expenditure
Authors: Keisuke Okada
Sovannroeun Samreth
Publication date: 21-01-2021
Publisher: Springer Berlin Heidelberg
Published in: Economics of Governance / Issue 1/2021
Print ISSN: 1435-6104
Electronic ISSN: 1435-8131
DOI: https://doi.org/10.1007/s10101-020-00246-3