Kate Mackenzie Being rich in resources really is a curse

Ghana is worried, not to mention Papua New Guinea and most likely, Uganda. Poor countries that have recently found themselves the owners of sizeable fossil fuel reserves all fear the “resource curse”, or “paradox of plenty” – that, like Nigeria, Angola, Congo and many others before them, the oil wealth will somehow translate into corruption, poverty and/or civil oppression instead of higher standards of 1living.

Francesco Caselli and Guy Michaels at VoxEU have attempted to work out whether the resource curse exists, by looking at comparing Brazilian municipalities that have received different levels of oil revenues.

The results were hardly reassuring for citizens of countries with newfound resources wealth.

The idea was to strip out some of the differences between countries that might be confusing attempts to establish a causal relationship between resource revenues and living standards.

One of the first things Caselli and MIchaels established was that oil income appears to have little impact on other sources of revenue; one real earned from oil amounted to about one extra real in overall GDP, with no benefit or detriment to the wider economy. The exception was that onshore oil tended to affect the composition on GDP, boosting services and diminishing manufacturing.

Next, how did municipal spending: the authors found that local governments with oil royalties did see a net increase in income, and spent more on avenues including housing and urban infrastructure, education, health, transport and transfers to households.

But does this spending in turn lead to a measurable benefit for the population? The picture, it turned out, was mixed. Strikingly, household income saw only ‘minimal improvements’. The authors add that oil-rich areas do not see any unusual growth in population, suggesting that there is no benefit in moving there.

Our finding that oil windfalls translate into little improvement in the provision of public goods or the population’s living standards raises a key question – where are the oil revenues going? As a way of addressing 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).

Now, the authors stress that while comparing municipalities helps strip out some potentially distorting factors, it also limits the observations to Brazil in particular. Furthermore, limiting a study to any one country rules out some factors, such as exchange rate impacts, and of factors that might only present at a national level.

But our results do lend some credence to the view that oil royalties are somehow easier to steal than other types of revenues. When we look at the usage and effects of municipal revenues coming from other sources, we find significant differences relative to revenue coming from oil, and the puzzle of “missing money” is less severe.

The last question, then, is: why are oil revenues different? Caselli and Michael say they’re unable to answer that question with their data, but postulate that it could be that misappropriation of public money is more widely tolerated when it comes from non-tax revenues, or that corruption is simply easier to hide with this sort of income.

Related links:

Obama to warn Ghana on curse of oil wealth (FT Energy Source)