Digging into the Resource Curse: Research into Oil Revenue and Brazilian Municipalities

Michael Giberson

A paper by Francesco Caselli and Guy Michaels, “Do Oil Windfalls Improve Living Standards? Evidence from Brazil,” takes a closer look at the how the resource curse works its anti-magic. (Ungated version here.) The abstract:

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.

The authors observe that focusing closely on an intra-country case provides both disadvantages and advantages.  They realize they risk obtaining findings that are not generalizable elsewhere.  However, an intra-country study naturally holds many institutional and policy variables constant, and therefore should more clearly reveal the relationship between resources and economic outcomes.

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.  The result leads them to ask: where are the oil revenues going?

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.