Oil Bonanza and the Composition of Government Expenditure

Okada, Keisuke and Samreth, Sovannroeun (2019): Oil Bonanza and the Composition of Government Expenditure.

Abstract

Government behavior can be impacted by the benefits arising from natural resources. Benevolent government and political leaders may use them to improve the welfare of people, whereas non-benevolent ones may use them for their own interest. As an attempt to examine the effects of the oil bonanza on government behavior in a comprehensive manner, the current study investigates how giant oilfield discoveries affect the size and composition of government expenditure using the data of 148 countries between 1972 and 2008. We find that giant oilfield discoveries significantly increase total government expenditure in the medium and long term, although they do not have an impact in the short term. We also obtain evidence that democracy plays a mediating role in these effects; if the democracy level in a country is mature, the size of total government spending does not increase even when discovering giant oilfields. Considering each category of government expenditure, giant oilfield discoveries significantly increase expenditure on defense and general public services, whereas they decrease expenditure on public order and safety, and economic affairs. Furthermore, giant oilfield discoveries do not have a significant impact on social spending including health, education, and social protection. 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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Resource curse; Petroleum; Government expenditure
• Subjects: H - Public Economics > H1 - Structure and Scope of Government > H10 - General; H - Public Economics > H5 - National Government Expenditures and Related Policies > H50 - General; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O13 - Agriculture ; Natural Resources ; Energy ; Environment ; Other Primary Products

References

Acosta-Ormaechea, S., Morozumi, A., 2017. Public spending reallocations and economic growth across different income levels. Economic Inquiry 55 (1), 98–114.

Albalate, D., Bel, G., Elias, F., 2012. Institutional determinants of military spending. Journal of Comparative Economics 40 (2), 279–290.

Alesina, A., Wacziarg, R., 1998. Openness, country size and government. Journal of Public Economics 69 (3), 305–321.

Alexeev, M., Conrad, R., 2009. The elusive curse of oil. Review of Economics and Statistics 91 (3), 586–598.

Ali, H. E., Abdellatif, O. A., 2015. Military expenditures and natural resources: evidence from rentier states in the Middle East and North Africa. Defence and Peace Economics 26 (1), 5–13.

Allansson, M., Melander, E., Themnér, L., 2017. Organized violence, 1989–2016. Journal of Peace Research 54 (4), 574–587.

Amundsen, I., 2017. Nigeria: defying the resource curse. In: Williams, A., Le Billon, P. (eds.), Corruption, Natural Resources and Development: From Resource Curse to Political Ecology, Edward Elgar Publishing Limited, Cheltenham, 17–27.

Arezki, R., Hamilton, K., Kazimov, K., 2011. Resource windfalls, macroeconomic stability and growth: the role of political institutions. IMF Working Paper WP/11/142, International Monetary Fund, Washington, DC.

Berman, N., Couttenier, M., Rohner, D., Thoenig, M., 2017. This mine is mine! how minerals fuel conflicts in Africa. American Economic Review 107 (6), 1564–1610.

Bhattacharyya, S., Conradie, L., Arezki, R., 2017. Resource discovery and the politics of fiscal decentralization. Journal of Comparative Economics 45 (2), 366–382.

Bhattacharyya, S., Hodler, R., 2010. Natural resources, democracy and corruption. European Economic Review 54 (4), 608–621.

Bulte, E. H., Damania, R., Deacon, R. T., 2005. Resource intensity, institutions, and development. World Development 33 (7), 1029–1044.

Caselli, F., Michaels, G., 2013. Do oil windfalls improve living standards? evidence from Brazil. American Economic Journal: Applied Economics, 5 (1), 208–238.

Cockx, L., Francken, N., 2014. Extending the concept of the resource curse: natural resources and public spending on health. Ecological Economics 108, 136–149.

Cockx, L., Francken, N., 2016. Natural resources: a curse on education spending? Energy Policy 92, 394–408.

Collier, P., Hoeffler, A., 1998. On economic causes of civil war. Oxford Economic Papers 50 (4), 563–573.

Corden, W. M., Neary, J. P., 1982. Booming sector and de-industrialisation in a small open economy. Economic Journal 92 (368), 825–848.

Cotet, A. M., Tsui, K. K., 2013. Oil and conflict: what does the cross country evidence really show? American Economic Journal: Macroeconomics 2013, 5(1), 49–80.

Easterly, W., Rebelo, S., 1993. Fiscal policy and economic growth: an empirical investigation. Journal of Monetary Economics 32 (3), 417–458.

Frankel, J. A., 2012. The natural resource curse: a survey. In: Shaffer, B., Ziyadov, T. (eds.), Beyond the Resource Curse. University of Pennsylvania Press, Philadelphia, PA, 17–57.

Gleditsch, N. P., Wallensteen P., Eriksson, M., Sollenberg, M., Strand, H., 2002. Armed conflict 1946–2001: a new dataset. Journal of Peace Research 39 (5), 615–637.

Gylfason, T., 2001. Natural resources, education, and economic development. European Economic Review 45(4–6), 847–859.

Horn, M. K., 2003. Giant fields 1868–2003 (CD-ROM). In: Halbouty, M. T. (ed.), Giant Oil and Gas Fields of the Decade 1990–1999, AAPG Memoir 78.

Horn, M. K., 2004. Giant fields 1868–2004 (CD-ROM). AAPG/ Datapages Miscellaneous Data Series, version 1.2.

International Monetary Fund, 1999. World Economic Outlook Database September 1999. International Monetary Fund, Washington, DC.

International Monetary Fund, 2005. Historical Government Finance Statistics. International Monetary Fund, Washington, DC.

International Monetary Fund, 2013. Government Finance Statistics. International Monetary Fund, Washington, DC.

Kotera, G., Okada, K., 2017. How does democratization affect the composition of government expenditure? Journal of Economic Behavior & Organization 137, 145–159.

Lei, Y.-H., Michaels, G., 2014. Do giant oilfield discoveries fuel internal armed conflicts? Journal of Development Economics 110, 139–157.

Li, Y., 2019. Saudi Arabia’s economic diplomacy through foreign aid: dynamics, objectives and mode. Asian Journal of Middle Eastern and Islamic Studies 13 (1), 110–122.

Marshall, M. G., Gurr, T. R., Jaggers, K., 2017. Polity IV Project, Political Regime Characteristics and Transitions, 1800–2016. Center for Systemic Peace, Vienna.

Meltzer, A. H., Richard, S. F., 1981. A rational theory of the size of government. Journal of Political Economy 89 (5), 914–927.

Morelli, M., Rohner, D., 2015. Resource concentration and civil wars. Journal of Development Economics 117, 32–47.

Mulligan, C. B., Gil, R., Sala-i-Martin, X., 2004. Do democracies have different public policies than nondemocracies? Journal of Economic Perspectives 18 (1), 51–74.

Nelson, J. M., 2007. Elections, democracy, and social services. Studies in Comparative International Development 41 (4), 79–97.

Nordhaus, W., Oneal, J. R., Russett, B., 2012. The effects of the international security environment on national military expenditures: a multicountry study. International Organization 66 (3), 491–513.

Okada, K., Samreth, S., 2017. Corruption and natural resource rents: evidence from quantile regression. Applied Economics Letters 24 (20), 1490–1493.

Profeta, P., Puglisi, R., Scabrosetti, S.,2013. Does democracy affect taxation and government spending? evidence from developing countries. Journal of Comparative Economics 41 (3), 684–718.

Rajkumar, A. S., Swaroop, V., 2008. Public spending and outcomes: does governance matter? Journal of Development Economics 86 (1), 96–111.

Rodrik, D., 1998. Why do more open economies have bigger governments? Journal of Political Economy 106 (5), 997–1032.

Ross M. L., 2001. Does oil hinder democracy? World Politics 53 (3), 325–361.

Ross M. L., 2015. What have we learned about the resource curse? Annual Review of Political Science 18, 239–259.

Ross, M. L., Hazlett, C., Mahdavi, P., 2017. Global progress and backsliding on gasoline taxes and subsidies. Nature Energy 2, 16201.

Sachs, J. D., Warner, A. M., 1995. Natural resource abundance and economic growth. NBER Working Paper No. 5398, National Bureau of Economic Research, Cambridge, MA.

Seiferling, M., 2013. Recent improvements to the Government Finance Statistics Yearbook Database in response to analytical needs. IMF Working Paper, WP/13/15.

Shelton, C. A., 2007. The size and composition of government expenditure. Journal of Public Economics 91 (11–12), 2230–2260.

Smith, B., 2015. The resource curse exorcised: evidence from a panel of countries. Journal of Development Economics 116, 57–73.

Töngür, Ü., Hsu, S., Elveren, A. E., 2015. Military expenditures and political regimes: evidence from global data, 1963–2000. Economic Modelling 44, 68–79.

van der Ploeg, F., 2011. Natural resources: curse or blessing? Journal of Economic Literature 49 (2), 366–420.

Venables, A. J., 2016. Using natural resources for development: why has it proven so difficult? Journal of Economic Perspectives 30 (1), 161–184.

Weil, D. N., 2013. Economic Growth. Third Edition, Pearson Education, Boston, MA.

Wickens, T. M., 2002. Government Finance Statistics Manual 2001 Companion Material: Classification of GFSM 1986 Data to the GFSM 2001 Framework. International Monetary Fund, Washington, DC.

World Bank, 2017. World Development Indicators. World Bank, Washington, DC.