21 January 2010

Does the resource curse exist?

A new paper on Voxeu titled 'Oil windfalls and living standards: New evidence from Brazil' by LSE economists Francesco Caselli and Guy Michaels looks at whether the resource curse exists, using evidence from Brazil. 
Their finding:
Municipalities that receive oil windfalls report significant increases in spending on infrastructure, education, health, and transfers to households. However, the windfalls do not trickle down and much of the money goes missing. Indeed, oil revenues increase the size of municipal workers’ houses but not the size of other residents’ houses.
Their conclusion? - Increased transparency, but going beyond mere transparency in accounting.

But our findings do suggest that it may be somewhat unwise to channel revenues from oil operations directly to local governments, at least if the officials are not properly monitored and accountable. For Brazil, this may be an especially important consideration as the system of property rights and royalties will probably be overhauled in response to the recent discovery of huge new offshore fields.
Indeed, the issue is clearly of political relevance, with several major federal legislative proposals to reform the royalty system currently pending. Most proposals tend to reduce both the share of royalties going to local governments and the discretion that these governments have in using the revenues. In the summer of 2009, the federal government issued its own proposals for the property rights regime of the newly discovered "pre-salt" giant oilfields.
More generally, our results may inform the debate about increasing transparency requirements both in poor, resource-abundant countries and in countries that receive aid. In particular, it is increasingly common for conditionality-based programmes to feature stringent reporting requirements from multinational oil companies and recipient governments.
Our results suggest that accounting transparency per se may be insufficient. Reporting schemes should document the actual effective disbursement of sums, and not merely their recording on balance sheets.

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