Not Manna from Heaven after All: The Endogeneity of Oil

Victor A. Menaldo

University of Washington - Department of Political Science

January 11, 2013

Is there really a resource curse? Or is it an institutions curse? Drawing on recent findings that challenge the view that there is a causal relationship running from oil to political and economic underdevelopment, this chapter seeks to identify what determines a hydrocarbons sector in the first place. I argue and find that revenue starved states with low capacity are more likely to launch oil exploration efforts, goose the production of extant wells, export oil to a higher degree, tax it more heavily, and attract higher levels of capital in hydrocarbons. While National Oil Companies have increasingly shouldered more of the heavy lifting to make this happen, private investors also continue to play a prominent role. They exploit huge advantages in power, money, and information to protect their property rights in host countries across the developing world; International Oil Companies increasingly engage in regulatory arbitrage to sidestep stringent environmental regulations in their home countries, as well as higher taxes. A series of statistical analyses yield results that support these claims after controlling for geological endowments, oil prices, and production costs. They hold no matter how I operationalize oil, or state capacity, and across a host of specifications that address endogeneity bias. These include static, fixed effects models, Autoregressive Distributed Lag models, estimated via Structure Generalized Method of Moments, and instrumenting state capacity with relevant lags, or Two-Stage Least Squares that use factor endowments and the country’s age as instruments.

Number of Pages in PDF File: 85

Keywords: Resource Curse, State Weakness, Oil Discovery, Development

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Date posted: February 22, 2012 ; Last revised: March 28, 2014

Suggested Citation

Menaldo, Victor A., Not Manna from Heaven after All: The Endogeneity of Oil (January 11, 2013). Available at SSRN: http://ssrn.com/abstract=2008889 or http://dx.doi.org/10.2139/ssrn.2008889

Contact Information

Victor A. Menaldo (Contact Author)
University of Washington - Department of Political Science ( email )
101 Gowen Hall
Box 353530
Seattle, WA 98195
United States
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