The Institutions Curse: The Theory and Evidence of Oil in Weak States

Abstract:     
Is there an institutions curse? Drawing on recent findings that challenge the view that there is a causal relationship running from oil to underdevelopment, I seek to identify what determines oil exploration and oil extraction rates in the first place. I argue and find that revenue starved states with low capacity are more likely to launch oil exploration efforts and goose the production of extant wells. These results hold after controlling for geological endowments, oil prices, and production costs. It does not matter how the dependent variable is specified; nor if state capacity is measured as a multidimensional index, a proxy for legal capability, deviations in foreign reserve holdings, or the state’s antiquity. The results hold across various 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 employ structural inequality as an instrument.

Number of Pages in PDF File: 49

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

working papers series