The Long-Run Effects of Oil Wealth on Development: Evidence from Petroleum Geology

Abstract

We estimate the long-run effects of oil wealth on development by exploiting spatial variation in sedimentary basins---areas where petroleum can potentially form. Instrumental variables estimates indicate that oil production impedes democracy and fiscal capacity development, increases corruption, and raises GDP per capita without significantly harming the non-resource sectors of the economy. We find no evidence that oil production increases internal armed conflict, coup attempts, or political purges. In several specifications failure to account for endogeneity leads to substantial underestimation of the adverse effects of oil, suggesting that countries with higher-quality political institutions and greater fiscal capacity disproportionately select into oil production. Countries that had weak executive constraints from 1950--1965 experienced the largest adverse effects of oil on democracy and fiscal capacity, yet they benefited the most in terms of GDP. Overall, the results confirm the existence of a political resource curse, while rejecting the economic resource curse hypothesis.

Keywords: resource curse, democracy, conflict, fiscal capacity

JEL Classification: H27, O11, O13, Q32, Q35