Oil Royalties and the Resource Curse

I don’t usually comment on political issues, but I came across an interesting research paper that ties in directly to the issue at hand. Lost in all the sturm und drang over the payment of oil royalties to Kelantan, is the question of whether these royalties will benefit the Kelantanese people as opposed to the Kelantanese government. This paper on VoxEU rather wryly suggests not (excerpts, emphasis mine):

Oil windfalls and living standards: New evidence from Brazil

“Yet economists are increasingly sceptical and many of them openly entertain the seemingly paradoxical notion that resources and windfalls may actually be bad news. In fact, some go so far as to speak of the "curse of natural resources" (see Bhattacharyya and Hodler 2009)...

Before dismissing this as yet another instance of the economics profession’s disconnection from the real world, consider the following list: Angola, Congo, Nigeria, Venezuela and the Middle East. What these places have in common is an abundance of natural resources coupled with varying degrees of abject poverty, state failure, civil war, rampant corruption and political repression...

Our research attempts to bypass these difficulties in interpreting cross-country comparisons by looking at Brazilian municipalities. Oil endowments, and hence oil production, vary widely across municipalities, and we show that oil output is not correlated (conditional on a few geographical controls) with other municipal characteristics…

The results paint a complex picture, with no apparent changes in some areas, small improvements in others, and a small worsening in yet others. On balance, however, the data appear to suggest that the actual flow of goods, services, and transfers to the population is not quite commensurate with the reported spending increases stemming from the windfall. This shortfall we dub "missing money"...

Our finding that oil windfalls translate into little improvement in the provision of public goods or the population’s living standards raises a key question – where are the oil revenues going? As a way of addressing this question, we put together a few pieces of tentative evidence:

• First, oil revenues increase the size of municipal workers’ houses (but not the size of other residents’ houses).
• Second, Brazil’s news agency is more likely to carry news items mentioning corruption and the mayor in municipalities with very high levels of oil output (on an absolute, though not per capita, basis).
• Third, federal police operations are more likely to occur in municipalities with very high levels of oil output (again in absolute terms).
• And finally, we document anecdotal evidence of scandals involving mayors in several of the largest oil-producing municipalities, some of which involve large sums of money…

This may be because citizens themselves are more tolerant of corruption when the money does not come from tax revenues. Or it may be because they have less accurate information on the amounts flowing to the government in the form of oil royalties. We are unable to explore these possibilities with our data…

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.”

I will forbear from mentioning the obvious comparisons between oil revenues and other state governments, or federal for that matter – you can draw your own conclusions.