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.

Is there a Mineral-Induced ‘Economic Euphoria’?: Evidence from Latin America

“…see Cassidy, 2019 andMahdavi et al, 2020). To add context here, Cassidy (2019) explains that a geological pre-requisite for the formation of oil reservoirs includes source rocks (a sedimentary rock deposited by algae and zooplankton millions of years ago) which form in sedimentary basins. It is also the case that sedimentary basins are home to numerous other deposits.…”

“…Despite decades of research, questions concerning the effects of the extractive sector on social, political, and economic outcomes largely remain unresolved (Gilberthorpe & Papyrakis, 2015). Much of the disagreement owes to the difficulty identifying some degree of exogenous variation in countries mineral wealth to consistently identify the effects of the extractive sector (Cassidy, 2019). Here it is important to understand that mineral exploration and production are determined by various endogenous, unobserved, and hard to measure factors.…”

“…To resolve this estimation problem, some studies have recently explored a promising approach which instruments countries' mineral rents with their endowment of sedimentary land (e.g. see Cassidy, 2019 andMahdavi et al, 2020). To add context here, Cassidy (2019) explains that a geological pre-requisite for the formation of oil reservoirs includes source rocks (a sedimentary rock deposited by algae and zooplankton millions of years ago) which form in sedimentary basins.…”

“…The interacted value between these two variables is multiplied by 100 to prevent the coefficient from appearing misleadingly large in the regression models reported below. For comparative purposes, further specifications also consider interacting the sedimentary basin variable with a dependence variable focused specifically on oil rents (reflecting the approach taken by Cassidy, 2019 andMahdavi et al 2020 to instrument oil wealth with sedimentary basins). Since the seminal work by Brunnschweiler and Bulte (2008), it is also customary to distinguish between measures of mineral dependence and mineral abundance.…”

“…Note this analysis does not use the precise sedimentary basin variable reported inCassidy (2019); which is the log of the sovereign area (in square kilometers) per 1,000 inhabitant. Population size may be endogenously determined and existing discussions (such as those inBellemare et al 2017) have explained at some length why lagged explanatory variables should not be used to 'exogenise' variables for identification purposes.…”