DP7579 Do Oil Windfalls Improve Living Standards? Evidence from Brazil

Author(s): Francesco Caselli , Guy Michaels

Publication Date: November 2009

Keyword(s): Brazil , oil , Dutch disease , corruption , fiscal windfalls , natural resources

JEL(s): E02 , E62 , H11 , H40 , H71 , H72 , H75 , H76 , O11 , O13 , O32 , O33

Programme Areas: Development Economics , International Macroeconomics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP7579.asp

We use variation in oil output among Brazilian municipalities to investigate the effects of resource windfalls. We find muted effects of oil through market channels: offshore oil has no effect on municipal non-oil GDP or its composition, while onshore oil has only modest effects on non-oil GDP composition. However, oil abundance causes municipal revenues and reported spending on a range of budgetary items to increase, mainly as a result of royalties paid by Petrobras. Nevertheless, survey-based measures of social transfers, public good provision, infrastructure, and household income increase less (if at all) than one might expect given the increase in reported spending. To explain why oil windfalls contribute little to local living standards, we use data from the Brazilian media and federal police to document that very large oil output increases alleged instances of illegal activities associated with mayors.