THE IMPACT OF OIL WEALTH ON ACCOUNTABILITY AND LONG-TERM ECONOMIC GROWTH

21 Oct 2019

A country’s oil wealth increases long-run economic growth on average, but it also makes governments less accountable to its citizens. This is the main conclusion of research by Traviss Cassidy published in the October 2019 issue of The Economic Journal.

The study draws on data from 172 countries over the period 1966-2008 and show that oil wealth makes countries less democratic, less reliant on tax revenue and more corrupt.

Despite this, oil also increases economic growth in the long run without harming the non-resource sectors of the economy. This contradicts the well-known idea of the “resource curse,” which posits that resource abundance hinders economic growth. Also contrary to conventional wisdom, the study finds that oil has little impact on internal conflict on average.

The long-run effects of oil are large. For example, an increase in oil wealth equal to the difference between the United Kingdom and the United Arab Emirates lowers a country’s level of democracy by an amount equal to the difference between the United States and Colombia. That same increase in oil wealth also raises a country’s GDP per capita by 7% in the long run.

Not all countries respond to oil wealth in the same way. Interestingly, countries that had weak institutional constraints on the executive branch in the 1950s and ‘60s experienced the largest adverse effects of oil on their politics—but they also benefitted the most economically. Strong political institutions are not required for reaping the economic rewards of oil, but they can help prevent political backsliding when government coffers swell with petro rents.

Teasing out the effects of oil wealth is inherently tricky. Oil companies prefer to invest in wealthier and more democratic countries, due to their stronger property-rights protections. Consequently, simple correlations overstate the benefits of oil. The study gets around this problem by predicting each country’s oil wealth based on the presence of sedimentary basins—areas where buried organic matter could potentially turn into hydrocarbons over the course of millions of years. Unlike oil exploration, geology cannot respond to economic or political factors.

Overall, the study’s results show that oil wealth increases long-run economic growth on average. These economic benefits accrue despite oil’s harmful effects on a country’s political system, which are more pronounced in low-income countries with weak institutions. Citizens of these countries may therefore face a choice between the riches brought by oil production and the reductions in political freedoms that often follow.

The Long-Run Effects of Oil Wealth on Development: Evidence from Petroleum Geology’ by Traviss Cassidy is published in the October 2019 issue of The Economic Journal.

Traviss Cassidy

Associate Professor | University of Alabama | +1 602-799-8302 | tmcassidy@cba.ua.edu