Our research examines the effect of oil discoveries on 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
In other words, oil-rich municipalities differ from oil-poor
municipalities only because the former have oil and the latter do not.
This makes it possible to ask whether oil has positive or negative
effects on other market activities. Furthermore, oil-producing
municipalities are entitled to royalties, so we can investigate the
consequences of an oil-related revenue windfall for the local
We begin by investigating the effects of oil on other market activities
and find that these are small. In particular, if a Brazilian
municipality generates one unit of the national currency (the real), of
extra value added from oil, this translates into roughly one real of
extra aggregate GDP. This indicates that, to a first approximation, oil
production has no effects, either negative or positive, on non-oil
We do find some small changes in the composition of non-oil GDP when the
oil is located onshore: the manufacturing sector shrinks and the service
sector expands. (These effects are probably due to an expansion of
services to oil operations and oil workers.) But offshore oil has little
impact on non-oil GDP or on its composition.
We turn next to the revenue windfall. We confirm that municipal revenues
increase significantly with oil production, and that oil royalties
account for the bulk of this increase. This makes it clear that royalty
payments are not undone by offsetting changes in other transfers from
the state or federal governments (or by tax cuts) — in fact, they are
The increase in municipal revenues arising from oil is matched by a
corresponding increase in municipal expenditures. Municipalities that
receive oil windfalls report significant increases in spending on a
variety of goods and services, such as housing and urban infrastructure,
education, health, transport and transfers to households.
Given the significant expansion in reported spending, we might expect
sizable improvements in living standards for the local population. We
therefore look at measures of housing quality and quantity, the supply
of educational and health inputs, road infrastructure, and welfare
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”.
To confirm that the windfall does not trickle down to the population
through other channels, we look at household income and find only
minimal improvements. We also show that oil-rich municipalities did not
experience a differential increase in population. This implies that our
results are not driven by a dilution of the benefits of oil abundance.
Furthermore, the fact that people do not flock to oil-rich communities
reinforces our message that oil abundance has not been viewed as
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
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.
As a partial explanation of why senior municipal workers may have
thought that they could “get away” with large-scale alleged theft in a
country where local elections are held regularly, we note that a survey
in the largest oil-producing municipality found considerable ignorance
among residents about the scale of the municipal oil windfall.
How much can we generalise from our findings to other settings? We
acknowledge that what might be true for Brazil need not apply to other
countries. More importantly, there are a number of prominent
explanations for the “resource curse” that only operate at the national
For example, some argue that resource abundance leads to an overvalued
nominal exchange rate, with deleterious consequences for
competitiveness. Naturally, this cannot show up across municipalities,
which do not print their own currencies. Similarly, our analysis cannot
test the hypothesis that resource abundance is a cause of political
violence and civil war.
But our results do lend some credence to the view that oil royalties are
somehow easier to steal than other types of revenues. When we look at
the usage and effects of municipal revenues coming from other sources,
we find significant differences relative to revenue coming from oil, and
the puzzle of “missing money” is less severe
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.
Indeed, the issue is clearly of political relevance, with several major
federal legislative proposals to reform the royalty system currently
pending. Most proposals tend to reduce both the share of royalties going
to local governments and the discretion that these governments have in
using the revenues. In the summer of 2009, the federal government issued
its own proposals for the property rights regime of the newly discovered
“pre-salt” giant oilfields.
More generally, our results may inform the debate about increasing
transparency requirements both in poor, resource-abundant countries and
in countries that receive aid. In particular, it is increasingly common
for conditionality-based programmes to feature stringent reporting
requirements from multinational oil companies and recipient governments.
Our results suggest that accounting transparency per se may be
insufficient. Reporting schemes should document the actual effective
disbursement of sums, and not merely their recording on balance sheets.
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