Winning the Oil Lottery: The Impact of Natural Resource Extraction on Growth

Author:Tiago Cavalcanti - Daniel Da Mata - Frederik Toscani
IMF Research Bulletin
6 6
Winning the Oil Lottery:
The Impact of Natural Resource Extraction on Growth
Tiago Cavalcanti, Daniel Da Mata, and Frederik Toscani
This summary provides evidence of the causal impact of oil
discoveries on development. Novel data on the drilling of
20,000 oil wells in Brazil allows us to exploit a quasi-
experiment. Municipalities where oil was discovered
constitute the treatment group, while municipalities with
drilling but no discovery are the control group. The results
show that oil discoveries significantly increase per capita
GDP and urbanization. We find positive spillovers to non-oil
sectors, specifically, an increase in services GDP which stems
from higher output per worker. The results are consistent
with greater local demand for non-tradable services driven by
highly paid oil workers.
What are the eect s of oil discoveries on economic
development? Although there is a long tradition in
economics of studying the i mpact of natural resource
abundance, no clear consensu s has emerged in the literature.
Should the discovery of oil lead to a prosperous p eriod
of high growth i n both the short and long run or should
countries fear the much-di scussed Dutch disease? Nominal
exchange rate appreciation and rent seeking c an have
adverse eects, as ca n volatility of revenues, but the large
scal wind fall associated with resource re venue can also
foster development. Even when we abstract from nominal
exchange rate movements and the impact of oil rents, t he
pure eect of the physical presence of a natu ral resource
sector might drive up loca l prices—and therefore crowd
out the development of other economic activities, bri nging
about negative eects on growt h—or increase demand
for workers and attract new activ ities, which can lead to
agglomeration eects, w ith a positive impact on
productivity and income (Michael s, 2011).
Initially, the literat ure focused on nding aggregate, countr y-
level evidence of the overall i mpact of natural resource
abundance. However, cross-country ev idence was shown to
be sensitive to changing per iods, sample sizes, and covariates
(for an overview of the literature, se e van der Ploeg, 2011). To
try to disenta ngle the various mechanisms th rough which
natural resource product ion can aect development in more
detail, a stra nd of the literature to which we contribute has
shied to with in-country studies (Acemoglu and others, 2014;
Dube and Vargas, 2013; and Michaels, 2011). Recent evidence
indicates, however, that resource extrac tion is endogenous
to institutions (Cust and Hardi ng, 2014; and Arezki and
others, 2015). ese results indicate that places wit h better
institutions disc over more natural resources a nd that a simple
regression of resou rce extraction on de velopment indicators is
thus likely to be biased a nd indeed overestimate the impact of
resource ex traction.
In order to overcome these concerns, we use the ra ndom
outcomes of exploratory oil dril ling in Brazil to investigate
the causal eec t of natural resource discoveries on local
development. Specifically, we compare economic outcomes
in municipalities where t he national oil company,
Petrobras, dril led for oil, but did not find any, to outcomes
in those municipal ities in which it drilled for oil and
was successful . Drilling attempts were carried out in
many locations with sim ilar geological characteris tics,
but oil was found in only a few places. e “treat ment
assignment” is related to the succ ess of drilling attempts:
Places where oil was found were assigned to treat ment,
while places with no oi l are part of the control group. e
treatment assignment resembles a “randomiz ation,” since
(conditional on drilling t aking place) a discovery depends
mainly on luck (see Figure 1 for a map of all dr y and
discovery wells). erefore, places with oil d iscoveries are
the “winners” of the “geologica l lottery.” Since there were
no significant royalt y payments to municipalities in Brazil
until several de cades aer the first discoveries, we are able
to isolate the direct impac t of oil extraction from the eect
of fiscal wind falls. And since we are conducting a wit hin-
country study, there cannot be a ny nominal exchange rate
response by construction.
e baseline results show that loc ations in which oil was
discovered had a 24.6–25.9 percent higher per capita GDP
over a span of up to 60 years compared to those in t he
control group (see Table 1). Furthermore, we document an
increase in both ma nufacturing and serv ices GDP per
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