How uncertain oil discoveries affect local governance in Brazil

An article authored by GSEM Postdoctoral Researcher Erik Katovich examines how offshore oil and gas discoveries affect local governance in Brazil, using a forecasting model and a quasi-experimental design. The study was published in the top-tier Journal of Development Economics. The author finds that municipalities where discoveries are realized, enjoy revenue windfalls but fail to improve public goods or economic activity, while municipalities where discoveries fail to produce suffer revenue shortfalls and declines in public goods provision. The study shows that discovery announcements draw less-educated candidates into local politics and increase political turnover when revenues are below expectations. This highlights discovery uncertainty as a key resource governance challenge and suggests policy implications for managing expectations and revenues.

Erik Katovich received funding from UW-Madison's IRIS and Tinker Nave.

ABSTRACT

Natural resource discoveries are often followed by delays and uncertain production outcomes, creating challenges for governments that anticipate resource revenues. I leverage exogenous subnational variation in offshore oil discoveries in Brazil to identify dynamic effects of discovery news and revenue shocks on local public finances, public goods provision, and politics. Municipalities where discoveries are realized enjoy significant growth in revenues and spending, but fail to improve public goods provision or stimulate economic activity. Municipalities that experience discovery announcements but never receive windfalls suffer long-term declines in revenues, investment, and public goods provision relative to never-treated controls. I show that electoral responses underlie these dynamics: discovery announcements draw less-educated candidates into local politics, and shortfalls between anticipated and realized oil revenues increase political turnover. Findings highlight discovery uncertainty as a fundamental resource governance challenge, and reveal mismanagement of windfalls and adjustment costs after disappointment as two faces of the Resource Curse.

The study is available open access: Winning and losing the resource lottery: Governance after uncertain oil discoveries

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