Oil Bonanza and the Composition of Government Expenditure

Government behavior can be impacted by the benefits arising from natural resources. Benevolent government and political leaders may use them to improve the welfare of people, whereas non-benevolent ones may use them for their own interest. As an attempt to examine the effects of the oil bonanza on government behavior in a comprehensive manner, the current study investigates how giant oilfield discoveries affect the size and composition of government expenditure using the data of 148 countries between 1972 and 2008. We find that giant oilfield discoveries significantly increase total government expenditure in the medium and long term, although they do not have an impact in the short term. We also obtain evidence that democracy plays a mediating role in these effects; if the democracy level in a country is mature, the size of total government spending does not increase even when discovering giant oilfields. Considering each category of government expenditure, giant oilfield discoveries significantly increase expenditure on defense and general public services, whereas they decrease expenditure on public order and safety, and economic affairs. Furthermore, giant oilfield discoveries do not have a significant impact on social spending including health, education, and social protection. Finally, giant oilfield discoveries increase the net implicit gasoline subsidy in the long term. These findings enhance our understanding of the effects of oil bonanza on government behavior.