Oil shocks and subnational public investment: The role of institutions in regional resource curse

Abstract

Theoretical and empirical studies on oil price shocks have mainly focused on measuring its relationship with national macroeconomic performance in developing countries. Nevertheless, research is scarce on the effects of natural resource booms on local governments and even more on public investment. Using a difference-in-differences strategy, this paper contributes to identifying the causal effects of the recent oil boom in Colombia (2008–2016) on subnational public investment. Our results suggest that the rise in international oil prices had mostly positive and disproportionate effects on public investment in oil producing departments and municipalities. Although municipalities and departments prioritized different sectors, both increased their investments in sectors with high social returns suggesting a lower likelihood of a resource curse. We also found that an institutional reform in 2012 was a source of heterogeneity and the main driver of the causal effects on subnational public investments.