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Keynes Fund

Summary of Project Results

Oil, Growth and Misallocation: Evidence from a Quasi-Experiment and Establishments Level Data. The study of the effects of natural resource abundance on economic growth and development has a long tradition in economics.

Adam Smith, David Ricardo and Thomas Malthus1 believed that countries endowed with natural resources, such as minerals and other primary commodities, could develop faster than natural capital scarce economies. This is due to the effect of natural resources on the capital base of a country (cf., Dasgupta, 2001) and the aggregate importance of agricultural production in the XVIII and XIX Centuries. With the industrial revolution, structural economists such as Raúl Prebisch (1950) and Hans Singer (1950) argued that the price of com- modities tend to decline over time relative to those of manufactured goods (which embodied higher added value - input and output linkages - and productivity); there- fore, commodity exporting countries would have a disadvantage in the division of trade and as such would be outperformed by other nations.

The Oil and Gas industry is in the center of the production network in many coun- tries and consequently its impact on the economy has been studied extensively in the literature2. The usual approach to disentangle the effects of oil production relies on cross-country evidence3. Several papers in the literature have shown correla- tions between natural resources and adverse outcomes. In an influential paper, Sachs and Warner (1995), using cross-sectional country regressions, show that resource- exporting countries tend to have lower growth rates, thereby confirming the struc- turalist view in a reduced form model. Recently, Isham, Woolcock, Pritchett, and Busby (2005) point out that resource-exporting countries present poorer governance indicators. However, cross-country evidence is sensitive to changing periods, sam- ple sizes, and covariates (van der Ploeg (2011)). Additionally, cross-country studies usually use very aggregate variables and make it difficult to control for institutional and cultural frameworks, and for policy variation between different countries. As a result, the literature has been shifting attention to a more detailed analysis to pin down specific mechanisms of how natural resources impact the economy. The main empirical challenge is, however, to deal with the issue of endogeneity of natural re- sources since there are many unobservable variables that might be correlated with oil production and might also affect economic development.

The aim of this research project is to empirically study the effects of oil production on the real economy and theoretically explore the channels through which the oil sec- tor impacts the rest of the economy. The project will consist of three innovative steps. First, it will investigate the effects of oil production on local economic development for the period from 1940 to 2000. In order to provide evidence on the effects of natural resource abundance on local development in Brazil, we will use a novel dataset and research design from the drilling of approximately 20,000 oil wells in the country. The dataset covers the complete universe of wells drilled in Brazil since exploration began and provides information on the location of wells. Secondly, we will incorporate an oil sector in an industry model with heterogeneous firms and sectors to be able to the- oretically evaluate the aggregate equilibrium effects of oil production on outcomes of other economic sectors. Lastly, based on the theoretical model, a structural estimation will allow us to pin down the channels through which oil production affects firm and worker dynamics through counterfactuall exercises.

Research Output

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

Winning The Oil Lottery: The Impact of Natural Resource Extraction on Growth, Tiago Cavalcanti, Daniel Da Mata and Frederik Toscani, Journal of Economic Growth, Vol 24, pages 79–115 (2019)


This paper provides evidence of the causal impact of oil discoveries on local development. Novel data covering the universe of oil wells drilled in Brazil allow 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 local production and have positive spillovers. Workers relocate from informal, low productivity agriculture to higher value-added activities in formal services, increasing urbanization. The results are consistent with greater local demand for non-tradable services driven by highly paid oil workers.

Project Information

Project Code: JHLO
Project Investigators
  • Professor Tiago Cavalcanti
Research Round
Third Round (October 2013)

Project Investigators

Tiago Cavalcanti is a Professor at the Faculty of Economics, University of Cambridge and a Fellow of Trinity College. His most recent research has focused on links between financial development and economic development, and on the role of female labour force participation on economic development.