Expenditure decentralization and natural resources

This paper explores the relationship between natural resource revenues and expenditure decentralization. While the literature suggests that an abundance of natural resources may have deleterious effects on fiscal decentralization and other variables, existing empirical evidence regarding expenditure decentralization is scant and suspect. We find that expenditure decentralization is highly persistent. We take this persistence into account and use four different estimation strategies to examine whether natural resource revenues influence expenditure decentralization. Increases in natural resource rents as a percentage of Gross Domestic Product (GDP) statistically significantly and negatively affect expenditure decentralization. A 1% year-on-year increase in natural resource rents reduces estimated expenditure decentralization by approximately 0.1% to 0.3%. This result is robust to an alternative measure of resource dependence. Our findings strongly suggest that increases in resource endowments lead to a centralization of government expenditures.