Resource discovery and the politics of fiscal decentralization

- Empirical analysis of the effect of natural resources on fiscal decentralization.
- Resource discovery has very little effect on revenue decentralization but induces expenditure centralization.
- Oil discovery the main driver of centralization and not mineral discovery.
- Resource discovery leads to centralization in countries without permanent democratization.
- Tax and intergovernmental transfers respond most to resource discovery and democratization whereas own source revenue, property tax, educational expenditure, and health expenditure do not seem to be affected.
- Higher resource rent leads to more centralization and the effect is moderated by democratization.

If the central government is a revenue maximizing Leviathan then resource discovery and democratization should have discernible impacts on the degree of fiscal decentralization. We systematically explore these effects by exploiting exogenous variation in giant oil and mineral discoveries and permanent democratization. Using a global dataset of 77 countries over the period 1970-2012 we find that resource discovery has very little effect on revenue decentralization but induces expenditure centralization. Oil discovery appears to be the main driver of centralization and not minerals. Resource discovery leads to centralization in locations which have not experienced permanent democratization. Tax and intergovernmental transfers respond most to resource discovery shocks and democratization whereas own source revenue, property tax, educational expenditure, and health expenditure do not seem to be affected. Higher resource rent leads to more centralization and the effect is moderated by democratization.