From curse to blessing? institutional reform and resource booms in Colombia

Abstract

Is it possible to reverse the resource curse through institutional reform? Evidence suggests that there is a negative relationship between abundance of natural resources and economic growth, political stability, democracy, and peace. However, evidence illustrating how institutional reform can reverse this situation is scarce. In this paper, we exploit a component of an institutional reform that modified the allocation rule of oil royalties in Colombia and evaluate a set of effects of this reform on the living standards of Colombian households. Using international variations in the price of oil for identification, we find that the reform had important effects on several household welfare indicators. We find positive impacts on important dimensions, such as reductions in multidimensional poverty and improvements on income, employment, housing conditions, health, and education, among others. Results are mixed or null in other outcomes, such as formality or employment in the service sector. Importantly, we find no effects on monetary poverty but larger income effects for rich and urban households. We test for the different channels boosting these effects and provide tentative evidence that supports the role of fiscal and administrative capacity mechanisms.