The Economic Spillovers from Resource Extraction: A Partial Resource Blessing at the Subnational Level?

Abstract

We examine the economic consequences of resource extraction and associated revenue windfalls, measured at the subnational level. Our analysis focuses on variations across Indonesian districts and municipalities to estimate the spillovereffects on economic activity, measured in terms of local GDP. Two important channels are identified: direct spillover effects from extraction activity, and the fiscal spillovers from local government spending associated with revenue windfalls from extraction activity. We use Indonesia's fiscal sharing rules to quantify and disentangle these two channels by application of an instrumental variable. We show that the main economic gains accrue via transfers to, and spending by, local government. While direct project-level investments and production contribute to measures of overall GDP, these are found to be largely due driven by the value of oil extraction, with only limited evidence for a direct impact on non-oil GDP. In contrast to other works, it appears that regionally decentralized government spending can be growth-enhancing over the decade surveyed. We argue that resource endowments do contribute to increased economic activity at the subnational level in Indonesia, but may lower the overall growth effect of spending.

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