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The economic spillovers from resource extraction: a partial resource blessing at the subnational level?

Author

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  • James CUST

    (University of Oxford & University of Luxembourg)

  • Ridwan D. RUSLI

    (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore, 637332.)

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 spillover effects on economic activity, measured in terms of local GDP. Two important channels are identified: direct spillover e ects 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 e ect of spending.

Suggested Citation

  • James CUST & Ridwan D. RUSLI, 2014. "The economic spillovers from resource extraction: a partial resource blessing at the subnational level?," Economic Growth Centre Working Paper Series 1402, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
  • Handle: RePEc:nan:wpaper:1402
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    More about this item

    JEL classification:

    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels

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