Paper short abstract:

Poverty and inequality have fallen over the past 15 years or so in Latin America. The reduction in poverty and inequality has been linked to a significant implementation of social assistance programmes that also coincided with i) favourable conditions in commodity prices that generated an unprecedented fiscal space to finance these programmes, and ii) important political transitions that have led in general to more competitive electoral systems. How natural resource rents have helped incumbent governments to improve their expected electoral returns? Recent impact evaluations seem to support the hypothesis that social assistance is associated with political participation of recipients in favour of the incumbent. In this paper we discuss and test whether the revenues from natural resources have facilitated the implementation of transfer programmes and whether this redistribution of resources has been motivated by electoral outcomes. We find that, in fact, natural resources have driven public spending in social transfers that would have otherwise not taken place, however, we do not find strong evidence to support the electoral-returns hypothesis.

Paper long abstract:

The introduction of social assistance in Latin America in the late 1990s coincided with a democratization process in the region and a significant increase in the contribution of revenues from non-renewable resources to the public budgets.

This paper provides an analysis of the distributional effects of revenues from the natural resources via social spending. A primary concern is to establish whether the redistribution of income via social spending would have not taken place in the absence of natural resources. Another aspect of this relation is that lessons from Latin America can also provide insights into the political incentives that natural resource rents generate to the incumbent. Experimental and quasi-experimental studies suggest that social assistance programmes can produce electoral gains to the incumbent.

Our working hypotheses are the following: H1) revenues from non-renewables have facilitated social spending in Latin America, and H2) natural resources have generated electoral gains to the incumbents in increasingly more competitive political systems. In order to test our hypotheses, we first examine the economics of redistribution via revenues from natural resources, with a particular focus on the incentives that drive incumbent decisions on social spending. Second, we consider a model of income redistribution in which an incumbent can make allocation decisions of public funds in the presence of taxation. We expand the model by allowing revenues from natural resources facilitating social spending without affecting the disposable income of better-off households. We empirically test our hypotheses using fixed effects estimators with instrumental variables in three stages. The results indicate that the expansion of social spending in Latin America over the period 1990-2009 has indeed been facilitated by the natural resource rents; however, the electoral gains hypothesis is not supported by the empirical analysis.