The effects of resource rents and elections on human capital investment in Colombia

Abstract

Previous studies have shown that politicians tend to behave opportunistically by promoting expansionary fiscal policies before elections in order to advance their political careers. While there is ample evidence of political budget cycles (PBCs) on the national-level, subnational-level analysis remains limited. To address this gap, this article examines whether resource rents fuel PBCs in Colombia at the subnational level. In particular, it analyzes whether a fiscal reform that redistributes royalty revenue between subnational governments, propagates the windfall effect to other states or limits the negative development impacts of resource rents and PBCs. Using municipal-level data and system generalized method of moments estimation to account for potential endogeneity, we found that municipalities invested in health and education according to the size of the resource rents they received. We also found that the fiscal policy reform in Colombia leads municipalities’ decisions about investment in human capital less reliant on resource revenue, especially for producer municipalities.