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Matteo Ruzzante and Nelson Sobrinho

Trend G13 Impact of Giant Discoveries on Government Debt in Advanced Economies G14 Impact of Giant Discoveries on Government Debt in Emerging Economies G15 Impact of Giant Discoveries on Government Debt in Developing Economies LIST OF TABLES 1 Granger Causality Tests of Discovery Predictability 2 Likelihood Ratio Tests of Discovery Predictability 3 Cumulative Impact of Giant Discoveries on Government Debt B1 Descriptive Statistics and Data Sources D1 Dynamic Panel Distributed Lag Model Estimates C2 Linear Probability Model Estimates – Fiscal Crises

Matteo Ruzzante and Nelson Sobrinho
This paper investigates the dynamic impact of natural resource discoveries on government debt sustainability. We use a ‘natural experiment’ framework in which the timing of discoveries is treated as an exogenous source of within-country variation. We combine data on government debt, fiscal stress and debt distress episodes on a large panel of countries over 1970-2012, with a global repository of giant oil, gas, and mineral discoveries. We find strong and robust evidence of a ‘fiscal presource curse’, i.e., natural resources can jeopardize fiscal sustainability even before ‘the first drop of oil is pumped’. Specifically, we find that giant discoveries, mostly of oil and gas, lead to permanently higher government debt and, eventually, debt distress episodes, specially in countries with weaker political institutions and governance. This evidence suggest that the curse can be mitigated and even prevented by pursuing prudent fiscal policies and borrowing strategies, strengthening fiscal governance, and implementing transparent and robust fiscal frameworks for resource management.
Matteo Ruzzante and Nelson Sobrinho

compiled by the authors (see online Appendix A.II). Tables Table 1: Granger Causality Tests of Discovery Predictability (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Regressors: Government debt (% of GDP) Log of population Log of real GDP per capita Real GDP growth CPI inflation Current account balance, 3-year average Fiscal deficit (% of GDP) Real exchange rate Polity2 index Governance indicator 1 lag Chi-square statistics 0.026 0.248 3.140 1.357 1.417 0.691 4.630 0