Oil, elections and fiscal transparency

How does governments’ ability to gain financing from oil income affect their behaviour? Numerous studies have explored the effects of oil wealth on countries’ political characteristics, especially the level of democracy. Oil has also been associated with a significant electoral incumbency advantage across different political regimes. However, the relationship between oil wealth and incumbent governments’ behaviour, including election-year fiscal manipulation, has been studied to a lesser extent. This article argues that higher oil rents increase election-year public spending as they provide national governments both with direct revenue and increased financing opportunities. However, fiscal transparency mitigates this effect. Consequently, oil-induced electoral budget cycles decrease as fiscal transparency increases. Using a high-quality measure of fiscal transparency in a panel of countries, robust evidence in favour of this argument is found. The findings suggest that many of the previous results on the political effects of oil, including incumbency advantage, might run through an election-year spending channel, and that fiscal institutions might matter substantially for the political effects of oil.