# **INTRODUCTION**

The last decade has seen significant oil and gas discoveries. Ross (2012), for instance, reports that between 1998 and 2006 19 new countries, mostly low and middle-income, have become oil and gas exporters. At the same time, many of these regions have been plagued by political violence, in particular ravaging civil wars. This link between natural resources and conflict outbreak has been confirmed by numerous studies (Fearon and Laitin, 2003; Collier and Hoeffler, 2004; Humphreys, 2005; Lujala et al., 2005; Fearon, 2005; Ross, 2006; Lujala, 2010). Ross (2012) warns that the inflow of oil revenue into mainly poor nations is likely to spread further the oil curse in the form of lack of democracy and civil conflict. While other causal mechanisms have been suggested (Humphreys, 2005; Ross, 2006), such negative outcomes can also be linked to features of oil revenue - non-tax based, unstable and secretive - that limit the ability and incentive of governments to spend such revenue productively (Ross, 2006).<sup>5</sup> In this paper, we study the conditions under which the patterns of public spending may mitigate the risk of violent domestic conflict. Some recent research suggests that more government spending either in general or specifically for welfare and the military may reduce the risk of civil conflict onset (Hegre and Sambanis, 2006; Basedau and Lay, 2009; Fjelde and de Soysa, 2009; Taydas and Peksen, 2012). While oil wealth has begun to be considered in the study of civil conflict as an important source of revenue for governments, there has not been a systematic analysis of whether oil-rich countries can increase public spending or alter the particular allocation of such spending to social sectors or the military as a way to mitigate the risk of conflict. This paper brings together the literature linking public spending and conflict, on the one hand, and that connecting natural resources and conflict, on the other.

We use time-series cross section data (148 countries, 1960-2009) to test the hypothesis that oil has a conditional effect on civil conflict depending on the size of government expenditure and the allocation of government spending. Our dependent variable is the onset of small and large civil conflict (Gleditch et al., 2002). The empirical estimations show that small and large conflicts alike are less likely when military spending is high in oil and gas rich economies. By contrast, in economies with little natural resources, increases in military spending are associated with a higher risk of conflict. Increased spending in education, health or social security is associated with lower risk of small-scale conflict, irrespective of the level of oil revenue. On the other hand, higher levels of general government expenditure do not appear to have any robust mitigating effects.

The paper proceeds as follows: Section I reviews work on natural resources and conflict; Section II discusses the literature on public spending and conflict; Section III presents our approach,

> 5 <mark>Gylfason (2001) links low economic growth in resource rich countries to low investment in education. Cotet and Tsui (2013) find that oil-rich countries tend to spend more on their military.</mark>

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