Oil discoveries can constitute a major positive and exogenous shock to economic activity, but the resource curse hypothesis would suggest they might also be detrimental to growth over the long run. We utilize a new methodology for estimating growth under-performance to examine the extent to which discoveries depress the growth path of a country following a discovery and prior to production starting. We find causal evidence of a significant negative effect on short-run growth and growth relative to counter-factual forecast growth in countries with weak institutions; creating growth disappointments prior to private and public resource windfalls. We term this the presource curse.

For a giant oil or gas discovery, in the period 1988-2010, we estimate an average growth disappointment effect of 0.83 percentage points, measured as the average annual gap between forecast and actual growth over the 5 years following a discovery. Further, we find our estimated effect varies by the size of discovery, increasing to 1.77 percentage points gap in the case of super-giant discoveries. The estimated effect is inversely related to the quality of political institutions, and driven by countries with lower institutional quality at the time  of discovery, consistent with the similar long run results documented in the resource curse literature. For countries with below-threshold institutional quality, the growth disappointment effect is larger – measured as 1.35 percentage points in annual terms. There is no measured growth disappointment effect for countries with strong institutions. Using the synthetic control method we conrm our findings for a selection of countries above and below the institutional quality threshold.

Our findings suggest that studies of the resource curse which focus only on the effects of resource exploitation or examine only long run growth effects may overlook important short run growth disappointments following discoveries, and the way countries respond to news shocks.

Read the paper here.

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