Giant oil and gas discoveries raise expectations of faster growth. In countries with weak institutions, growth falls short of those expectations, before a single barrel is produced.
In plain language
The question
A giant oil or gas discovery makes a country richer on paper the day it is announced, but production usually starts years later. The resource curse literature asks what happens once the oil flows. This paper asks what happens in the gap between discovery and production. Mozambique prompted the question: after major gas finds in 2009 and 2010, the IMF forecast average growth of 7.8 percent for 2012 to 2016, and actual growth had slumped to 3.3 percent by the end of that period. The yardstick is the IMF’s own five-year growth forecasts, made after each discovery, as the benchmark for what growth was expected to be.
What we find
- Forecasts rise, growth does not. After a giant discovery (500 million barrels of oil equivalent or more) between 1988 and 2010, IMF growth forecasts went up, but actual growth did not follow. The paper estimates that growth ran on average 0.83 percentage points a year below forecast over the five years after a discovery, and 1.77 points after the very largest, super-giant, finds.
- Institutions decide who is hit. The shortfall is concentrated in countries with weak checks on executive power at the time of discovery, where it reaches 1.35 points a year. The paper finds no shortfall in countries with strong institutions.
- Country comparisons agree. Synthetic-control comparisons for a selection of countries above and below the institutional threshold confirm the main result.
The authors call this the presource curse. The paper does not pin down its mechanism, which it leaves to future research.
Why it matters for policy
The economic risks of resource wealth begin at discovery, not at first production, so the policy response cannot wait for the revenues. Governments with weaker institutions are the most exposed in exactly this window. Expectations themselves may make things worse if they feed overly favourable investor perceptions or credit ratings. And the gap between official forecasts and outcomes is a practical tool: it can show when a country’s growth is falling behind the path its discovery was expected to deliver.
Abstract
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. This paper utilizes a new methodology for estimating growth underperformance to examine the extent to which discoveries depress the growth path of a country following a discovery and prior to production starting. The study finds causal evidence of a significant negative effect on short-run growth and growth relative to counterfactual forecast growth in countries with weak institutions, creating growth disappointments prior to private and public resource windfalls. This effect is termed the presource curse. For a giant oil or gas discovery in 1988-2010, the study estimates an average growth disappointment effect of 0.83 percentage points, measured as the average annual gap between forecast and actual growth over the five years following a discovery. Further, the estimated effect varies by the size of the discovery, increasing to a 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 the 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 confirm our findings for a selection of countries above and below the institutional quality threshold. The findings suggest that studies of the resource curse that 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.
Coverage
Cite as
James Cust and David Mihalyi (2017). "Evidence for a Presource Curse? Oil Discoveries, Elevated Expectations, and Growth Disappointments." World Bank Policy Research Working Paper 8140.