Evidence for a Presource Curse? Oil Discoveries, Elevated Expectations, and Growth Disappointments

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Natural Resource Discoveries, Citizen Expectations and Household Decisions

“…This provides suggestive evidence that the quality of institutions may be important in shaping citizen expectations on the impact of oil discoveries. This finding concurs with earlier findings of Cust and Mihalyi (2017a) who showed that countries with weaker political institutions experience lower growth after a discovery relative to the period before a discovery and compared to contemporaneous growth forecasts by the IMF.…”

“…1 This exuberance stems from the expectation that windfalls from resource extraction might bring a significant shift in the economic trajectory of their economies. Recent research however suggests that in some countries expectations can overshoot the benefits subsequently felt, coinciding with growth disappointments, a phenomenon known as the "presource curse" (Cust and Mihalyi, 2017a). Various authors propose mechanisms whereby overly optimistic expectations about future rents, triggered by announcements of major resource discoveries, may induce governments to embark on unplanned spending including through excessive borrowing (Mansoorian, 1991;Arezki et al, 2017;Collier, 2017).…”

“…First, we add to the fledgling literature on the presource curse that seeks to understand why some countries appear to shift to worse growth paths subsequent to major petroleum discoveries. Cust and Mihalyi (2017a) show that in countries with weaker institutions that discover oil, growth can decline in the postdiscovery period prior to production. This growth disappointment may be associated with elevated and excessive expectations about the benefits that will flow from the discovery, potentially leading to sub-optimal choices by both private and public agents.…”

Macro-Financial Aspects of Climate Change

“…They have not yet converted hydrocarbon rents into other sources of export revenues needed to grow and diversify. They also often face major challenges attracting commercial investors and raising affordable finance, although some of them, for example, Mozambique and Ghana, have heavily borrowed against expected extractive revenues and are already burdened with the high cost of debt service (Cust, J. and D. Mihalyi, 2017). Climate policy leaders could help these countries adjust to an LCT through technology, financial cooperation, and trade agreements that would provide them with revenue visibility to invest in low-carbon growth and diversification.…”

The role of governance and international norms in managing natural resources

“…The alternative scenario increases the prospect of plunder and mismanagement. Indeed, recent empirical work has argued that critical thresholds exist in polices and institutions that determine whether resource abundance leads to perverse political choices (Casselli and Tesei 2016) and whether major oil discoveries lead to short-run growth disappointments or not (Cust and Mihalyi 2017).…”