Evidence for a Presource Curse? Oil discoveries, Elevated Expectations, and Growth Disappointments
James Cust () and
David Mihalyi ()
No 193, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford
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 counter-factual 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, between 1988 to 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 estimate defect 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.
Keywords: rousource curse; economic growth; forecasting; forecast errors; news shocks; institutions (search for similar items in EconPapers)
JEL-codes: O40 O43 Q33 Q35 (search for similar items in EconPapers)
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Working Paper: Evidence for a presource curse ? oil discoveries, elevated expectations, and growth disappointments (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:oxcrwp:193
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