Resource-rich countries tend to experience slower economic growth and more social problems than do less-endowed countries—a phenomenon dubbed the “resource curse.” But it turns out that in many cases, economic growth begins to underperform long before the first drop of oil is produced; this we call the “presource curse.”
In a recent research paper, we found that, following oil discoveries, growth systematically underperforms the forecasts made by the International Monetary Fund. For certain countries with weak institutions, the discoveries have even led to significant growth disappointments, compared with pre-discovery trends.
Short-term growth impact of giant oil and gas discoveries
We propose that the presource curse is driven by elevated expectations. Expectations can in turn drive suboptimal behavior. For example, governments may be pressured by voters to embark on risky borrowing on the back of overly rosy projections.
To find out more, read our new article published in Finance and Development.