The Presource Curse

Author:James Cust and David Mihalyi
SUMMARY

Oil discoveries can lead first to jubilation then to economic jeopardy

 
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The Presource Curse Finance & Development, December 2017, Vol. 54, No. 4

James Cust and David Mihalyi

Oil discoveries can lead first to jubilation then to economic jeopardy

Every year there are major discoveries of oil and gas deposits around the world. Government officials and citizens alike are jubilant, anticipating the prosperity these discoveries herald. But that exuberance can often be misplaced. Some countries have experienced growth disappointments after major oil finds, and economic problems have set in shortly thereafter. 

The world has long recognized that countries with abundant revenues from oil and other natural resources often tend to have less 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, especially in countries with weak political institutions, economic growth begins to underperform long before the first drop of oil is produced, an event we call the presource curse. 

Back to EarthIn 2009 Ghana was soaring. Barack Obama had chosen it to be the first African country he would visit as president of the United States. The country, which had navigated a peaceful transfer of power in 2007, was bucking the global economic slowdown at the time, with robust economic growth that averaged 7 percent between 2003 and 2013. 

To cap it all, Ghana had twice struck gold—or to be more precise, black gold. It had a major offshore oil discovery in 2007 and another in 2010. Hopes were high that these finds would help propel Ghana toward middle-income prosperity. Ghana’s then-president, John Kufuor, proclaimed in 2007, “Even without oil we are doing well. . . . With oil as a shot in the arm, we are going to fly.”

Fast-forward to today; Ghana is not flying. Growth dropped below 4 percent between 2014 and 2016, despite IMF forecasts for above 7 percent. The oil discovery and the financial windfall it promised appeared to usher in an era of economic imprudence: heavy borrowing, profligate spending, and exposure of the economy to the oil price crash of 2014. Ghana also succeeded in defying the spirit of its own saving rules. While it saved a prescribed $484 million in oil revenues for a rainy day, it also borrowed $4.5 billion on international markets. Since 2015 the country has been in an IMF program of support and surveillance. A new government took over in 2017, but the crisis continues. 

Ghana is not alone. Other countries have experienced the jubilation of discoveries, only to see growth stumble or fall. In Mozambique, the largest offshore gas deposits in sub-Saharan Africa were discovered in...

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