Beware of Strike-it-Rich Euphoria: the Curse of Potential Oil Wealth

IMF Blog, March 9, 2018

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The resource curse, or paradox of plenty, is when countries with an abundance of natural resources suffer stagnant economic growth or even contraction.
Presource curse: an effect from the discovery of oil or other natural resources, not from oil exports. It can affect countries before production begins—“before a single barrel of oil is taken out of the ground.”
Mechanism: expectations and “strike-it-rich euphoria” lead governments to increase spending and borrowing in anticipation of future revenues, creating vulnerability if prices or production do not meet expectations.

World Bank economist James Cust: “The share of the world's poor living in resource-rich countries in the year 2000 was less than 25 percent, but by 2030 it will be almost 75 percent.”
Practical outcomes:
- Countries can experience growth problems even prior to production.
- Over-borrowing and expansionary fiscal policies in anticipation of resource revenues can precipitate crises when prices collapse.

Ghana
- Implemented a strong petroleum revenue management program specifying how to use oil revenues and included a savings fund for future generations.
- Saved about $500 million from oil revenues.
- Borrowed about $4.5 billion.
- Although it didn't break the rules of their petroleum revenue management act, borrowing “defied the spirit of it.”
- When the oil price crashed in 2014, oil revenues dried up and growth slumped.
Tanzania
- Did not increase borrowing to the same extent as Ghana.
- Did not increase spending to unsustainable levels.
- As a result, when oil prices crashed in 2014, Tanzania was less vulnerable than Ghana.

Core advice: “Don’t count your chickens before they’ve hatched.”
Practical governance guidance implied by the examples:
- Establish clear petroleum revenue management frameworks that specify use of oil revenues and include savings for future generations.
- Avoid expanding borrowing and spending based on anticipated resource revenues.
- Learn from past country experiences to manage major discoveries prudently.

Content drawn from an IMFBlog post featuring a podcast with World Bank economist James Cust discussing management of resource wealth and the presource curse.

IMF Blog post: Beware of Strike-it-Rich Euphoria: the Curse of Potential Oil Wealth