“Understanding and avoiding the oil curse in the Arab world”, why is the topic important?

The conference was closed with a panel discussion moderated by Ahmed Galal, Managing Director of the Economic Research Forum. The Panel included Abdullatif Al-Hamad, Director General and Chairman of the Arab Fund for Economic and Social Development; Ibrahim Elbadawi, Economic Policy and Research Center – EPRC, Dubai Economic Council & Economic Research Forum – ERF); and Alan Gelb, Center for Global Development, who provided a wrap-up of the discussions and highlighted the following steps.

Watch video interviews with Ahmed Galal, Abdullatif Al-Hamad and Ibrahim Elbadawi about the importance of the topic to the region and  the role of ERF in producing knowledge about the important issues of natural resources and long-term development.

Ahmed Galal, Economic Research Forum (ERF)

Abdullatif Al-Hamad, Arab Fund for Economic and Social Development (AFESD)

Ibrahim Elbadawi, Economic Policy and Research Center (EPRC) & Economic Research Forum (ERF)

“Oil revenues may run down much before we exhaust the oil”, Paul Collier

At the end of the first day, I had the opportunity to interview Paul Collier, Professor of Economics, Director of the Centre for the Study of African Economies at the University of Oxford. The following issues were addressed:

  • Given that oil is a non-renewable resource, what will happen to the region when the oil is gone?
  • How well do you believe the region is successfully trying to manage its oil wealth?
  • What would you advise policymakers to do to intelligently manage their oil funds?

Collier stressed on the need to build up other assets than oil revenues, which could include capital, human skills, investment in the country and assets abroad. He also highlighted the diversity of the region; different countries having different degrees of success and different opportunities. According to him, Dubai presents a good example of a country who managed successfully to diversify away from oil by turning itself into a service economy. Following this example and given its good location, North Africa should diversify in manufacturers and services for the European market.

As for the risk of facing an oil curse, Collier considers it being very low given the amount of oil discoveries in other places (i.e. North America). According to him, the danger remains in the market becoming over-supplied to the extent that prices calm down, as well as the possible adoption of a regulatory regime that reduces the use of oil to save the planet; which makes the diversification of the economy even more urgent.

Finally, Collier pointed out the need for a decision-making structure to allow the use of oil funds for domestic investment and foreign asset accumulation.

Watch the full interview:

International vs. Arab country experiences

The third session of the conference featured two presentations while focusing on “International vs. Arab Country Experiences”. The first one was presented by Thorvaldur Gylfason, Professor of Economics at the Department of Economics – University of Iceland, on “International Experiences with the Management of Natural Resources”. (Click here to watch a video interview with Gylfason published under an earlier post)

The second presentation was delivered by Hoda Selim, Economic Research Forum (ERF), on “The GCC and Populous Oil-rich Economies in the Arab World: How Much in Common and How Much in Contrast?”.

Watch highlights from Hoda Selim about the key findings of the paper:

Session VI: Institutions in natural resource rich economies

Given the significant role played by institutions with respect to oil management, the last session of the conference was dedicated to discuss “Institutions in Natural Resource-Rich Economies”.

Klaus Schmidt-Hebbel, Catholic University of Chile, addressed Fiscal Institutions in Resource-rich Economies while highlighting the lessons to draw from the Chilean and Norwegian experiences.

Klaus Schmidt-Hebbel (Catholic University of Chile); Ragnar Torvik (Norwegian University of Science and Technology) & Antoine Heuty (Revenue Watch Institute)

Klaus Schmidt-Hebbel (Catholic University of Chile); Ragnar Torvik (Norwegian University of Science and Technology) & Antoine Heuty (Revenue Watch Institute)

From his side, Ragnar Torvik, Norwegian University of Science and Technology, made a presentation on “Transparency and Accountability in Resource Rich Countries”. According to him, the potential answer to the question “why do some resource-rich countries do so well while others do so badly?” is politics. Therefore, the potential answer to “why do politics differ?” is transparency and accountability.

Watch highlights from Ragnar Torvik on the importance of checks and balances, transparency and accountability to guarantee a better use of natural resources:

Session V: The role of good governance

Moderated by Hassan Hakimian, University of London, the fifth session at the “Understanding and Avoiding the Oil Curse in the Arab World” Conference featured two presentations from Ibrahim Elbadawi (Economic Policy and Research Center – EPRC, Dubai Economic Council & Economic Research Forum – ERF) and Sambit Bhattacharyya (University of Sussex). The focus was on “Turning the Curse into a Blessing : The Role of Good Governance”.

Ibrahim Elbadawi, (Economic Policy and Research Center (EPRC) - Dubai Economic Council)

Ibrahim Elbadawi, (Economic Policy and Research Center (EPRC) - Dubai Economic Council)

Elbadawi presented the findings from his paper on “Resource Rents, Political Institutions and Economic Growth” which confirm that even though the resource curse has a short term positive effect, it has clear negative implications in the long run.  More importantly, the curse is conditional on bad governance so that countries with high commitment to checks and balances and high inclusiveness (political democracy) use resource rents to grow or alternatively could escape the curse; and vice versa. This has important policy implications for the region: “Arab spring should not only bring democracy (…) but should also lay the foundations of a strong checks and balances system”.

Sambit Bhattacharyya (University of Sussex) & Hassan Hakimian (University of London)

Sambit Bhattacharyya (University of Sussex) & Hassan Hakimian (University of London)

From his side, Bhattacharyaa shared with the audience his research results on “Public Capital in Resource-Rich Economies: Is there a Curse?”. Given that poor countries typically have acute shortage of public capital (e.g. road network, railway lines, telecommunications network etc.), finance from resource depletion is an opportunity for financing much needed public capital. However, the reality is that resource rich countries systematically under-invest in public capital and therefore, all the wealth that comes out from the ground is not transformed into assets for the benefit of the citizens. Mineral and hydrocarbon resource rich  countries suffer from the curse more relative to countries with agriculture and forestry. However, good institutions moderate the negative effect.

“Economic diversification and the role of the government in resource-rich economies” by Alan Gelb

The focus of the fourth and last session of day 1 was “Natural Resources and Development”. Alan Gelb, Center for Global Development, made a presentation on “Economic Diversification and the Role of Government in Resource Rich Countries”. Gelb highlighted the possible reasons why countries seek to diversify away from advantage, among which: diversified economies do better in the long run; seek learning-by-doing opportunities and greater “self-discovery”; fear of resource exhaustion; fear that population growth would reduce natural rent/head; fear of potential substitution risk; need to generate jobs; desire diversification for greater macro stability; see higher return on domestic spending given that investing abroad has perceived risks. According to him, every country has different needs and potentials but motivation should be clear because it will shape policy. “There is no simple one thing that Governments need to do to diversify away from oil. They need to first understand why they want to” he said.

He also underlined the need to look at what successful countries have done. In this regard, he listed the following as lessons learned: long term goals for economic development and social stability; strong, stable and engaged technocracy with some continuity; exports, new entry, central to development strategy; constituencies for macroeconomic stability outside the resource sector; opportunities to diversify.

Gelb concluded his presentation by saying that although a strong, concentrated resource base makes economic diversification more difficult, it provides opportunities, including funding for investments in infrastructure, human capital and institutions. Most countries have options if they want to diversify. The question is how strongly they are prepared to push and whether they can do so against political pressure to use rents in other ways.

Watch highlights from Alan Gelb about what policymakers should do to make the structural transformation and to diversify away from oil; and the factors that have helped developing countries to avoid the most adverse effects of the “resource curse”:

Oil management in the Icelandic Constitutional Bill, by Thorvaldur Gylfason

Thorvaldur Gylfason, Professor of Economics at the Department of Economics – University of Iceland, was recently involved in the writing of the Constitution of Island after the 2008 crisis. With respect to oil management, Gylfason highlighted the importance of one of the clauses in the constitutional bill which reforms the resource management system that Iceland has had for the past 25 years. “If the constitutional bill with this clause is accepted by the population in the referendum, it will basically mean a radical change in the way Island manages its natural resources. People, the natural owner of the resource, will at long last get a fair share of rents from the resource” he said.

To learn more about the way the constitution was written and the issues relative to oil management, watch the full interview with Gylfason:

Gylfason presented a paper on “International Experiences with the Management of Natural Resource” at the third session of the conference “Understanding and Avoiding the Oil Curse in the Arab World” Conference which focused on “International vs. Arab Country Experiences”.