Don’t Blame the Abundance of Oil! The Volatility in Oil Revenues Combined With Poor Governmental Responses to these Volatilities Drives the Resource Curse

This blog is written by Kamiar Mohaddes, Senior Lecturer and Fellow in Economics at Girton College, University of Cambridge, UK.

According to the resource curse paradox, abundance of oil (natural gas, minerals and other non-renewable resources) is believed to be an important determinant of economic failure. But is the poor performance of resource-rich countries, when compared to countries which are not endowed with oil, due to the abundance of oil in itself or is the curse instead due to price volatility in global oil markets and production volatility due to political factors (such as wars and sanctions)? More importantly, is there a role for institutions and the government (in particular fiscal policy) in offsetting some of the negative growth effects due to the curse?

What do we know about the curse?
Although the early literature showed the existence of a negative relationship between real GDP per capita growth and resource/oil abundance, more recent evidence is not so clear cut. Firstly, the early literature used cross-country analysis that fails to take account of dynamic heterogeneity and error cross-sectional dependence, and this could bias the results. Secondly, the early analysis ignores the effects of oil revenue volatility on growth, which turns out to be important.

Figure 1 shows that for major oil producers, there is a positive relationship between the volatility in oil revenue and GDP growth (measured by its standard deviation over the full sample), but a clear negative relationship between real GDP per capita growth and its volatility. This suggests that the excess volatility in oil prices and production is associated with higher volatility in GDP growth, which in turn has a negative effect on output growth. We shall see now whether these results continue to hold when we use more advanced econometric techniques.

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It Takes Two Functioning Cylinders to Operate the Macroeconomic Locomotive: The Fiscal-Monetary Interdependence in Oil-Dependent Arab Economies

This blog is written by Ibrahim Elbadawi, director of the Macroeconomics Research and Forecasting Department at the Dubai Economic Council

As part of the ERF research theme on “natural resource management and economic diversification”, the research project on “Monetary and Fiscal Institutions in Resource-Rich Arab Economies” addresses, among other issues, the interdependence between fiscal and monetary institutions. In this context, the research considered the two central policy questions of the fiscal foundation of the choice of exchange rate and monetary regimes and the capacity of fiscal and monetary institutions to conduct counter-cyclical fiscal policy during oil busts and booms. These two issues are of profound policy relevance to the oil-dependent Arab economies. Also, they have been the subject of high profile academic research in the context of the paradigm shift of monetary economics research toward focusing on the fiscal-monetary policy interdependence and on institutions and regimes rather than just policies.

What is fiscal dominance?

In fiscally dominated economies (FD), exchange rate regimes are determined by fiscal, not monetary considerations. This is because such countries are likely to be characterized by persistent and high deficits; limited capacity to raise tax revenues; limited capacity to rein on public expenditure; and hence likely to try to maximize the inflation tax. To stem the tendency of the economy to experience persistent inflationary pressures, they resort to exchange rate stabilization by adopting fixed or heavily managed exchange rate regimes. However, due to the high inflationary inertia (i.e., inflation today fueling expectations of higher inflation in the future), exchange rate stabilizations in FD economies often times fail, leading to devaluation crises and further inflationary pressures. Therefore, credible monetary and exchange rate regimes require that economies be free from fiscal dominance.

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Religion: A Plural Reality with Multiple Meanings

This blog is written by Political Science Professor and former Parliamentarian Dr. Mona Makram-Ebeid

 

The effects of the restructuring of traditional state power engendered by globalization on the political, economic and security processes of different countries in the Arab World, particularly after the Arab spring uprisings, are still in the making.

The changes in each of the countries represent different paths leading toward a shared model of the “new” Arab state. Since the 19th century, religious life has witnessed changes of different kinds, but was unable to settle into a constant and sustainable model that could serve as the basis for a new religious order.

There is no doubt that disillusionment with government and religious authorities is helping fuel a re-examination of religious discourse. As citizens begin to read religious texts with critical intelligence they will see through the myths, the inconsistency with principles and the cultural prejudices and literary devices imposed by humans on interpretation of the text. A new understanding of religion is the pre-requisite of any social change.

Majority Muslim countries are today faced with a three sided “prison,” namely: an archaic Islamic past, a seductive Western future, and the problematic present.

Half an ounce of gold

In the seventh century, that is how much most of Eastern Christians had to pay for the privilege of living under the protection of the Caliphate. If they did not want to pay the Jizya (the levy) they could convert or “face the sword.” Today, in the 21st century, many Christians (mainly in Syria and Iraq) are given the same choice! But this time the offer comes from the Islamic State (ISIS also known as Daesh)! whose objective is to have a Christian- free Middle East.

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The Empowerment of Women in the Household starts with their Empowerment in the Market

This blog is written by Dr. Zafiris Tzannatos, Senior Consultant for Strategy and Policy

 

A precondition for effective bargaining (or, as some put it, negotiation) is to have some kind of power. This power can derive from “voice,” whereby you put your claim out in the open and hope to get a favorable response (think of shaming your spouse or seeking legal recourse).  Or, if you have an acceptable alternative, power can take the form of “exit” (voting with your feet: think of divorce or emigration when political/economic conditions deteriorate).

Women did not have much of either option in the past. Their voices were silenced by patriarchal institutions, work opportunities were few and exit options (to where?) were limited. Of course, individuals can rise or fall depending on the circumstances they face and their own deeds.  However, collectively we are bound by the constraints imposed by prevailing economic, societal and political institutions, or, in other words, the laws, regulations, norms, culture, customs, and religion that provide the framework within which two fundamental human activities take place: production/market and reproduction/family (both in their broadest sense, i.e., including all transactions and types of households).

Production and reproduction have for long been characterized by a strict division of labor. This division started becoming blurred in high-income countries after World War II. In the 30 years that followed the end of the war (“Les Trente Glorieuses”), fast economic growth led to full employment conditions.

As the limited supply of male workers started to be exhausted, real wages started rising and, with them, family incomes. Rising incomes reduced the need for women to work in what used to be their main “employers” before the War (farming and domestic service) or to even work at all. On the other hand, rising wages made staying at home increasingly expensive for women.  The issue thus became an empirical one: Would the wage carrot win over the stick of need?

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The Gender Gap Runs Deeper than Religion or Education

This blog was written by Rice University Professor of Economics and Statistics Mahmoud El-Gamal

CAPMAS, the official Egyptian statistical agency, announced in 2014 that job market participation rates were three times higher for males (at 72.3%) than for females (at 23.1%). The average figures for the entire MENA region are slightly more lopsided, as reported by the World Bank based on ILO estimates, at 75% for males, and 22% for females over 15 years of age. Researchers noted that the gender gap in labor market participation in MENA is three times its counterpart in other emerging regions. Had this gap been two thirds of its size over the past decade, International Monetary Fund researchers calculated (box 1.3, p. 29), regional GDP would have been a trillion Dollars higher for that decade.

Social attitudes may hold the key to this large gender gap in labor market participation. Wave 6 of the World Values Survey (WVS6), collected between 2010 and 2013, sheds significant light on this issue. This wave of the survey covered 55 countries, including twelve countries from MENA (Algeria, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Palestine, Qatar, Tunisia, and Yemen), to which I added Turkey, which is one of the ERF countries, to form MENAT.

 

It’s Not Simply An Islamic Issue

 

In what follows, I will focus mainly on one question in particular that was asked in WVS6: “When jobs are scarce, men should have more right to a job than women,” eliciting responses of “Agree,” “Neither,” or “Disagree.”

Affirmative responses to this question in MENAT (at 67.3%) were more than twice as high as they were for the remaining 42 countries (31.1%). The higher rates applied to both genders (74.7% for males and 60% for females in MENAT, as compared to 35.7% for males and 27% for females outside MENAT).

In the entire sample, the percentage of Muslims who agreed with the statement (at 61.8%) was nearly double the percentage of non-Muslims (at 32.5%). However, majority-Muslim populations do not entirely explain the difference in responses between MENAT and the rest of the world. In fact, within MENAT, the percentage of Muslims who agreed with the statement (at 66%) was less than the percentage of non-Muslims who did (at 68.7%).

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How can political connections help in capturing the energy subsidies that go to the energy intensive manufacturing sectors in Egypt?

This Op-ed is written by Dr. Ishac Diwan  (Harvard Kennedy School) and Marc Shiffbauer (World Bank)

This Blog post is based on a research paper ‘On Top Of The Pyramids: Cronyism And Private Sector Growth In Egypt’ by Phil Keefer, Ishac Diwan, and March Shiffbauer. This paper is still work in process and will be available soon.

It is well known that energy subsidies are high in Egypt. The total bill was close to 12% of GDP in 2012. Much of the attention has focused on that part of the subsidies that goes to households as it is also well known that these are highly regressive, with a large share of the benefit estimated at about 50% of the subsidy accruing to the top population quintile.

But energy subsidies also go to firms, and mainly to those in the energy intensive sectors. These subsidies, mainly in the form of diesel, account for nearly 25% of total energy subsidies, costing overall about 3% GDP, or close to $8 billion (in comparison, public investment was 6% GDP in 2012). Are these subsidies less regressive than those going to consumers?

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Op-Ed: ‘Politics and Economics – Economic Research Forum’s 17th Annual Conference’

At graduate school, admittedly a few decades ago, conventional wisdom had it that economics was about offering policymakers welfare-improving options – the political process and political regimes were a given. However, as time went by, it became increasingly apparent that politics shape policies; hence development outcomes and their distribution. Economic power matters, but by now it is evident that the development process is as much—if not more—about politics as about economics.

If you do not believe me ask Jim Robinson.

Accordingly, when potential themes for this year’s annual conference were being mulled over a year ago, “Politics and Economic Development” kept emerging a clear winner. At that time, we believed that the political landscape in our region would change eventually, but little did any ne realize that an avalanche of change would come so soon, and as dramatically as it did.

After decades of political apathy, revolution after revolution is breaking out, unrestrained by age-old institutions or by borders. Among the many myths shattered by the revolutions was the one that held that people would sacrifice political freedom for economic gain. The wave of change is reaching countries like Libya and Bahrain who can afford to extend generous economic benefits. Apparently, the combination of a youth bulge, an increasingly educated population, the virtual proximity provided by technology, along with unequal distribution of opportunity and the demand for human dignity is very powerful indeed.

While the transformation process is still unfolding, once the fervor has died down and the people of the region have started to come to terms with what is a new—and for many, hard-won—freedom, the question will be; ‘What now?” Countries will move, as some already have, from the rejection of old regimes and policies to searching for ways to rebuild and replace them with policies that create prosperity and equality of opportunity for all. Among the critical questions that they have to deal with are: what does it take to bring about a democratic society? Does democracy automatically guarantee better development outcomes? Are democratic and economic liberalization necessarily linked? And what are the mechanisms that will meet the legitimate aspirations of the people?

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