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.

Continue reading

Institutions, Oil and Macroeconomic Management… What Does it Take to End the Resource Curse?

This blog is written by Hoda Selim, an economist at the Economic Research Forum

Natural resource wealth has been often blamed for the poor economic and development outcomes in oil-rich Arab countries. It has been claimed that the special characteristics of natural resources, such as price volatility, uncertainty and exhaustibility, pose challenges for effective macroeconomic management. Symptoms of the oil curse are many, and include: overall macroeconomic volatility, excessive borrowing during resource busts, Dutch disease, excessive consumption, and low or inefficient total investment.

In this context, policymakers were advised to improve the management of their wealth. But, could it be that long-standing and deep-rooted but weak institutions in the Arab World are the root cause of the oil curse?

Research has attempted to show that it was oil that hurts democracy through the creation of a rentier state. However, the current literature has almost reached a convergence that the resource curse is conditional on the quality of institutions (i.e., that resource-rich economies with strong political checks and balances are able to turn the resource curse into a blessing). In other words, political institutions shape incentives for economic institutions or, alternatively, they affect how resource rents are collected, allocated and used, and therefore influence macroeconomic management and economic outcomes.

Continue reading

ERF to Hold Kuwait Conference on Monetary and Fiscal Institutions in Resource-Rich Arab Economies

The Economic Research Forum (ERF) will hold a conference on Monetary and Fiscal Institutions in Resource-Rich Arab Economies on November 4-5, 2015, in Kuwait City, Kuwait. The event, being held in cooperation with the Arab Fund for Economic and Social Development, is intended to address the challenges facing macroeconomic institutions in oil-rich Arab countries, particularly those responsible for monetary and fiscal policies.

The problem is that while oil-rich Arab countries account for close to half of global oil reserves and a quarter of natural gas reserves, they have neither achieved economic prosperity nor approached the ranks of developed nations. The efficiency (or lack thereof) of monetary and fiscal institutions in resource-rich Arab economies could explain this phenomenon, at least partially.

More than 100 participants from the region and abroad will examine the prospects and policy options for achieving fiscal and monetary stability in oil-rich Arab countries. Over five sessions and a panel discussion, experts will try to understand the rules and procedures governing fiscal and monetary policies in oil-rich Arab countries, the degree of independence and interaction between fiscal and monetary institutions, and the influence of politics on both.

Continue reading

“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: