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Cracking the Arab World’s Development Puzzle: Oil or Politics?

February 16, 2017 • GLOBAL ECONOMY, Middle East & Africa

By Ibrahim Elbadawi and Hoda Selim

Is the Arab World cursed by its own institutions rather than by oil wealth? These institutions, which have predated oil discoveries, have shaped economic incentives that affect how oil revenue is collected and used, and in turn influenced economic outcomes. Over time, the interaction between oil and politics became intertwined, preventing economic development in Arab countries. As low oil prices risk becoming a new normal, political reforms with checks and balances can turn the curse into a blessing.

 

Introduction

Despite massive hydrocarbon endowments, Arab economies have neither achieved economic prosperity nor became developed. With oil and natural gas discoveries taking place since the first half of the 20th century, Arab countries account for 7 out of the 13 members of the Organization of the Petroleum Exporting Countries (OPEC). They hold close to half of global oil reserves and a quarter of natural gas reserves. They control close to a third of oil production and 14% of natural gas production. And even though the per capita income of some Arab oil-producing economies is high, they would be considered less developed than Norway, a country with more limited oil resources and even Japan, a country without any natural resources. More worryingly, some oil exporters like Sudan and Yemen remain among the world’s poorest economies and have experienced episodes of violent conflict. More importantly, the low oil price environment, considered by some forecasters to be the new norm in the medium-term, raises the question of whether current income levels could be sustained in the future.

Many academics have attributed this disappointing performance to a “curse” which refers to the paradox that countries with an abundance of natural resources often fail to grow as rapidly as those without such resources (Sachs and Warner, 1994). The initial interpretation of the curse rested on pure economic grounds arguing that large resource windfalls lead to Dutch disease, overall macroeconomic volatility and debt overhang, among other ills. Yet this explanation fell short of explaining the successful economic performance of Norway, the world’s seventh largest oil exporter and fourteenth largest oil producer. Chile is another good example of an emerging country which is the world’s largest producer and exporter of copper. This realisation motivated a new strand of the literature that argues that “the curse is real but conditional on the presence of bad institutions” (Collier and Goderis, 2007; and, Elbadawi and Soto, 2016).

 

Dispelling the Oil Curse Myth

Despite their diversity in size, demographics and wealth, the macroeconomic performance of Arab countries has been generally vulnerable to the ebbs and flows of oil prices (Table 1 below). Yet, this article argues that the Arab world is cursed by weak institutions rather than by oil. In particular, weak political institutions have predated resource discoveries and over time have been able to shape economic incentives that affect how resource rents are collected, allocated and used, and therefore influenced economic outcomes (Galal and Selim, 2013). Over time, the interaction between oil and politics became intertwined, preventing these countries from embarking on a sustainable development path. In fact, there is a positive association between oil rents and limited freedom in political rights and civil liberties. More worryingly, Figure 1 (below) shows that oil-rich Arab countries lag behind using these two measures. In 2014 out of the 205 countries covered by Freedom House, 88 were considered “free”, of which none is an Arab oil-rich economy. Only one country is considered partly free, Kuwait. Moreover, most countries, especially in the GCC have not any undertaken meaningful political reform since the 1970s.

 

Table 1. Selected macroeconomic indicators during oil booms and busts

Source: Authors’ calculations based on WEO and WDI databases, 2014.

 
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